It is fundamental for a business to have efficient and robust internal control systems in place to ensure effective corporate governance. Acclime China’s advisory team takes a hands-on role in helping to establish or strengthen internal controls for your organisation.
The five major components of internal controls according to COSO Framework are control environment, risk assessment, control activities, communication and monitoring. All 17 principles under the five major components are required to be included and function effectively in a company’s internal control structure. The 17 principles consist of the following concepts:
Acclime’s advisory experts assess existing financial risks and help implement the most appropriate treasury management strategy in order to face risks head on, while still adapting to your individual business needs.
In addition, since efficient treasury management also encompasses banking relationships, Acclime can advise foreign companies on how recent reform to the country’s banking system alters the way companies in China should approach their treasury operations.
In the financial auditing of public companies, SOX 404 top–down risk assessment (“TDRA”) is a financial risk assessment performed to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 404). This is used to determine the scope and required evidence to support management’s testing of its internal controls as well as by external auditors to issue formal opinions on the company’s internal controls.
The SOX 404 assessment ensures that all publicly-traded companies establish secure internal controls for financial reporting. They must document, test, and maintain the procedures for the upmost effectiveness of the company. Registered external auditors must attest to the accuracy of the company management’s assertion that internal accounting controls are in place, operational, and effective.
There are 3 steps to completing the evaluation of the effectiveness of internal controls:
Acclime will ensure that your employees understand what they need to do to properly prepare financial reports, and understand the information they need to have them done correctly.
In Western countries limited liability companies are generally subject to an annual audit carried out by independent external auditors whose role is to express an objective opinion on the truthfulness and fairness of the financial statements.
In China, auditing is not a legal requirement but is required under the regulations. Prior to the introduction of the ASBE, the primary objective of auditing in China was to carry out inspection on the financial records of a business to ascertain their accuracy and legality (i.e. whether the transactions conducted complied with relevant state laws and regulations). Auditors in China are concerned with protecting the legal interests of the company as well as the interests of the state. Only with the implementation of the ASBE were the concepts of true and fair presentation introduced.
Prior to 2000 financial statements of state-owned enterprises were not required to be audited annually by independent auditors, but periodical or social audits conducted for the purpose of ascertaining the enterprise’s tax liabilities or other purposes might be conducted by the State Audit Bureau or Tax Bureau. Since 2002, except for a few types of specialised industries that have been explicitly exempted, all other state-owned enterprises must be audited at least annually. In addition, the regulations governing the accounting of joint stock companies and foreign investment enterprises require these companies to be subject to annual audit carried out by a registered Chinese certified public accounting firms. When reporting on whether the financial statements of foreign investment enterprises are prepared in accordance with the relevant laws and regulations, auditors may make reference to the following main laws and regulations:
Both the Accounting system and Accounting standards constitute an integral part of China’s unified accounting system. As administrative documents, they set out the rules for accounting such as the recognition, measurement, disclosure and reporting of accounting elements. While both are formulated and promulgated by the MOF, certain differences exist between the two.
Firstly, in terms of the scope of application, specific accounting standards are mostly applicable to joint stock limited companies although some of them also apply to other enterprises. As for the Accounting System, apart from joint stock limited companies, other qualified enterprises may also adopt the system but prior approval is required for state-owned enterprises wishing to implement the system.
Secondly, the Accounting System covers all aspects of an enterprise’s transactions and events. In other words, if an enterprise falls within the scope of the Accounting System, the accounting treatment of all its transactions and events must be handled according to the stipulations of the system. As for specific accounting standards, they only govern certain transactions and events or certain accounting aspects of an enterprise. For instance, all the 13 specific accounting standards issued to date merely deal with specific transactions and events of an enterprise.
Thirdly, stipulations concerning the recognition, measurement, disclosure and reporting of accounting elements contained in the specific accounting standards are more general, with no stipulations on how accounting records should be made. By comparison, stipulations in the Accounting System are more specific, giving detailed rules on the account titles and instructions for use.
Since 1 January 2002, FIEs have implemented the Accounting System for Business Enterprises promulgated by the MOF on 29 December 2000, while the Accounting System for Foreign-invested Enterprises issued by the MOF on 24 June 1992 and its related regulations on account titles and financial statements were nullified. Below are certain issues concerning the implementation of the new accounting system.
If an FIE has to change its accounting estimate as a result of implementing the accounting system, all changes should be made using the prospective application. If an FIE has to change its accounting policies, the following circumstances where it is stipulated that the retrospective adjustment method is to be used:
FIEs should abide by the following stipulations in implementing the accounting system:
When compiling comparative financial statements using the retrospective adjustment method, if changes in accounting policies occur during the periods covered, adjustments should be made to the net profits and losses and other related items in the periods concerned accordingly. For entries in comparative financial statements subject to cumulative effect due to policy change prior to the periods covered, adjustments should be made to the initial retained income as well as other related items.
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