Is Audit Mandatory in China? Rules and Regulations

Audit is a process of exam­in­ing and ver­i­fy­ing the finan­cial state­ments and records of an orga­ni­za­tion to ensure their accu­ra­cy, com­plete­ness, and com­pli­ance with rel­e­vant laws and reg­u­la­tions. Audit is an impor­tant tool for enhanc­ing the trans­paren­cy, account­abil­i­ty, and cred­i­bil­i­ty of busi­ness­es and pub­lic insti­tu­tions. In Chi­na, audit is manda­to­ry for cer­tain types of enti­ties and trans­ac­tions, while vol­un­tary for oth­ers. In this arti­cle, we will explain the rules and reg­u­la­tions of audit in Chi­na, the types and scope of audit, the ben­e­fits and chal­lenges of audit, and how to get start­ed with audit.

What are the rules and regulations of audit in China?

The rules and reg­u­la­tions of audit in Chi­na are main­ly based on the fol­low­ing sources:

• The Audit Law of the Peo­ple’s Repub­lic of Chi­na is the fun­da­men­tal law that gov­erns the audit activ­i­ties in Chi­na. It was enact­ed in 1994 and revised in 2006 and 2018. It defines the prin­ci­ples, objec­tives, scope, meth­ods, stan­dards, respon­si­bil­i­ties, and super­vi­sion of audit in Chi­na. It also stip­u­lates the rights and oblig­a­tions of audi­tors, audi­tees, and oth­er par­ties involved in audit.
• The Account­ing Law of the Peo­ple’s Repub­lic of Chi­na is the basic law that reg­u­lates the account­ing sys­tem, account­ing stan­dards, account­ing records, account­ing reports, and account­ing super­vi­sion in Chi­na. It was enact­ed in 1985 and revised in 1999 and 2017. It requires all orga­ni­za­tions that engage in eco­nom­ic activ­i­ties in Chi­na to estab­lish an account­ing sys­tem, keep account­ing records, pre­pare account­ing reports, and accept account­ing supervision.
• The Cer­ti­fied Pub­lic Accoun­tants Law of the Peo­ple’s Repub­lic of Chi­na is the spe­cif­ic law that reg­u­lates the qual­i­fi­ca­tion, prac­tice, man­age­ment, and dis­ci­pline of cer­ti­fied pub­lic accoun­tants (CPAs) in Chi­na. It was enact­ed in 1993 and revised in 2014. It sets the require­ments for obtain­ing and main­tain­ing a CPA license, the scope and stan­dards of CPA ser­vices, the rights and duties of CPAs and CPA firms, and the super­vi­sion and penal­ties for CPAs and CPA firms.
• The Secu­ri­ties Law of the Peo­ple’s Repub­lic of Chi­na is the com­pre­hen­sive law that reg­u­lates the issuance, trad­ing, list­ing, dis­clo­sure, super­vi­sion, and pro­tec­tion of secu­ri­ties in Chi­na. It was enact­ed in 1998 and revised in 2005, 2013, 2019, and 2020. It requires all com­pa­nies that issue or list secu­ri­ties in Chi­na to pre­pare finan­cial state­ments accord­ing to the account­ing stan­dards for busi­ness enter­pris­es (ASBEs), dis­close finan­cial infor­ma­tion accord­ing to the infor­ma­tion dis­clo­sure rules for list­ed com­pa­nies (IDRLCs), and accept audit by qual­i­fied CPA firms.
• The Account­ing Stan­dards for Busi­ness Enter­pris­es (ASBEs) are the uni­fied account­ing stan­dards that apply to all busi­ness enter­pris­es in Chi­na. They were issued by the Min­istry of Finance (MOF) in 2006 and updat­ed peri­od­i­cal­ly. They con­sist of a basic stan­dard that out­lines the gen­er­al prin­ci­ples of account­ing recog­ni­tion, mea­sure­ment, pre­sen­ta­tion, and dis­clo­sure, and 38 spe­cif­ic stan­dards that cov­er var­i­ous account­ing topics.
• The Audit­ing Stan­dards for Cer­ti­fied Pub­lic Accoun­tants (ASCAs) are the pro­fes­sion­al audit­ing stan­dards that apply to all CPAs who pro­vide audit­ing ser­vices in Chi­na. They were issued by the Chi­nese Insti­tute of Cer­ti­fied Pub­lic Accoun­tants (CIC­PA) in 2010 and updat­ed peri­od­i­cal­ly. They con­sist of a gen­er­al stan­dard that out­lines the basic require­ments for audit­ing qual­i­ty con­trol, ethics, inde­pen­dence, objec­tiv­i­ty, pro­fes­sion­al judg­ment , pro­fes­sion­al skep­ti­cism, and doc­u­men­ta­tion, and 40 spe­cif­ic stan­dards that cov­er var­i­ous audit­ing procedures.

