The United Arab Emirates (UAE) has established itself as a leading innovation hub and trading centre in the world due to its various Free Zones, which include KIZAD (Khalifa Economic Zones Abu Dhabi), Masdar City, and Abu Dhabi Global Market (ADGM). The benefits of setting up operations in such an environment are numerous, including 100% foreign ownership and tax exemption, among others. However, this privilege comes with the need to adhere to a number of requirements. The most notable among these is conducting an annual financial audit. Understanding how to prepare for and why you need the audit is a key step in establishing your company in the Middle East.

Why do I need to conduct the audit?

In the UAE, an audit goes beyond a requirement of law. It acts as a mechanism for verifying that your company operates within the legal parameters. License renewal: In the Abu Dhabi Free Zones, presenting an audited financial statement is a must for obtaining a new trade license.

Banking relationships: Banks, both local and international, will require audited documents in order to establish or maintain banking relationships.

Compliance with VAT & Corporate Tax: With the introduction of the UAE Corporate Tax, an audit will act as the source of truth regarding the amount of taxable income in case of any future disputes between the company and the Federal Tax Authority.

The Key Preparations: What Should You Prepare?

Proper preparation ensures smooth sailing during the audit process. Here are some of the documents that your finance team (or an outsourced accounting service provider) needs to prepare for an efficient and effective audit

Trial Balance and General Ledger: A full report on your financial activities for the entire fiscal year

Bank Confirmation Letters: A statement from each of your corporate bank accounts

Legal Documents: Trade license, Memorandum of Association, and the certificate of incorporation

Fixed Assets Register: A complete list of your corporate assets, with depreciation schedules

Revenue and Expenses Evidentiary Documentation: Receipts, contract agreements with clients/suppliers, payroll records

VAT returns: A summary of your VAT returns filed throughout the year (for the numbers to be verified against your general ledger)

Important note: The auditor conducting the process in one of the Abu Dhabi Free Zones needs to be approved and registered in that particular free zone. Otherwise, the audit report will be invalid.

Audit Process Timeline and Best Practices

As mentioned earlier, the auditing process takes place through a certain timeline, which, if known beforehand, will enable effective utilization of internal resources. Here are some key steps and best practices:

Appointment of the Auditor: It is recommended to choose an accounting firm registered in your Free Zone early in the fourth quarter of the fiscal year.

Fieldwork: Auditors will check the company’s documents, conduct a physical inventory (if applicable) and ask questions about particular transactions.

Report Preparation: An auditor will create a draft of the report for the review of the management. This is when all the recommendations of the auditor included in the “Management Letter” should be discussed.

Submission: After signing the report by both sides, it needs to be sent to the Free Zone Authority through their website.

Common Mistakes and Ways to Avoid Them

To avoid any possible troubles with the Free Zone Authority, consider following these best practices:

Keep Accounting Records Up-to-Date: Do not postpone the accounting work until the end of the year. Month-by-month reconciliation will help detect and fix all the problems in advance.

Know the Deadlines: Normally, most Free Zones expect the audit report to be presented 90 to 180 days after the fiscal year ends. Failure to do so will result in significant penalties or license suspension.

Make Sure VAT Corresponds to Revenue: As mentioned before, most Free Zones do not require the payment of VAT from foreign companies. However, it is recommended to provide information about the income tax paid to the government as it helps build trust.

Advantages of Compliance with the Rules

Despite being mostly considered an obligatory procedure, a successful completion of the audit can serve as a valuable tool. Indeed, it works as a seal of approval that can be used to attract more investors or establish a beneficial partnership. Such a strategy can be particularly helpful in Abu Dhabi where fierce competition forces businesses to seek additional advantages.