Statutory audit

All Wholly Foreign Owned Enterprises (WFOE), Joint Ventures (JV) and Representative Offices (RO) are required to be audited by a Chinese Certified Public Accountant at the end of each calendar year. The audited financial statements are the basis for the annual tax declaration and settlement. The statutory audits are also a precondition for the annual prolongation of the business license and for the transfer of profits to the investor abroad.

The audited financial statements must be prepared as per 31st December. Unlike most European countries, application for another fiscal year closing date is not possible.

For the statutory audit (HB 1), the auditor has to certify that the accounting work has been done and the financial statements have been prepared in accordance with the Chinese Accounting Law (China GAAP) and other relevant state and local regulations. The audit should also include a review the operations of the company and the identification of risks and weaknesses of internal control (e.g. potential fraud etc.).

In many cases, in addition to the auditing required by the Chinese authorities, a foreign investor needs audit reports to fulfill internal or statutory requirements in his home country (HB 2). For this purpose, the auditor must deliver additional reports in accordance with other international accounting standards, such as IFRS or the German HGB as well as additional management letters. These reports, which have to be customized to very specific requirements, can only be prepared in close communication with the home auditor and the CFO of the parent company.