An audit is a critical component of a company’s operations. An objective and neutral audit can not only enhance transparency and build trust among management and shareholders but also helps reduce the risk of errors and fraud, thereby ensuring a true and fair view of a company’s financial health.

In China, the audit process follows a standardised calendar: all companies close their books on 31 December, and the audit season typically begins in October, especially for larger entities requiring preliminary reviews and interim procedures. The final deadline for completing audits is 31 May, aligning with the country’s annual corporate income tax and regulatory filing requirements.

This article examines recent audit updates and highlights the importance of audits for foreign-invested enterprises in China, covering aspects such as compliance, risk management and adherence to global reporting standards.

Main audit updates from 2024 to 2025

The International Standards on ISA have undergone significant updates regarding group audits, particularly with the release of ISA600 – Special Considerations for Audits of Group Financial Statements (including the work of component auditors).

This revised version was issued in 2022 and came into effect on 15 December 2023, applying to audits of financial statements starting in 2024 and beyond. It brings more requirements to group auditors as well as component auditors. Component auditors must engage early, provide sufficient evidence, communicate closely with the group team and comply with new documentation requirements.

How to prepare for the annual audit

Following the main audit updates from the past year, it becomes more important for companies, especially those foreign-invested enterprises, to implement a practical and proactive approach to audit preparation. An effective audit is an ongoing process that requires continuous attention throughout the year, not only a last-minute effort.

The following key steps outlines how companies can prepare effectively before the auditors arrive, in alignment with updated PRC auditing and accounting standards.

Review prior audit and tax documents

Start the preparation by examining last year’s audit report and tax filings. Any issues raised by auditors or tax authorities should be addressed, and all necessary adjustments must be accurately reflected in the accounts.

Verify vouchers and ledgers

Confirm that all accounting vouchers are properly filed and consistent with general ledger entries. Also, ensure that monthly book closings are completed accurately.

Reconcile bank and cash balances

All bank statements should be matched with the company’s book records, formal bank reconciliation statements should be prepared, and cash count reports should be properly organised.

Ensure tax and VAT compliance

Verify that all fapiao are correctly issued, obtained and recorded. Additionally, ensure that all taxes, including corporate income tax, individual income tax and other local taxes, are fully declared and paid.

Prepare PRC GAAP-compliant financial statements

Draft the balance sheet, income statement and cash flow statement in compliance with Chinese Accounting Standards for Business Enterprises (ASBEs).

Gather supporting documents

Collect all relevant contracts, lease agreements, loan documents and official filings, and make sure all documents are properly signed and stamped by the company where required.

Review fixed assets and inventory

Conduct physical counts of inventory and fixed assets. Reconcile the results with book records and prepare depreciation and inventory valuation reports.

Examine related party transactions

Identify and document all transactions with related parties, such as shareholders, directors and affiliates. Ensure compliance with disclosure and pricing requirements.

Coordinate with external auditors

Confirm the audit schedule and required materials in advance. Assign dedicated staff to support audit inquiries across finance, HR and operations.

Conduct an internal pre-audit meeting

Hold a coordination meeting with finance and operational teams to ensure readiness, address potential risks, such as compliance gaps or liquidity issues, and clarify roles.

Why foreign enterprises should perform a financial audit

Understanding how to prepare for an audit is just one aspect. For foreign-invested enterprises (FIEs) in China, an audit also serves as a strategic tool that enhances compliance, strengthens governance and supports informed decision-making.

Compliance with Chinese law

Although China’s Company Law (Article 208) prescribes the need for companies to have their financials audited by a Chinese Certified Public Accountants (CPA) firm, in practice, tax and other government administrations may or may not require the corresponding audit reports, depending on the business’s size, substance and nature. Financials shall be prepared in accordance with the provisions of laws, administrative regulations and the State Council’s financial department.

The audit report ensures that the financial reporting adheres to the People’s Republic of China’s Generally Accepted Accounting Principles (PRC GAAP). PRC GAAP generally refers to the accounting policies issued in 2006 and effective from 2007, which continue to align with International Financial Reporting Standards (IFRS).

Large-scale companies typically apply these accounting policies, whilst smaller-scale entities may elect other accounting policies, such as Accounting Standards for Small Enterprises or Accounting Standards for Business Enterprises.