These rules and reg­u­la­tions form the legal frame­work of audit in Chi­na, which is super­vised and enforced by var­i­ous author­i­ties, such as the Nation­al Audit Office (NAO), the Min­istry of Finance (MOF), the Chi­na Secu­ri­ties Reg­u­la­to­ry Com­mis­sion (CSRC), and the Chi­nese Insti­tute of Cer­ti­fied Pub­lic Accoun­tants (CIC­PA).

What are the types and scope of audit in China?

There are two main types of audit in Chi­na: statu­to­ry audit and vol­un­tary audit.

Statu­to­ry audit is a type of audit that is required by law or reg­u­la­tion for cer­tain types of enti­ties or trans­ac­tions. The pur­pose of statu­to­ry audit is to ensure com­pli­ance with the rel­e­vant laws and reg­u­la­tions, pro­tect the inter­ests of the stake­hold­ers, and safe­guard the pub­lic inter­est. The scope of statu­to­ry audit includes:

• Audit of finan­cial state­ments. This type of audit is required for all com­pa­nies that issue or list secu­ri­ties in Chi­na, as well as some oth­er com­pa­nies that meet cer­tain cri­te­ria, such as state-owned enter­pris­es (SOEs), finan­cial insti­tu­tions, for­eign-invest­ed enter­pris­es (FIEs), and large-scale enter­pris­es. The audi­tors are required to express an opin­ion on whether the finan­cial state­ments are pre­pared in accor­dance with the ASBEs and present fair­ly the finan­cial posi­tion, per­for­mance, and cash flows of the company.
• Audit of inter­nal con­trol. This type of audit is required for all com­pa­nies that issue or list secu­ri­ties in Chi­na, as well as some oth­er com­pa­nies that are sub­ject to spe­cial super­vi­sion by the CSRC. The audi­tors are required to express an opin­ion on whether the com­pa­ny has estab­lished and main­tained an effec­tive inter­nal con­trol sys­tem over finan­cial reporting.
• Audit of spe­cial pur­pose reports. This type of audit is required for some spe­cif­ic trans­ac­tions or events that involve secu­ri­ties issuance, list­ing, merg­er, acqui­si­tion, restruc­tur­ing, asset appraisal, cap­i­tal ver­i­fi­ca­tion, or oth­er mat­ters that affect the inter­ests of the investors or cred­i­tors. The audi­tors are required to express an opin­ion on whether the spe­cial pur­pose reports are pre­pared in accor­dance with the rel­e­vant rules and reg­u­la­tions and reflect truth­ful­ly and com­plete­ly the rel­e­vant facts and circumstances.
• Audit of gov­ern­ment affairs. This type of audit is con­duct­ed by the NAO or its local branch­es to exam­ine and super­vise the finan­cial rev­enues and expen­di­tures, bud­get imple­men­ta­tion, state-owned assets man­age­ment, eco­nom­ic respon­si­bil­i­ty, per­for­mance eval­u­a­tion, and oth­er aspects of gov­ern­ment depart­ments, pub­lic insti­tu­tions, SOEs, and oth­er enti­ties that use pub­lic funds. The audi­tors are required to report their find­ings and rec­om­men­da­tions to the rel­e­vant author­i­ties or the public.

Vol­un­tary audit is a type of audit that is not required by law or reg­u­la­tion but is ini­ti­at­ed by the enti­ty itself or request­ed by a third par­ty. The pur­pose of vol­un­tary audit is to enhance the cred­i­bil­i­ty, trans­paren­cy, and effi­cien­cy of the enti­ty’s finan­cial infor­ma­tion, man­age­ment sys­tem, or busi­ness oper­a­tion. The scope of vol­un­tary audit includes:

