Financial Statements and Audit Report in China

According to Article 175 of the Company Law of the People’s Republic of China, companies shall prepare financial and accounting reports at the end of each fiscal year, January 1 to December 31, and such reports shall be audited by an accounting firm in accordance with the provisions of the law. As required by the Chinese regulations, all foreign entities established in China, including representative offices, shall complete the statutory annual audit for the financials as of 31 December before the deadline set for the annual settlement of the company income tax, which is May 31.

A qualified CPA firm shall perform the statutory annual audit in accordance with the Chinese Standards on Auditing; the auditors shall assess the company's financial statements, verify the compliance with the Chinese accounting principles ("ASBE", Accounting Standards for Business Enterprises) and then issue an audit report including their opinion on the fairness and compliance of the company’s financial situation.

Besides the auditor's opinion, the audit report includes:

• the balance sheet

• the profit and loss statement

• the cash flow statement

• the notes to the financial statements

• the reconciliation between the accounting and the tax profit

The statutory annual audit also provides an opportunity to shareholders and managers to review the operations and the performance of the year, identify potential risks, assess the financial status, and evaluate tax liabilities.

The deadline corresponds with the annual settlement of the corporate income tax (deadline May 31) and the annual reporting to the authorities (deadline June 30).

Financial deadlines:

• financial statements annual year (31 December)

• periodical accounting tax deadline (15 January)

• annual audit (deadline before company income tax clearance)

• annual settlement of the corporate income tax (31 May)

• annual reporting to the authorities (30 June)

• approval of the financials by the shareholders (before the above deadlines and according to the Group internal policy or articles of association of the company)

Internal audit activities are implemented prior and after the statutory audit to grant proper management of the accounting and tax compliance.

The annual audit plays a crucial role for foreign companies which must repatriate profit to the parent entity abroad, since they can remit profit only once a year after completing the annual audit and tax compliance process. Tax authorities control the annual audit report, verify that the CIT has been paid on the profit to be distributed and confirm the maximum profit amount that can be repatriated based on the net profit indicated in the financial reports.