Hong Kong Audit Exemption: Why Small Companies Still Need an Audit

No. Hong Kong has a reporting exemption, not an audit exemption. A private company that does not exceed two of three limits (revenue HK$100,000,000, total assets HK$100,000,000, 100 employees) can prepare simpler financial statements under section 359 of the Companies Ordinance (Cap. 622). Those statements must still be audited. The only companies that escape the statutory audit are dormant companies under section 447. Everything else needs an auditor's report, which the IRD expects with the profits tax return.

Last reviewed: September 2026 · Sources: Companies Registry, Companies Ordinance (Cap. 622), Inland Revenue Department, HKICPA SME-FRF & SME-FRS

Why the myth survives

The confusion comes from the word "exemption". Section 359 of the Companies Ordinance creates what the law calls the reporting exemption. It exempts qualifying companies from parts of the reporting regime: full Hong Kong Financial Reporting Standards, the business review in the directors' report, and some disclosures.

It says nothing about switching off the audit. The Companies Registry's FAQ on accounts and audit confirms that a company within the reporting exemption still has its financial statements audited. What changes is the opinion: the auditor reports on whether the statements have been properly prepared, rather than whether they give a true and fair view.

So a "simplified" set of accounts is a lighter set of accounts, not an unaudited one. Owners who budget on the assumption that "small companies don't need audits" usually find out at the worst moment, when the profits tax return is due.

Who qualifies for the reporting exemption

Section 359 covers several kinds of company. The thresholds below are the ones most Hong Kong SMEs will meet. A company qualifies if it does not exceed any two of the three limits.

A few rules decide how the tests work in practice.

• Two consecutive years. Once a company qualifies, it keeps qualifying until it fails the tests for two consecutive financial years. A company that does not yet qualify must meet the tests for two consecutive years before it qualifies. One unusual year does not change the answer.
• Employee numbers are a monthly average, not a head count on the balance sheet date.
• Revenue is pro-rated when the financial year is not 12 months long, as it often is for a first set of accounts.
• Groups are tested on aggregate figures, after eliminating intragroup balances and transactions. A holding company qualifies only if the group qualifies, and each company in the group must also be eligible in its own right.
• Some businesses are shut out entirely whatever their size. These include banking licence holders, money-lending businesses, corporations licensed under Part V of the Securities and Futures Ordinance, and insurers (other than insurance agents).

Using the exemption is optional. A qualifying company can still prepare full HKFRS accounts if its bank, investors or a future buyer want them.

Worked example: does the company qualify?

Harbour Components Ltd, a private company with no subsidiaries, reports these figures for the years ended 31 March 2025 and 31 March 2026.

Revenue is over the limit, but two of the three conditions (assets and employees) are met in both years. The company is a small private company for 2025/26 and may prepare its accounts under the reporting exemption.

The audit still happens. If revenue grows to HK$150,000,000 and total assets climb to HK$105,000,000 in the next two years, it fails two of three tests twice in a row. It would then fall out of the small private company category, although it could still look at the eligible private company route with its HK$200,000,000 limits and a members' resolution.

What the reporting exemption actually changes

A qualifying company can use the HKICPA's Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME-FRF and SME-FRS). It applies to accounting periods beginning on or after 3 March 2014 and was last revised in February 2019. In practice, it changes several things.

• Measurement is simpler. The framework works on the historical cost convention, without the fair-value remeasurements full HKFRS can require.
• No deferred tax. Under SME-FRS, only current tax is recognised, so there are no deferred tax calculations.
• The cash flow statement is optional.
• Disclosures are lighter. Notes are shorter and there is less narrative.
• The directors' report does not need a business review. Under section 388, a company within the reporting exemption is exempt from preparing one.
• The audit opinion is different. The auditor says whether the statements have been "properly prepared in accordance with" the framework, not whether they give a true and fair view.

Some things do not change. Inventories are still carried at the lower of cost and net realisable value. Foreign-currency monetary balances are still translated at the closing rate. Most importantly, the books must still support every number, because the auditor will test them.

The one group that genuinely skips the audit: dormant companies

Section 447 of the Companies Ordinance exempts a dormant company from the requirement to appoint an auditor and have its financial statements audited. Dormancy is a formal status, not a description of a quiet year.

Under the Companies Registry's guidance on dormant companies, becoming dormant works like this.

1. Pass a special resolution declaring the company dormant.
2. Deliver it to the Registrar using the specified form.
3. Keep the company free of accounting transactions. The company stops being dormant as soon as it enters into any accounting transaction. Paying fees the law requires, such as Companies Registry filing fees, does not count as a transaction.
4. Leave dormancy by special resolution when business restarts, or it ends automatically at the first transaction.

A dormant company does not file an annual return. It must still notify changes of registered office, directors and company secretary. If the resolution is delivered after an annual return has already fallen due, that return must still be filed.

On the tax side, the IRD's profits tax return FAQ confirms that a dormant company under the Companies Ordinance is not required to attach audited financial statements to its return. The return itself still has to be completed and filed if the IRD issues one.

A company that trades a little, holds a property that earns rent, or pays a staff member is not dormant. It needs an audit.

Why the IRD cares as much as the Registrar

For most SMEs, the real deadline for the audit is set by the Inland Revenue Department, not by the company's annual general meeting. The IRD's guidance on completing the profits tax return asks a corporation to submit the supporting documents with its BIR51: the balance sheet, the auditor's report and the profit and loss account for the basis period, plus a tax computation.

