Hainan Company Annual Audit

Hainan company annual audit is crucial and important for business. According to PRC Company Law and other relevant regulations, all foreign invested enterprises (FIEs) in China, including wholly foreign owned enterprises (WFOEs), joint ventures (JVs), foreign invested commercial companies (FICEs), and representative offices (ROs), are required to comply with the statutory annual audit and other compliance processes.

Annual audit can be compared to a company health check. The reports reveal the company’s performance and can be used to analyse the internal structure in regard to cost and tax efficiency.

Significance of annual audit to FIEs in China
FIEs can only distribute and repatriate their profits or dividends back to their home country after completion of their annual statutory audits and settlement of all relevant tax liabilities. Failure to comply with the annual audit and compliance may result in extra expenses, penalties, or even revocation of business licenses.

When FIEs initially began setting up in China, many were not familiar with Chinese accounting standards and tax rules. This resulted in incorrect accounting treatments or tax filings becoming common, especially amongst small and medium-sized FIEs. The annual audit is a good opportunity to enhance a company’s internal control systems. Through the annual audit process, auditors will help find mistakes in business operations, help FIEs improve their financial reports in accordance with Chinese accounting standards, and ensure that accounting data is presented appropriately.

Types of audit reports
1. Statutory Annual Audit
This is the general audit for which balance sheet, income statement and cash flow statement, prepared according to Chinese GAAP, are necessary. In order to simplify and shorten the whole audit process, foreign business should maintain a proper bookkeeping throughout the year.

2. Annual Foreign Currency Audit
This special audit is for the State Administration of Foreign Exchange (SAFE). This report displays and analyzes the Foreign Investor’s Equity. However, the company itself can file this currency audit. It is not necessary to get it done by an authorized CPA firm. Special Foreign Exchange regulations for this document apply.

3. Annual Tax Audit & Clearance
The purpose of this audit is to compute the taxable profit based on the company’s turnover and cost. This also includes a separate corporate income tax audit report for companies who generate more than 30,000,000 RMB turnover, more than 100,000 RMB losses or want to use the previous carry forwarded loss for the current year.

In China, the accounting year is the calendar year, namely, January 1st to December 31st. After completing the annual statutory audit, the annual filing process, which is also termed as joint annual inspection is required. This process involves the submission of a statutory audit report, including but not limited to, the audited financial statements, tax examination report and foreign exchange examination report, to the various government authorities, as required under Chinese legislation.

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