• Audit of finan­cial state­ments. This type of audit is con­duct­ed for enti­ties that are not sub­ject to statu­to­ry audit but want to improve their finan­cial man­age­ment, attract investors or cred­i­tors, or pre­pare for future list­ing. The audi­tors are required to express an opin­ion on whether the finan­cial state­ments are pre­pared in accor­dance with the ASBEs or oth­er account­ing stan­dards agreed upon by both parties.
• Audit of inter­nal con­trol. This type of audit is con­duct­ed for enti­ties that want to eval­u­ate and improve their inter­nal con­trol sys­tem over finan­cial report­ing or oth­er busi­ness process­es. The audi­tors are required to express an opin­ion on whether the inter­nal con­trol sys­tem is designed and oper­at­ed effectively.
• Audit of spe­cial pur­pose reports. This type of audit is con­duct­ed for enti­ties that need to pro­vide spe­cial pur­pose reports for spe­cif­ic pur­pos­es, such as tax fil­ing, grant appli­ca­tion, con­tract com­pli­ance, or due dili­gence. The audi­tors are required to express an opin­ion on whether the spe­cial pur­pose reports are pre­pared in accor­dance with the agreed-upon cri­te­ria and procedures.
• Audit of non-finan­cial infor­ma­tion. This type of audit is con­duct­ed for enti­ties that want to dis­close or ver­i­fy their non-finan­cial infor­ma­tion, such as envi­ron­men­tal per­for­mance, social respon­si­bil­i­ty , cor­po­rate gov­er­nance, or qual­i­ty man­age­ment. The audi­tors are required to express an opin­ion on whether the non-finan­cial infor­ma­tion is pre­pared in accor­dance with the rel­e­vant stan­dards and guide­lines and presents fair­ly the rel­e­vant aspects of the entity.

What are the benefits and challenges of audit in China?

Audit in Chi­na has many ben­e­fits and chal­lenges for both audi­tors and audi­tees. Some of the ben­e­fits are:

• Enhanced cred­i­bil­i­ty and trans­paren­cy. Audit can pro­vide an inde­pen­dent and objec­tive assur­ance on the reli­a­bil­i­ty and accu­ra­cy of the finan­cial and non-finan­cial infor­ma­tion of an enti­ty, which can increase the con­fi­dence and trust of the stake­hold­ers, such as investors, cred­i­tors, reg­u­la­tors, cus­tomers, sup­pli­ers, employ­ees, and the public.
• Improved man­age­ment and per­for­mance. Audit can help iden­ti­fy and cor­rect the errors, weak­ness­es, risks, and inef­fi­cien­cies in the enti­ty’s finan­cial report­ing, inter­nal con­trol, or busi­ness oper­a­tion, which can improve the qual­i­ty and effec­tive­ness of the man­age­ment and per­for­mance of the entity.
• Increased com­pli­ance and account­abil­i­ty. Audit can help ensure that the enti­ty com­plies with the rel­e­vant laws and reg­u­la­tions, ful­fills its con­trac­tu­al oblig­a­tions, meets its social respon­si­bil­i­ties, and achieves its strate­gic goals, which can enhance the account­abil­i­ty and rep­u­ta­tion of the entity.

Some of the chal­lenges are:

• Diverse and com­plex reg­u­la­tions. Audit in Chi­na is sub­ject to var­i­ous rules and reg­u­la­tions from dif­fer­ent author­i­ties at dif­fer­ent lev­els, which may change fre­quent­ly and dif­fer sig­nif­i­cant­ly across regions and indus­tries. Audi­tors and audi­tees need to keep abreast of the lat­est devel­op­ments and require­ments of audit in Chi­na and adapt to the chang­ing environment.
• High cost and work­load. Audit in Chi­na can be time-con­sum­ing and resource-inten­sive, espe­cial­ly for enti­ties that have mul­ti­ple sub­sidiaries, branch­es, or busi­ness seg­ments across dif­fer­ent loca­tions. Audi­tors and audi­tees need to allo­cate suf­fi­cient time, mon­ey, and per­son­nel to con­duct audit in Chi­na and ensure its qual­i­ty and efficiency.
• Poten­tial con­flicts and dis­putes. Audit in Chi­na may involve sen­si­tive issues, such as fraud, cor­rup­tion, tax eva­sion, or envi­ron­men­tal dam­age, which may trig­ger con­flicts or dis­putes between audi­tors and audi­tees or among dif­fer­ent stake­hold­ers. Audi­tors and audi­tees need to han­dle these issues care­ful­ly and pro­fes­sion­al­ly and seek legal or medi­a­tion assis­tance if necessary.

How to get started with audit in China?

