Annual Audit in China

With the approach of the end of the year, shareholders and managers of Chinese companies shall start to plan the audit of the financial statements of the tax year. As required by Chinese regulations, legal entities established in China, including representative offices of foreign companies, shall complete their statutory annual audit before the deadline set for the annual settlement of the company income tax, which is May 31 of the following year.

A qualified CPA firm shall perform the statutory annual audit in accordance with the Chinese Standards on Auditing; the auditors shall assess the company’s financial statements, verify the compliance with the Chinese accounting principles (“ASBE”, Accounting Standards for Business Enterprises) and issue an audit report at the end of the process including their opinion whether the financial statements are prepared in accordance with the ASBE, and if they present fairly and in all material aspects the financial position and the economic performance of the company in the tax year.

Besides the auditor’s opinion, the audit report includes:

• the balance sheet;

• the profit and loss statement;

• the cash flow statement;

• the notes to the financial statements, and

• the reconciliation between the accounting and the tax profit.

The statutory annual audit also provides an opportunity to shareholders and managers to review the operations and the performance of the year, identify potential risks and adjustments, and assess the financial status.

The audit process may require several months to be completed, depending on the size of the audited company and the volume of transactions and accounts. Most of the companies generally start in January after the end of the tax year to complete the whole process within April 30.

The annual audit is the first step in the yearly compliance procedure; the audit is followed by the annual settlement of the company income tax (deadline May 31) and by the annual declaration with the relevant authorities, such as the State Administration for Market Regulation, the Ministry of Commerce, and the State Administration of Foreign Exchange to be performed within June 30 of the following year.