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:
- 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.).
- 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.
- 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.
- 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.
- 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.
- 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
The deadlines for audit in China depend on the type of entity and the type of audit. Generally, companies that issue or list securities in China must complete their annual financial statement audit within four months after the end of each fiscal year (by April 30) and their interim financial statement audit within two months after the end of each half-year (by August 31). Other companies that are subject to statutory audit must complete their annual financial statement audit within six months after the end of each fiscal year (by June 30). Companies that conduct voluntary audit may choose their own deadlines according to their needs.
The penalties for non-compliance with audit in China vary depending on the type of entity, the type of audit, and the severity of the violation. Generally, entities that fail to conduct statutory audit or provide false or misleading information in their audit reports may face administrative penalties, such as fines, warnings, rectification orders, suspension of business activities, revocation of business licenses, or disqualification from issuing or listing securities. Entities that cause losses or damages to other parties due to their non-compliance with audit may also face civil liabilities or criminal charges.
You can find a qualified auditor in China by searching online directories or databases of CPA firms or CPAs in China, such as those provided by CICPA or MOF. You can also ask for referrals or recommendations from your business partners, industry associations, chambers of commerce, or other professional bodies. You can also compare and evaluate different auditors based on their qualifications, experience, reputation, fees, and services.
- National People’s Congress of the People’s Republic of China | Audit Law of the People’s Republic of China
- National People’s Congress of the People’s Republic of China | Accounting Law of the People’s Republic of China
- National People’s Congress of the People’s Republic of China | Certified Public Accountants Law of the People’s Republic of China
- National People’s Congress of the People’s Republic of China | Securities Law of the People’s Republic of China
- 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
- Chinese Institute of Certified Public Accountants | 中国注册会计师审计准则
- National Audit Office of the People’s Republic of China | Home
- Ministry of Finance of the People’s Republic of China | Home
- China Securities Regulatory Commission | Home
- Chinese Institute of Certified Public Accountants | Home