Financial Statement AuditAnnual Financial Statement Auditing by a Chinese CPA Firm
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- Not mandatory.
- Done by a Chinese CPA firm.
- Chinese GAAP.
About Annual Financial Statement Audit
The annual financial statement audit is not mandatory for registered company in China. Companies can decide it by themselves in some conditions:
- The company wants to qualify for the annual finance status.
- Annual financial statement audit report of the Chinese subsidiary is required for the audit of the head office.
- The authority requires an annual financial statement audit report for the payment of dividends.
In China, the financial year of all companies is a calendar year, from January to December. The annual financial statement audit will start in January and generally take up to 4 months to complete, an annual audit needs to be carried out for the previous year’s activity. For a foreign-invested company, it needs to be prepared by a Chinese Certified Public Accounting (CPA) firm.
Standard reports that need to be produced as part of the audit include a full balance sheet, an income statement, and a cash flow statement.
Differences in Chinese Accounting Standards
By using a Chinese CPA firm, accounts must be prepared in accordance with Chinese Generally Accepted Accounting Principles (Chinese GAAP or PRC GAAP) PRC GAAP are similar to the globally recognized International Financial Reporting Standards (IFRS) and US GAAP, but they are not entirely the same.
Some of the key differences include:
- Chinese GAAP depreciation methods are different. CAS uses different valuation methods for fixed assets. IFRS allows valuation either by historical cost or by the revaluation of assets, whereas CAS insists on the historical cost principle.
- More detailed coverage of certain areas in IFRS. There are areas where IFRS has more detailed coverage that has been adopted by CAS. An often relevant example of this is employee benefits, where there are many more options permitted under IFRS than CAS, making the incorporation under CAS of some employee benefits packages difficult.
- Delays in the adoption of IFRS rules. There is often a delayed period between the issuance of new rules under IFRS and their adoption into CAS. Any new rules are reviewed for appropriateness in China by the Ministry of Finance. Even if they are approved for inclusion, there is likely a period where the standards differ.
Frequently Asked Questions
The annual financial statement audit is not mandatory for a company registered in China. The companies can decide it by themselves in some conditions:
- The company wants to qualify for the annual finance status.
- The annual financial statement audit report of the Chinese subsidiary is required for the audit of the head office.
- The authority requires an annual financial statement audit report for the payment of dividends.
The annual finance statement audit must be done by a Chinese CPA firm according to the laws and regulations.