Tax compliance

The annual audit usually carries a tax result verification to confirm or propose tax adjustments, ensuring that the enterprise has correctly calculated and paid its Corporate Income Tax (CIT) per Chinese tax regulations.

Tax losses can be carried forward for five years, and the standard profit tax rate is 25%. Small and medium-sized businesses that meet the criteria and have a profit below RMB 3 million can enjoy a reduced tax rate of 5% until 31 December 2027.

Financial transparency and accuracy

Through annual audits, the accuracy of financial records and reporting can be reinforced. The audit reports of at least the last three years are also generally required by potential investors, bankers and other creditors and can be sought by the tax bureau.

The audit reports first confirm the accounting treatment, for instance, revenue recognition, which is critical in understanding the true performance of a business. They may also have different accounting policies themselves and would need to understand differences in Chinese accounting practices.

Failure to perform the annual audit can result in additional management costs for non-compliance and tense the cashflow strategies.

Internal control and risk management

The audit process allows auditors to evaluate the company’s internal control systems and enables the finance team to make necessary improvements. This is usually included in a management letter addressed to the company’s management and governance committee(s) and, for example, could include recommendations in areas such as strengthening internal controls, citing areas where additional segregation of duties could be applied.

Profit distribution and capital repatriation

FIEs can only distribute profits or remit dividends back to their home country after completing their annual audit and settling all relevant tax liabilities. Audits are normally carried out annually.

Enhancing corporate governance

Annual audits are an integral part of corporate governance. They help ensure the integrity and fairness of financial reporting and provide oversight and assessment of management practices.

Adapting to regional differences

Chinese Accounting Standards and audit report requirements may vary based on the Group’s standards. Conducting an annual audit helps businesses identify these differences and ensure compliance with local regulations.

Main audit phases and processes

Audits follow a structured path designed to ensure thorough evaluation and compliance at every stage:

1. Business acceptance

This phase involves reviewing the client’s basic information, conducting independent assessments and evaluating overall business risks. It enables auditors to pre-assess challenges and obvious red flags, which can also be reflected in the company’s industry and location. It is also part of the Know Your Client (KYC) process.

This can also include, for instance, understanding the going concern risk to the business, as part of the audit work involves looking at the financial sustainability of the company being audited.

2. Audit plan

This phase focuses on gaining a comprehensive understanding of the client and their industry. Auditors conduct interviews and on-site observations to deepen this understanding. They also review the client’s internal control systems to assess whether they are appropriately designed for the scale of the business and to identify any significant deficiencies.

Finally, the auditor determines the materiality of the audit, conducts a preliminary analytical review of the financial statements, identifies potential risks and develops audit strategies. They also establish a schedule for on-site audit review activities.

3. Audit execution

During this phase, implement the audit strategy and carry out the necessary procedures, such as confirmations, physical checks, sampling tests and analytical reviews. After executing these procedures, assess whether any adjustments to the audit strategy are needed.

4. Audit conclusion

Based on the results of the audit procedures, auditors draw appropriate conclusions and prepare a draft audit report. Once they receive the final supporting documents and communicate their findings with governance and management, they issue the final audit report.

5. Communication with governance and management

Throughout the audit process, auditors communicate their findings with governance and management. If necessary, they issue a management letter outlining recommended changes to enhance overall compliance.

How Acclime can help with annual audits in China

As the 2025 audit season approaches, companies are preparing their audit plans. Preliminary work is expected to begin in October 2025, with audits scheduled for completion by May 2026, aligning with China’s tax deadlines and group reporting requirements.

Whether newly established or long established, businesses must choose the right audit team and allocate resources early to ensure compliance with both local and group standards.

To support this, Acclime offers a pre-audit financial health check to identify potential issues such as compliance risks, fraud indicators, account fluctuations and process gaps, providing actionable recommendations before the statutory audit begins, particularly valuable in China, where auditors cannot provide consulting during audits.

Beyond health checks, we provide full audit support tailored to client needs, from managing the entire process and assisting group auditors with on-the-ground procedures, to delivering statutory audits and audits under IFRS, US GAAP or other standards, as well as internal audit procedures for global firms.

With decades of experience, our bilingual team ensures seamless communication and execution, and we now also extend our audit services to Hong Kong to meet local regulatory requirements. Please get in touch for a consultation with our experts by sending an email to enquiries@lehmanbrown.com.