Background

An audit is a critical component of a company’s operations. An objective and neutral audit can enhance transparency, build trust among management and shareholders, and reduce the risk of errors and fraud, 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 FIEs in China, covering compliance, risk management and adherence to global reporting standards. 

Main Audit Updates (2024-2025) 

The International Standards on Auditing (ISA) have updated group audit requirements, particularly with ISA 600 – Special Considerations for Audits of Group Financial Statements (including component auditors’ work). 

Issued in 2022 and effective from 15 December 2023 (applying to 2024+ audits), the revised ISA 600 imposes additional requirements: component auditors must engage early, provide sufficient evidence, communicate closely with the group team, and comply with new documentation rules. 

How to Prepare for the Annual Audit 

Following these updates, FIEs in particular need a proactive approach to audit preparation—an ongoing process, not last-minute effort. 

The following key steps help companies prepare effectively, in line with updated PRC auditing and accounting standards: 

• Review prior audit and tax documents: Examine last year’s audit report and tax filings, address auditor/tax authority issues, and reflect necessary adjustments in accounts. 

• Verify vouchers and ledgers: Ensure accounting vouchers are properly filed, consistent with general ledgers, and monthly book closings are accurate. 

• Reconcile bank and cash balances: Match bank statements with book records, prepare reconciliation statements, and organize cash count reports. 

• Ensure tax and VAT compliance: Verify correct fapiao issuance/recording and full declaration/payment of all taxes. 

• Prepare PRC GAAP-compliant financial statements: Draft balance sheet, income statement and cash flow statement per ASBEs. 

• Gather supporting documents: Collect relevant contracts and filings, ensuring proper signing and stamping where required. 

• Review fixed assets and inventory: Conduct physical counts, reconcile with book records, and prepare valuation/depreciation reports. 

• Examine related party transactions: Document transactions with related parties and ensure compliance with disclosure/pricing rules. 

• Coordinate with external auditors: Confirm audit schedule/materials and assign dedicated staff to support inquiries. 

• Conduct an internal pre-audit meeting: Coordinate with teams to address risks and clarify roles. 

Why Foreign Enterprises Should Perform a Financial Audit 

For FIEs in China, an annual audit is a strategic tool to enhance compliance, strengthen governance, and support decision-making. Key reasons: 

Compliance with Chinese Law 

China’s Company Law (Article 208) mandates financial audits by Chinese CPA firms. Financial statements must comply with laws, regulations, and State Council financial provisions. 

Audit reports ensure compliance with PRC GAAP (2006 policies aligned with IFRS), with large companies applying these and smaller entities electing alternative standards. 

Tax Compliance 

Annual audits verify tax results and adjustments, ensuring correct CIT calculation. Tax losses carry forward 5 years; standard rate is 25%, with a 5% reduced rate for eligible SMEs (≤RMB 3 million profit) until 2027. 

Financial Transparency and Accuracy 

Audits reinforce financial accuracy; at least three years of reports are required by investors, bankers, and may be requested by tax bureaus. 

They confirm key accounting treatments (e.g., revenue recognition) and help navigate Chinese accounting differences. Non-compliance risks additional costs and cashflow disruption. 

Internal Control and Risk Management 

Auditors evaluate internal controls, with recommendations (e.g., strengthening controls, segregation of duties) included in management letters. 

Profit Distribution and Capital Repatriation 

FIEs can only distribute profits or remit dividends after completing the annual audit and settling tax liabilities. 

Enhancing Corporate Governance 

Audits are integral to corporate governance, ensuring financial integrity and overseeing management practices. 

Adapting to Regional Differences 

Audits help identify differences between Chinese standards and group standards, ensuring local compliance. 

Main Audit Phases and Processes 

Audits follow a structured process to ensure thorough evaluation: 

1. Business acceptance: Review client information, assess risks (including KYC and going concern), and identify red flags. 
2. Audit plan: Understand the client/industry, review internal controls, determine materiality, identify risks, and set an audit schedule. 
3. Audit execution: Implement the audit strategy, conduct necessary procedures, and adjust strategies if needed. 
4. Audit conclusion: Draw conclusions, prepare a draft report, and issue the final report after confirming documents and communicating findings. 
5. Communication: Communicate findings throughout the process; issue a management letter with recommendations if needed. 

As audit season approaches, early preparation is essential. The audit cycle begins in October and typically concludes by May, so choosing the right audit team is critical to staying compliant and on schedule. We provide tailored full audit support, including managing the process, assisting group auditors, and delivering statutory/IFRS/US GAAP audits and internal audits. With over 20 years of experience, our bilingual team ensures seamless execution, with extended services to Hong Kong. Contact us to discuss how we can support your audit needs.