China company annual audit (FIEs) refers to all foreign invested enterprises including Wholly Foreign Owned Enterprises (WFOE), Joint Ventures (JV), and Representative Offices (RO) are required to be conducted on an annual basis. This statutory requirement has to be met prior to business license renewal every year. Annual audit of FIE statutory accounts must be conducted by a firm of Certified Public Accountants registered in the PRC under PRC regulations.
Importance of annual audit on FIEs
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.
Key areas in the annual audit
For JVs, WFOEs and FICEs, accounts related to purchases and sales are usually the most vulnerable areas in an annual audit, and so more time would typically be spent reviewing these accounts and ensuring that the accounting data is genuine and accurate. This is done by comparing the transactions with the corresponding contracts, invoices, orders, and inventory changes.
In addition, it is quite common for FIEs new to China to conduct most of their transactions with affiliated companies overseas. For example, they would import from their foreign parent company and either sell the products domestically, or export products purchased from China to their overseas affiliates. These transactions can raise issues in transfer pricing and bring the foreign company into non-compliance with the Chinese tax bureau.
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If you have further inquires, please do not hesitate to contact Tannet at anytime, anywhere by simply visiting Tannet’s website english.tannet-group.com, or calling Hong Kong hotline at 852-27826888 or China hotline at 86-755-82143422, or emailing to tannet-solution@hotmail.com. You are also welcome to visit our office situated in 16/F, Taiyangdao Bldg 2020, Dongmen Rd South, Luohu, Shenzhen, China.
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