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Business> Legal-Ease
UPDATED: January 15, 2007 No.3 JAN. 18, 2007
The Annual Audit (III)
If you are a representative office (RO) in China, auditors will check on the following...
By Chris Devonshire-Ellis

Representative office annual audits

If you are a representative office (RO) in China, auditors will check on the following:

The information below is limited to ROs who are expenses-based taxpayers.

Cash--Are your bank statement and bank reconciliation correct?

Foreign currency issues--Is the transaction rate entered correctly?

Fixed assets purchasing--Has it been recorded into expenses? If not, has it been approved by the tax authority?

Fixed asset disposal gain/loss--Is it recorded into expenses?

Funds from the parent company--Are these consistent with the parent company's records?

Interest income/expenses--Have they been identified in the expenses report correctly?

Expatriate Individual Income Tax (IIT)--For high-level management, such as the Chief Representative, has the IIT calculation and pertinent rate been correctly assessed?

Audit fees--Have the audit fees been accrued and separately entered? Are they listed in the expenses report?

Rental expenses--Have the rental expenses been accrued and separately entered? Are they listed in the expenses report?

Employer contributions to overseas social security plans--If employees are involved in overseas social security plans, has this payment been included in the expenses report?

Expenses paid on behalf of the head office--The local tax bureau may require such expenses to be recorded in the expenses report.

Stamp duty--Is the RO subject to stamp duty?

Unofficial Invoices (fapiao)--Has the RO received unofficial invoices (non VAT) as part of its expenses? If so, this can be subject to tax penalties.

Business licenses and related administrative matters--The annual renewal of all of your licenses such as registration certificate, tax licenses and so on.

Local employees registered with FESCO and valid work permits for expatriate staff--Has all this been completed in accordance with the pertinent regulations?

Risk-oriented China annual audits--Are you prepared?

The year-end is a busy time for Chinese auditors, being the time for all FIEs to face examination by China Certified Public Accountants (CPAs). Are international businesses with China operations prepared?

-- What is risk-oriented audit?

Compared with traditional audits, the two different points of risk-oriented audit are: to completely assess the internal controls of the enterprise, not only routine transactions, but also non-routine transactions, and to assess and disclose the main risks of the enterprise.

This means Chinese auditors will focus on the effectiveness and efficiency of internal controls and the disclosure of main risks much more carefully than before.

As the auditor pays greater attention to the controls used by clients to manage risks, controls testing will focus on items such as the control environment and corporate governance more than the detailed procedural controls tested under traditional approaches.

-- Where does this new method come from?

Risk-oriented audit is based on the COSO (the Committee of Sponsoring Organizations of the Treadway Commission) internal control framework. International businesses should build up their internal controls and monitor their risks through this framework--control environment, risk assessment, control activities, information and communication monitoring

-- Are you prepared?

What are the main key areas of scrutiny involved in passing risk-oriented audit?

Companies should evaluate the following points: build up necessary controls in key processes, such as purchases, sales, inventory and closing the books, monitor and control risks by standard process and procedure; install a periodic internal control review or internal audit to update the controls and disclose the risks; communicate with external governmental departments, obtain new information or requirements from the government, so that the company is able to improve or update the internal controls accordingly in compliance with national regulations and the current needs.

Annual licensing and renewals in China

An audit is not just about financial issues. You also have to submit a range of other documents and licenses to the authorities for checking and renewal if necessary, the so-called "annual cooperative examination." This is a bureaucratic process, but it is a good time to take stock and ensure all your paperwork is up to date.

Luckily, the authorities do try to make it is as easy as possible, and you can either submit your details via the Internet, or by going to an office where officials from a total of seven different agencies come together temporarily for this process.

These seven agencies are (almost) the same as the ones to which you have to submit your audited accounts:

The Bureau of Foreign Trade and Economic Cooperation,

The Administration of Industry and Commerce,

The Economic Committee,

The Financial Bureau,

The State Administration of Taxation,

The State Administration of Foreign Exchange, and China Customs.

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