How to Prepare for an Effective Annual Audit in China?

Whether an audit is effective or not makes a big difference in a company’s governance and development in the long run, though it is not easy to identify the audit effectiveness right after the process.
From the company’s perspective, an effective audit can help maintain its financial health and offer advice on how certain processes may be improved.
To be more specific, an effective audit can:ensure that financial statements of the company present a true and fair view of its financial situation;reveal irregularities and sub-optimal business practices;identify risks in different functional areas;

offer advice on improving internal.


1.What do companies need to prepare in general?Career In Business
Arrange confirmations
Bank confirmation is a primary focus in verifying the bank balance of the financial audit. Before the auditor’s investigation, companies are suggested to get relevant information ready in advance, including bank statements, bank reconciliations, bank balance, borrowings, guarantees, time deposits, bank mailing address, and contact number, etc.This will shorten the time spent at this stage and provide the auditor a good impression.

Besides bank confirmations, auditors may arrange confirmations for the current accounts to verify the existence and accuracy of the selected amounts, such as the related-party balances and transactions, trade receivables and payables, inventory on consignment, advancements to employees, etc.From the companies’ perspective, they are suggested to check accounts with current customers before the annual audit, if they didn’t do this regularly. This will save much time for their auditors. 
Analyze recover ability of receivables (credit risks)
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Credit risks analysis on financial assets often involves management’s judgment. While many companies find it difficult to conduct such an analysis, it is nevertheless essential to assess the recover ability of financial assets such as trade debtors.
Under the newly effective accounting standard on financial instruments, the expected credit loss model should be adopted when making the analysis. The accounts receivable aging analysis alone is no longer sufficient for impairment assessment of financial assets.

Companies should make clear accounting policies on what factors are to be taken into consideration when assessing credit risks, look for reasonable and supportable forward-looking information that is available to the management, and determine the risk of default.If there are indeed such default risks based on companies’ self-evaluation, it will very likely be noticed and inquired by the auditor during the audit. Companies are suggested to think about how to justify the risks when being asked. 
Prepare for expense checkingCareer In Business
It’s important for companies to obtain and maintain tax-deductible expense vouchers, which, in China, mainly refer to VAT invoices. Companies are suggested to check and prepare relevant invoices and other documentation in advance.When the year-end approaches, for invoices that should have been but are not yet obtained, companies should try to see if there is any chance to get them ready before the financial audit. Should companies fail to obtain legitimate expense vouchers before filing the annual CIT returns, relevant expenses will become non-deductible for CIT purposes in the current year.

For outbound expenses paid to overseas vendors, relevant taxes must be withheld, or else such expenses will not be pre-tax deductible.Besides obtaining VAT invoices and other legitimate tax-deductible vouchers, companies should also make full provision of the expenses in their accounting books, irrelevant of whether they have received the VAT invoice or not. All expenses should be properly recorded before the end of December.Remember to bind your accounting vouchers and keep them tidy and organized. By making a good impression on the auditors, companies may expect fewer questions from the auditors. 

Analyze profits and justify fluctuations
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Companies should analyze their profit ratio in advance. In case significant changes are found for essential indicators, such as gross margin fluctuations or selling expenses increase, companies should have valid explanations to justify the fluctuations, as such irregulates will definitely be noticed by their auditors and lead to queries during the audit. 
Corporate income tax (CIT) related preparations
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Under the current policy, companies decide whether they are qualified for certain CIT incentives based on their self-assessments. This simplifies the process for enjoying tax incentives but increases potential tax risks where there have been misjudgments.
So, auditors generally will help to make CIT relevant evaluations in the annual audit, although they do not express an opinion in this regard.
From the companies’ perspective, they are suggested to prepare relevant sub-ledgers and gather and retain supporting documents for such items in advance. On the other hand, they are suggested to carefully examine if they have exhausted all possible tax reductions.

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