Hong Kong IRD Field Audit — Expert Support & Defence

A field audit typically involves: (1) Opening meeting — auditors explain the scope and request document lists; (2) Records examination — systematic review of accounting records, bank statements, invoices, and contracts; (3) Enquiry letters — written questions about specific transactions or discrepancies; (4) Business inspection — auditors may inspect premises, stock, and operations; (5) Director/staff interviews — discussions about business operations and transactions; (6) Closing meeting — discussion of findings. The entire process can take weeks to months.

For cash-intensive businesses (restaurants, retailers, salons), the IRD computes an expected gross profit margin based on industry standards and your stated cost of sales. If your declared profit margin is significantly below the industry average without satisfactory explanation, the IRD will treat the shortfall as undeclared income. For example, if the restaurant industry average gross margin is 65% but your return shows 50%, the 15% gap is assessed as unreported revenue. Preparing your own mark-up analysis with explanations for any below-average margins is essential.

Generally no. Under s.51 of the IRO, the IRD has power to require any person to provide documents, information, and accounts relevant to a tax investigation. Refusal to comply without reasonable excuse is an offence. However, legally privileged documents (communications with your solicitor) may be withheld. The key is to provide what is legitimately required — no more, no less — guided by specialist advice.

You can request that staff interviews be conducted in the presence of your CPA or legal adviser. Staff should be briefed to answer questions honestly and accurately — but should not speculate, guess, or volunteer information beyond the specific question asked. Inconsistent answers between staff members (even if honest misunderstandings) can create credibility issues. Pre-audit coaching sessions ensure staff are prepared without coaching them to give false information.

Typical document requests include: audited accounts and supporting working papers; bank statements (all accounts); sales invoices and purchase invoices; contracts with major customers and suppliers; payroll records and IR56B; lease agreements; directors' loan accounts; travel and entertainment expense details; fixed asset register; and stock records. For offshore income claims: contract evidence, correspondence, and evidence of overseas activities are commonly requested.