Foreign Invested Enterprises (FIE) refer to companies founded in China by foreign enterprises, economic organisations or individuals, the registered capital of which is subscribed and contributed by a foreign investor(s).
According to the People's Republic of China (PRC) Company law and relevant legislations, all FIEs, such as Wholly Foreign Owned Enterprises (WFOEs) and Joint Ventures (JVs), are required to prepare their annual financial statements, including balance sheets, income statements and cash flow statements for their annual PRC statutory audit to related Chinese authorities if required.
Representative Offices (ROs) are also subject to annual statutory audits. An annual statutory audit can only be performed by a Certified Public Accountants firm (CPA Firm) registered in the PRC. FIEs can distribute and repatriate their profits or dividends back to their home country after submitting their audited financial statements and settling all relevant tax liabilities. There are some exceptions for limited transaction companies in the Free Trade Zones where the authorities can grant an exemption.
The process
The Accounting Standards govern FIEs for Business Enterprises (CASs) of the PRC, also referred to as the PRC GAAP, and there are no basic differences between standards for domestic and foreign enterprises. FIEs, including their legally responsible person, shall take full responsibility for the financial statements' truthfulness, legitimacy and completeness.
When performing the statutory audit, the CPA shall conduct the audit in accordance with the China Standards on Auditing promulgated by the Chinese Institute of Certified Public Accountants (CICPA). The objective of a statutory audit is for the CPA to express an opinion on whether the financial statements fairly present, in all material respects, the company's financial position at the year-end, its financial performance and cash flows for the year, in accordance with the requirements of CASs.
In China, the accounting year is the calendar year, i.e., 1 January to 31 December. Per the Company Law of PRC, a company shall prepare a financial report at the end of each fiscal year and have it audited by a CPA Firm. An annual corporate income tax (CIT) filing is required to be completed by Chinese tax authorities, while an annual inspection filing is performed by an annual report to be filled out on the website of the National Enterprise Credit Information Publicity System (Publicity System). Nowadays, the annual statutory audit is not compulsory for both annual CIT filing and annual inspection filing. If an annual audit is performed, the FIE should inform the local authorities and fill in the required information about the annual audit. The local practice is that the possibility of being selected by local authorities during the annual filings would be higher for those not having an annual audit when filing. If selected for investigation, the authorities normally require the company to have an annual audit report.
The FIE should fill in the Publicity System whether audited or not at the time of filing, while the RO is required to submit the annual statutory audit report when filling in the annual report in Publicity System.
Below are the government annual inspections and related deadlines:
- Annual CIT filing - deadline by 31 May
- AIC Enterprise Credit Information Publicity - deadline by 30 June
The value
For the company, be it for business, tax or internal control purposes, an audit can be very valuable and beneficial, providing an opinion and understanding of the financial statements, which provides peace of mind, and also can be used for investors, banks and financing, etc. Through the audit process, the auditors enhance the value of the financial statements, including:
Fairness of financial statements
Giving an opinion on the fairness of the financial statements is generally regarded as the focus of the auditors. An audit serves as a double-check on what management believes is correct. The auditors provide unbiased opinions on financial statements and accounting treatment.
Ability of going concerns
The auditor will assess the company's ability as a going concern. When events or conditions that may cast significant doubt have been identified, the auditor will review management's plans for future action based on its going concern assessment and gather sufficient and appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out procedures considered necessary.
Tax risk and advice
The auditor will analyse the tax risks to review the compliance with local tax regulations and law through an understanding of the nature of the company's business and the tax treatment adopted by the company.
Internal controls
The company should maintain a sound system of internal control to safeguard both the shareholder's investment and the company's assets. In the audit process, the auditor will review the effectiveness of the internal control systems of financial, operational and risk management. If there are internal control deficiencies, the auditor shall communicate directly with the management in written form, such as a management letter, and provide some practical recommendations for addressing the issues identified.
Fraud
Fraud refers to intentional acts resulting in (quantitative and/or qualitative) misstatements in financial statements. Fraud, as it relates to financial statements, may be categorised into two types:
- Misstatements arising from fraudulent financial reporting to mislead/deceive users of financial statements
- Misstatements in financial statements arising from the misappropriation of assets
When auditors suspect that there are misstatements in the financial statements due to fraud, they will perform necessary and sufficient auditing procedures to confirm or dispel their suspicion about the existence of misstatements.
The above are matters of corporate governance as well as reporting and are all concerns for the auditor. If the auditor obtains evidence to support a view that fraud may exist or evidence confirming that a significant misstatement or operation risk does exist, they will communicate the misstatement to the appropriate level of management, to the directors, or to the shareholders, if applicable. By promptly communicating these issues to management, the auditor facilitates adjustments and appropriate changes so that the financial statements will be able to meet the objective of truly and fairly reflecting the company's financial position and operating results. The auditors should always maintain an attitude of professional scepticism. Good auditors are trained to identify problems in time and provide practical recommendations to the company to avoid risks. Consequently, auditing serves a valuable function other than helping the company in fulfilling statutory requirements in China.
How Acclime can support you
Acclime China is highly experienced and able to handle all aspects of PRC statutory audit report compliance and filing, including:
- Conduct a statutory audit in accordance with China Standards on Auditing over the financial statements prepared under PRC GAAP
- Review CIT reconciliation for annual CIT filing purposes
In addition to issuing the audit report in line with Chinese regulations, Acclime China can also deliver additional reporting documents in accordance with other international accounting standards, such as IFRS, US GAAP or the German HGB, as well as the additional management letter as required. We will work closely with our clients to understand their business model and effectively ensure the company's compliance for smooth business operations. We can also carry out internal control reviews to find internal control weaknesses and conduct risk health checks on businesses.
