When it comes to 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. It thereby ensures 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 guide 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.
- China requires companies to close their books on 31 December, with the statutory audit deadline set at 31 May each year, leaving a defined window for preparation and execution.
- ISA 600 (revised) has been in effect since December 2023 and places greater documentation and communication responsibilities on both group and component auditors for financial statements prepared from 2024 onwards.
- Foreign-invested enterprises complete their annual audit before distributing profits or remitting dividends abroad, making the audit a practical prerequisite for capital repatriation.
- The standard corporate income tax rate in China is 25%, though qualifying SMEs may currently apply a reduced 5% rate until December 2027, subject to profit, employee and asset thresholds.
Key developments in audit standards affecting China
The International Standards on Auditing (ISA) have undergone significant changes regarding group audits, particularly with the revised ISA 600, Special Considerations for Audits of Group Financial Statements (including the work of component auditors).
The revised ISA 600 came into effect on 15 December 2023 and applies to audits of financial statements for accounting periods beginning on or after that date. The updated standard places greater responsibilities on both group auditors and component auditors. Component auditors are expected to engage earlier in the audit process, provide sufficient audit evidence, maintain close communication with the group audit team and comply with enhanced documentation requirements.
In parallel, auditors and regulators continue to place increased scrutiny on revenue recognition practices, related party disclosures and going concern assessments. Companies are increasingly expected to demonstrate the commercial substance behind their financial positions, particularly foreign-invested enterprises involved in cross-border transactions.
Businesses operating across multiple jurisdictions are also facing greater pressure to align their local Chinese accounts with broader group reporting frameworks, including IFRS and US GAAP. This often requires planning and coordination early in the audit cycle to minimise reporting inconsistencies and compliance risks.
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 outline 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
Prepare the balance sheet, income statement and cash flow statement in compliance with the Chinese Accounting Standards for Business Enterprises (ASBEs). Ensuring these are drafted accurately before the auditors arrive reduces the risk of delays during fieldwork.
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.
Importance of annual audits for foreign-invested enterprises
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, the specific audit requirements for foreign-invested companies vary 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 includes a tax reconciliation and inspection 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 corporate income tax rate is 25%. Small and medium-sized businesses may qualify for a reduced 5% tax rate until 31 December 2027. To be eligible, businesses meet certain criteria, including profits below RMB 3 million, a headcount of no more than 300 employees and total assets not exceeding RMB 50 million.
China’s tax administration has also become increasingly digitalised, with authorities using automated data-matching systems to identify inconsistencies between audit reports and tax filings. Companies should ensure that their financial statements and tax submissions are fully aligned before filing, as discrepancies are now more readily detected.
Financial transparency and accuracy
Annual audits reinforce the accuracy of financial records and reporting. Audit reports covering at least the last three years are generally required by potential investors, bankers and other creditors, and may also be requested by the tax bureau. The audit report first confirms the accounting treatment, for instance, revenue recognition, which is critical in understanding the true performance of a business. Stakeholders may also have different accounting policies themselves and would need to understand differences in Chinese accounting practices. Companies that do not complete their annual audit can face additional costs and complications when managing cash flow or responding to regulatory enquiries.
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. These findings are typically included in a management letter addressed to management and governance committees and may include recommendations on strengthening internal controls, improving oversight and applying greater segregation of duties where appropriate, all of which are key elements of an effective internal audit function.
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 their approach to China’s statutory audit requirements aligns with local regulations.
Main audit phases and processes
Audits follow a structured path designed to ensure thorough evaluation and compliance at every stage:
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.
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.
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.
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.
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.
Conclusion
A statutory audit is more than a regulatory obligation for foreign-invested enterprises in China. It reinforces financial accuracy, supports tax compliance, strengthens internal controls and ensures that profits can be distributed or repatriated without delay.
In practice, that means closing books to PRC GAAP standards by 31 December, preparing documentation throughout the year rather than at the last minute and ensuring that financial statements and tax filings are fully aligned before the 31 May deadline. For businesses operating across multiple jurisdictions, it also means coordinating early with group auditors to meet the responsibilities introduced under the revised ISA 600.
Understanding the audit timeline, the preparation steps and the compliance requirements specific to your entity type is the starting point for getting this right. Where local requirements are unclear or your reporting spans multiple frameworks, the right support can help you manage each phase from planning through to the final audit report.
How Acclime can help with annual audits in China
Acclime provides end-to-end audit support in China, helping businesses manage annual audit requirements and maintain compliance with both local and group reporting standards. From pre-audit financial health checks and statutory audits to IFRS, US GAAP and internal audit support, our China audit services cover every stage from identifying compliance risks to coordinating with group auditors and managing on-the-ground audit procedures.
By partnering with Acclime, businesses can streamline the audit process, reduce compliance risk and improve audit readiness across multiple jurisdictions. Contact us to learn more about how we can support your annual audit and reporting requirements.
Contact our teams for expert support and further information about auditing requirements in China to ensure you are compliant in the market.
Russel Brown OBE, Vice Chairman, Partner, r.brown@acclime.com
Yolanda Xie, Partner, Audit, y.xie@acclime.com
Christophe Marquis, Director, c.marquis@acclime.com