The small-corporation concession that once let companies with gross income up to HK$2,000,000 file without those documents no longer applies. The IRD's return-filing guidance explains that supporting documents are required from the 2022/23 year of assessment. A small company therefore faces the same audit-before-filing sequence as a large one.

For the 2025/26 returns issued on 1 April 2026, the IRD's block extension circular set the filing dates by year-end code.

E-filers got roughly a further month, and "M" code returns with an assessable loss had until 1 February 2027. The 2026/27 dates will come in next year's IRD circular. For the full filing mechanics, see our BIR51 filing guide.

Separately, a private company must hold its AGM within nine months after the end of its accounting reference period, unless it has dispensed with the AGM. It can do that by written resolution, by being a single-member company, or by all members agreeing, and the dispensation must be registered within 15 days. Even without a meeting, the audited reporting documents must still be sent to members. The Registrar's meetings FAQ sets out the rules.

How to be audit-ready, not audit-anxious

Audit cost and duration depend mostly on how much the auditor has to reconstruct. The practical way to keep both down is to close the books properly every month, so year end is the twelfth ordinary close rather than a rescue. Our month-end close checklist sets out a five-day routine.

Where JetFlow fits: JetFlow keeps the ledger, bank reconciliations, receipts captured through its AI Hot Folder, and period locks in one place, so the trial balance you hand to your auditor ties back to source documents. See how JetFlow handles period close.

Before the auditor arrives, make sure you have these ready.

1. A locked trial balance for the year end, with no further postings.
2. Bank reconciliations for every account at the year-end date, plus the bank confirmation authority your auditor will send.
3. Aged debtor and creditor listings that agree to the ledger, with support for material balances and any bad-debt write-offs.
4. A fixed asset register with additions supported by invoices and depreciation that recalculates.
5. Stock count sheets if you hold inventory, and the valuation at the lower of cost and net realisable value.
6. Payroll records: the Employer's Return totals, MPF remittance statements and bonus accruals.
7. Statutory records: board minutes, the register of members and directors, and any resolutions passed in the year.
8. Contracts for leases, loans and significant customer or supplier agreements.

Section 51C of the Inland Revenue Ordinance requires business records to be kept for at least seven years. The IRD summarises the expectation in its record-keeping guidance. Records you keep for the auditor should be the same records you keep for the IRD.

Common mistakes

• Treating "small company" as "no audit". The reporting exemption and the audit exemption are different provisions with different effects.
• Calling a company dormant without the special resolution. A company with no trading but no filed resolution is simply an inactive company. It still needs an audit.
• Staying "dormant" while paying expenses. A bank charge or a rent payment that is not a mandatory filing fee can end dormancy, and with it the audit exemption.
• Testing the thresholds on one year only. Qualification changes only after two consecutive years, in either direction.
• Counting employees at year end. The test uses the monthly average across the year.
• Forgetting group aggregation. A small subsidiary of a large group cannot use the small private company thresholds on its own figures.
• Booking the auditor too late. For a December year end, starting fieldwork in July leaves little room before the D-code filing date.

Frequently asked questions

Do small companies in Hong Kong need an audit?

Yes. Every Hong Kong company must have its annual financial statements audited, except a dormant company under section 447 of the Companies Ordinance. Small private companies can prepare simpler accounts under the reporting exemption, but those accounts are still audited.

What is the difference between the reporting exemption and an audit exemption?

The reporting exemption in section 359 lets a qualifying company use simpler accounting standards (SME-FRF and SME-FRS), skip the business review and give fewer disclosures. An audit exemption would remove the need for an auditor entirely, and in Hong Kong that exists only for dormant companies.

Can a company with no business avoid an audit?

Only if it formally becomes dormant by delivering a special resolution to the Companies Registry, and then records no accounting transactions. A company that simply stopped trading without doing this still needs audited accounts.

Is SME-FRS the same as HKFRS for Private Entities?

No. SME-FRS is the simplest framework, designed for companies within the reporting exemption and certain other small entities. HKFRS for Private Entities is a separate, fuller standard, so check which one your auditor proposes to use.

Do I need to file audited accounts with the Companies Registry?

A Hong Kong private company does not deliver its accounts to the Companies Registry with its annual return. The audited accounts go to members and to the IRD with the profits tax return.

Key takeaways

• Section 359 gives small companies a reporting exemption. It does not remove the audit.
• The small private company test is two of three: revenue up to HK$100,000,000, total assets up to HK$100,000,000, up to 100 employees, tested over two consecutive years.
• Only dormant companies under section 447 are exempt from audit, and dormancy requires a special resolution delivered to the Registrar.
• The IRD expects the auditor's report with the BIR51. For 2025/26, December year ends had until 17 August 2026 and March year ends until 16 November 2026.
• A clean monthly close is the most reliable way to reduce audit time and fees.

A reporting exemption makes the accounts lighter, not optional. If your year end still turns into a scramble for bank statements and receipts, start free with JetFlow and give your auditor a trial balance that ties to its source documents. For the wider filing calendar, see our Hong Kong SME compliance calendar.

This article is general information, not legal, accounting or tax advice. Confirm your company's position with a Hong Kong CPA.