Under the Companies Ordinance (Cap. 622):
- Every Hong Kong-incorporated company (except those officially declared dormant) must prepare audited financial statements annually, regardless of whether IRD requests a tax return.
- The audit is a statutory obligation for corporate governance, not just a tax compliance step.
In Hong Kong, there is no VAT or GST. It is probably because of this that, unlike most other countries/ places in the world, there is no threshold for audit requirements, ie. nearly all locally incorporated companies must prepare audited annual financial statements in accordance with HKFRS/HKAS (or permitted simplified frameworks for eligible smaller entities) and have them audited under Hong Kong Standards on Auditing (HKSAs) issued by HKICPA. Only those dormant Hong Kong incorporated companies obtaining exemption from the Inland Revenue Department (“IRD”) would have exemptions.
Here’s a clearer breakdown of the legal audit requirements under the Hong Kong Companies Ordinance (Cap. 622):
Annual Audit for Companies Limited by Shares (Private Companies) in Hong Kong
Audit Required
- All private companies limited by shares, whether small or large, must prepare annual financial statements and have them audited by a CPA registered with the AFRC
- These audited accounts are not filed with the Companies Registry (CR) but are submitted to the Inland Revenue Department (IRD) along with the Profits Tax Return.
Dormant Company Exemption
- A company can be considered “dormant” and exempt from audit only if it has no accounting transactions during the financial year, passes a special resolution, and files Form ND2A.
Simplified (“Reporting Exemption”)
- Small or eligible private companies that meet size criteria may prepare simplified financial statements, but must still be audited.
Timeline
- The audit requirement does not depend on when the Inland Revenue Department (IRD) issues a Profits Tax Return.
- Every Hong Kong-incorporated company (except those officially declared dormant) must prepare audited financial statements annually, regardless of whether IRD requests a tax return.
- The audit is a statutory obligation under the Companies Ordinance (Cap. 622): for corporate governance, not just a tax compliance step.
What changes when IRD issues a return every 3 years for loss-making companies is only the tax filing frequency, not the audit frequency. The company still needs to:
- Close its books at each financial year-end.
- Have the accounts audited annually.
- Keep those audited accounts ready for submission when IRD eventually requests the return.
So even if IRD doesn’t ask for a return this year, the audit must still be done for that financial year.
Annual Audit for Companies Limited by Guarantee in Hong Kong
Submission to CR Required
- These companies must prepare, audit, and file their audited financial statements alongside the annual return (Form NAR1) with CR.
Exemptions
- A “small guarantee company” may qualify for simplified reporting, but audited accounts must still be filed with CR.
Timeline
For a company limited by guarantee in Hong Kong, the timeline and filing requirements are:
- The Annual Return for Guarantee Company (Form NAR1) must be filed with the CR within 9 months after the end of the company’s financial year.
- The audited financial statements (including directors’ report and auditor’s report) must accompany this annual return when submitted to the Companies Registry.
Key Points
- This is different from private companies limited by shares, which do not file audited accounts with CR.
- Late filing attracts penalties (up to HK$50,000 + HK$1,000 per day for continuing default).
This is different from private companies limited by shares, which do not submit audited FS to CR – they only attach them to the Profits Tax Return for the Inland Revenue Department.
In a Nutshell
- Private companies limited by shares: Must be audited annually (unless Dormant); audited FS submitted to IRD, not CR.
- Companies limited by guarantee: Must be audited and must file audited FS with CR.
- Reporting exemption (simplified accounts): Reduces complexity, not a substitute for audit.
What are the common misconceptions about when to have audit of a limited liability company in Hong Kong?
“All private companies are exempt if they’re small” ❌
- Only dormant companies—those with absolutely no accounting transactions during the financial year and filed a Form ND2A—are exempt from audit.
- The reporting exemption under the Companies Ordinance allows eligible small private companies or groups to prepare simplified financial statements under SME-FRF, but does not exempt them from having their statements audited.
- Qualifying based on revenue, assets, or employee count (2 out of 3: ≤HK$100 M, ≤HK$100 M, ≤100 employees; OR ≤HK$200 M, ≤HK$200 M, ≤100 employees AND with 75% members’ special resolution4 with none objecting) lets you file simplified financial statements under SME-FRF, but not skip the audit requirement.
“Only companies with subsidiaries need to file consolidated audited statements”❌
Regardless of group structure, every Hong Kong-incorporated company (except officially dormant ones) must prepare and have audited financials annually under Part 9 of the Companies Ordinance.
“Foreign branches don’t require audit” ❌
While dormant local companies are exempt, foreign branches and local companies with actual transactions are not exempt and must be audited.
“Audit timing isn’t linked to tax filing” ❌
The audit report must be completed before filing your Profits Tax Return (PTR). For newly incorporated companies, the first PTR (and audit) is due 18 months after incorporation; subsequent ones align with the financial year-end.
“In-house accountants can certify accounts instead of auditors” ❌
Audits must be conducted by an independent CPA registered with AFRC —in-house accountants cannot sign off the audit.
“Small companies don’t need business reviews or interim/ pre-final audits or business reviews” ❌
While private companies may opt out of “business reviews” in the directors’ report by special resolution, all companies must still complete a full statutory audit annually. For some companies with tight group reporting deadlines, they might choose to have interim or pre-final audits.
Most misunderstandings stem from confusion between the reporting exemption (simplified reporting) and audit exemption (only for properly filed dormant companies). Despite simplified reporting, statutory audits remain mandatory for all active Hong Kong companies.
What are the penalties for non-compliance?
Here are the key penalties under Hong Kong law for non-compliance with audit requirements for a limited liability company:
1. Fines for Late or Non submission of Audited Accounts
If audited financial statements are delayed or not submitted, the company may be fined up to HK$50,000, plus a daily default penalty of HK$1,000 for each continuing day of non-compliance—under Section 622 of the Companies Ordinance.
2. Penalties for False or Misleading Statements
Intentionally or recklessly including false, misleading, or deceptive information in the accounts or audit report is a criminal offense, carrying the risk of fines and imprisonment under the Companies Ordinance.
3. Directors’ and Officers’ Liability
Although most enforcement actions are taken against the company, responsible officers may also be held personally liable—especially in cases involving deliberate misconduct or negligence.
4. Potential Criminal Prosecution
Persistent or serious breaches may lead the Registrar of Companies to file a summons in a Magistrates’ Court, triggering criminal proceedings with escalating penalties, including potential imprisonment.
5. Additional Compliance Failures
Missing the Annual Return (NAR1) incurs a fine of up to HK$50,000, plus HK$1,000 per day for ongoing delay.
Failing to maintain properly audited accounts can also lead to record-keeping offences under Section 655 of the Ordinance—penalized by HK$10,000, plus HK$300 per day for continued non-compliance.
So, oversight and enforcement lie with the Companies Registry, while legal proceedings and actual penalty collection are handled through the Magistrates’ Court upon conviction.