To get start­ed with audit in Chi­na, audi­tors and audi­tees need to fol­low these steps:

1. Deter­mine the type and scope of audit. Audi­tors and audi­tees need to deter­mine whether they need to con­duct statu­to­ry audit or vol­un­tary audit, what kind of audit they need to con­duct (finan­cial state­ments, inter­nal con­trol, spe­cial pur­pose reports, etc.), what stan­dards they need to fol­low (ASBEs, ASCAs, etc.), what peri­od they need to cov­er (annu­al, quar­ter­ly, etc.), what enti­ties they need to include (par­ent com­pa­ny, sub­sidiaries, etc.), and what deliv­er­ables they need to pro­duce (audit report, audit opin­ion, etc.).
2. Select a qual­i­fied audi­tor. Audi­tors and audi­tees need to select a qual­i­fied audi­tor who has a valid CPA license in Chi­na, who has rel­e­vant expe­ri­ence and exper­tise in the indus­try or field of audit, who has a good rep­u­ta­tion and track record in audit qual­i­ty and ethics, who has a rea­son­able fee struc­ture and sched­ule, who has a good com­mu­ni­ca­tion style and rap­port with the audi­tee. Audi­tors and audi­tees need to sign an audit engage­ment let­ter that spec­i­fies the terms and con­di­tions of the audit service.
3. Pre­pare for the audit. Audi­tors and audi­tees need to pre­pare for the audit by col­lect­ing and orga­niz­ing the rel­e­vant doc­u­ments and records, such as finan­cial state­ments, account­ing vouch­ers, con­tracts, invoic­es, bank state­ments, tax returns, etc. Audi­tors and audi­tees need to coör­di­nate the audit plan, time­line, and pro­ce­dures, and assign the roles and respon­si­bil­i­ties of the audit team and the audi­tee’s staff.
4. Con­duct the audit. Audi­tors and audi­tees need to con­duct the audit accord­ing to the audit plan and pro­ce­dures, using var­i­ous audit tech­niques, such as obser­va­tion, inquiry, inspec­tion, con­fir­ma­tion, cal­cu­la­tion, analy­sis, etc. Audi­tors need to obtain suf­fi­cient and appro­pri­ate audit evi­dence to sup­port their audit opin­ion. Audi­tees need to coöper­ate with the audi­tors and pro­vide them with access to the nec­es­sary infor­ma­tion and resources.
5. Report the audit results. Audi­tors and audi­tees need to report the audit results by prepar­ing and issu­ing the audit report and oth­er deliv­er­ables. The audit report should include the audi­tor’s opin­ion, the basis for the opin­ion, the respon­si­bil­i­ties of the audi­tor and the audi­tee, and any oth­er mat­ters that are rel­e­vant to the audit. The audit report should be signed and dat­ed by the audi­tor and deliv­ered to the audi­tee and oth­er intend­ed users.
6. Fol­low up on the audit. Audi­tors and audi­tees need to fol­low up on the audit by eval­u­at­ing the audit qual­i­ty and feed­back, resolv­ing any out­stand­ing issues or dis­putes, imple­ment­ing any rec­om­men­da­tions or improve­ments, fil­ing or dis­clos­ing any required infor­ma­tion or doc­u­ments, and main­tain­ing a good rela­tion­ship for future coöperation.

Frequently Asked Questions

Sources:

1. Nation­al Peo­ple’s Con­gress of the Peo­ple’s Repub­lic of Chi­na | Audit Law of the Peo­ple’s Repub­lic of China
2. Nation­al Peo­ple’s Con­gress of the Peo­ple’s Repub­lic of Chi­na | Account­ing Law of the Peo­ple’s Repub­lic of China
3. Nation­al Peo­ple’s Con­gress of the Peo­ple’s Repub­lic of Chi­na | Cer­ti­fied Pub­lic Accoun­tants Law of the Peo­ple’s Repub­lic of China
4. Nation­al Peo­ple’s Con­gress of the Peo­ple’s Repub­lic of Chi­na | Secu­ri­ties Law of the Peo­ple’s Repub­lic of China
5. Min­istry of Finance of the Peo­ple’s Repub­lic of Chi­na | 关于印发《企业会计准则第 14 号——收入》的通知
6. Chi­nese Insti­tute of Cer­ti­fied Pub­lic Accoun­tants | 中国注册会计师审计准则
7. Nation­al Audit Office of the Peo­ple’s Repub­lic of Chi­na | Home
8. Min­istry of Finance of the Peo­ple’s Repub­lic of Chi­na | Home
9. Chi­na Secu­ri­ties Reg­u­la­to­ry Com­mis­sion | Home
10. Chi­nese Insti­tute of Cer­ti­fied Pub­lic Accoun­tants | Home