Audit of service enterprises in Hong Kong

     Among the Hong Kong companies audited by our company, there is a company specializing in contracting labor services. The business model of their company is to make money by contracting out projects and providing labor services.

Different methods of income recognition under different progress of service completion
  • First: the accounting of the income from services started and completed in the same fiscal yearAccording to the method of recognition of service income, the service started and completed within the same fiscal year shall be recognized when the service is completed, and the amount recognized shall be the total amount of the contract or agreement.
  • Second: the beginning and completion of labor services belong to different accounting years of labor incomeSome services are more specific, take longer to complete and may span fiscal years. In order to determine the annual profit and loss correctly, at the end of the year, it is necessary to comprehensively evaluate the completion of the labor service and the possibility that the income can flow into the enterprise, and confirm the income and carry forward related costs according to certain methods.In general, if the commencement and completion of services are in different fiscal years, the enterprise shall recognize the related service income on the balance sheet date according to the percentage of completion method, provided that the results of the services provided transactions can be reliably estimated.
  • Third: Clearly distinguish project income and cost      A large part of the service income of the Hong Kong company mentioned in the beginning is the recognition of revenue and carried forward costs in different fiscal years according to the percentage of completion. In particular, the company has contracted several engineering projects at the same time, so it is necessary to more clearly distinguish which project is responsible for the collection and expenditure of each project, and can reasonably divide the income and cost according to the degree of completion when settling accounts.
Service enterprises in Hong Kong company two knowledge points
  • What are labor costsRefers to the cost of providing external services, this is relative to service income. Personnel wages, welfare, labor insurance, related expenses and so on are labor costs. The above labor costs to be able to enter the account, all need the relevant bills and transfer flow. In particular, personnel wages, for the labor service company is generally a large amount of expenditure, payroll, relevant personnel's certificate number, transfer flow must be retained.
  • Regarding L/C, what if the bank confirmation does not match the information provided by the customerThis kind of service company, no matter for the income and cost of the expenditure, the payment settlement amount will be relatively large, may involve a lot of letters of credit. If there is a letter of credit, we need to pay attention to it, because the auditor will check the bank deposit balance before auditing, which includes the letter of credit, and will list the details of the letter of credit. If it is found that the bill provided by the customer is different from the account on the actual bank confirmation letter, we will be required to find the reason for the difference and adjust it to be consistent with the one on the confirmation letter. Otherwise the audit report will have reservations.
As for this letter of credit, this customer had such two situations before. First, the letter of credit of one of their clients was shown on the confirmation letter of the bank, but not on the account of the client. At that time, the audit asked the reason. It turned out that the client and the supplier had discussed not to receive the payment of the letter of credit, but it had not been processed by the bank, which caused the difference. Second, there was a letter of credit on the confirmation letter of the bank, but the account provided by the customer did not. Later, it was found out that the reason was the difference caused by the unreached account. No matter which reason, the auditor would take the third-party institution, that is, the bank, as the criterion, unless the error was caused by the bank, if it was caused by the bank, the bank would issue a letter to write the correct one. Otherwise, the audit report of reserved opinions would be issued to the bank. At that time, the client learned about this situation and adjusted these letters of credit to be consistent with the bank confirmation letter. Meanwhile, we also reminded that the letter of credit must be written off at the bank, otherwise the same problem would occur in the audit next year.
Of course, the above problems are only partial explanations for the labor service companies. Specific situations, different companies they will have subtle differences, that is dealt with in different ways.
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