Audit in UAE for Free Zone Companies

Audits are a fundamental part of maintaining transparency and accountability for companies operating in the UAE, especially within free zones. By systematically reviewing financial statements and evaluating the internal control system, audits help ensure that a company’s financial information is accurate and reliable. The Federal Tax Authority (FTA) plays a key role in overseeing tax compliance, conducting tax audits to verify that companies are adhering to the UAE’s tax laws and regulations. To meet audit requirements, companies must prepare audited financial statements that reflect their true financial position and performance. Audit firms in the UAE, such as AFD and Farhat and Co, assist businesses in navigating the audit process, ensuring that all compliance obligations are met and that internal control systems are robust. Through regular audits, companies can maintain the confidence of stakeholders, demonstrate their commitment to good governance, and operate efficiently within the regulatory framework established by UAE authorities.

Is Audit Mandatory for Free Zone Companies in the UAE?

Most companies throughout the world must perform audits. However, some companies are exempted from these audits based on their selected jurisdiction. Regarding the UAE Free Zones, you can enjoy countless benefits by starting your business in these profitable jurisdictions. Therefore, a common doubt arises about whether the audit is mandatory for Free Zone Companies in the UAE. Companies in the Mainland UAE are mandated to undergo audits, while those businesses located in the Free Zones may be required for audits based on several factors.

Additionally, the Commercial Companies Federal Law, No. 32 of 2021, requires mainland companies to maintain financial records for a minimum of five years. It is important for companies to maintain proper accounting records, as these are prepared by staff and later verified by external auditors to ensure accuracy in financial reporting. Statutory audits are mandatory for certain types of companies established in the UAE mainland according to the Commercial Companies Federal Decree-Law No. 32/2021. The retention of financial records helps facilitate regulatory oversight and dispute resolution, and it is the responsibility of companies to comply with all audit and record-keeping requirements.

The Federal Tax Authority (FTA) conducts tax audits to ensure companies meet their tax compliance obligations. The general procedure for audits in the UAE free zones involves notification by the authorities, submission of required documentation, and cooperation during the audit process. Companies must follow specific procedures to ensure audit compliance, including maintaining accurate records and responding to auditor requests. So, let us try to clarify this confusion by understanding the UAE free zone audit requirements.

Auditing in the Free Zone in the UAE

We know you might be looking for the Free Zone company audit rules in the UAE, but our main motive is to clear all your doubts about auditing in the Free Zone in the UAE. Therefore, we recommend that you understand the basic meaning of auditing before diving into the rules for audits in Free Zone Companies in the UAE. A statutory audit is a process of examination of a company’s financial situation and its results as stated by its financial reports. Conducting a statutory audit helps companies plan for the future and protects them from potential risks. The auditor must identify and report any issues during auditing to fix any issues later, which includes assessing audit risk to determine the appropriate audit procedures. Companies scheduled for a tax audit receive at least five days’ notice from the FTA before the audit. So, let us understand the basics of auditing in the free zone in the UAE.

An audit in UAE free zone is an examination and review of your business’s financial records and statements, including the use of system data, in order to comply with the accounting standards set by the authority. Auditors or audit firms, like Flyingcolour Auditors, conduct these audits in the UAE’s free zone. The purpose of these audits is to give assurance to the stakeholders that the financial records are accurate and reliable. External auditors provide an objective opinion on the operation of an organisation, which can be valuable for business insights. External audits are crucial for providing independent assurance on financial statements, ensuring compliance, and supporting organisational growth. Auditing enhances transparency and efficiency in a company’s operations. The scope and results of audit work performed by auditors are detailed in their final report, clarifying findings related to financial fairness. Employees play a vital role in maintaining financial integrity by preventing fraud and ensuring accurate record-keeping through internal audits and effective financial management.

So, we hope you have now understood the basics of audits in the Free Zone in the UAE. Now, let us move forward to the requirements for audits in the Free Zone in the UAE.

Audit Requirements in the Free Zone in the UAE

There are many requirements regarding conducting audits in the Free Zone in the UAE.

We have outlined the most essential audit requirements for the Free Zone in the UAE below:

• Companies in the UAE’s free zone, such as yours, are not audited and are required to submit audit reports. However, some entities like Free Zone Company (FZCO) and Free Zone Establishments (FZE) must deal with mandatory auditing.

• Auditing is also necessary for most Free Zone Companies, especially those companies registered with the DMCC, Meydan Free Zone, DWC, and JAFZA.

• As per the law, the Free Zone Companies should hire a professional auditor approved by the Free Zone Authority. In practice, an auditing service should only be delivered by auditing firms with a valid professional license under the Ministry of Economy

• The eligibility of the auditing firm should be the key factor to consider when hiring an auditing firm. In case you work with an auditing company that is not eligible, you must face the full force of the law. Therefore, you should hire Flying Colour Auditing Firm because we are an eligible auditing firm for auditing in the free zone in the UAE.

• Companies registered with the Free Zone must submit their audited financial statements to the relevant Free Zone authority. This is because some free zone authorities will ask you to give the audited financial statement at the time of the trade license renewal of your company. Reviewing these statements through the audit process helps you gain a clear understanding of your company’s finances and ensures financial transparency. If you ignore this requirement, you might often incur penalties or face consequences like non-approval of your trade license. Free Zone Companies can face penalties for failing to comply with audit requirements as outlined in corporate tax laws. Preparing for a tax audit includes reviewing financial records, tax calculations, correcting errors identified during the audit, and ensuring compliance with filing deadlines. The FTA may extend the audit limitation period to ten years in cases of tax evasion or suspicion of fraud. Timely payment of taxes is essential, as failure to make payment or not having paid tax dues can result in additional penalties and legal consequences. If you want to avoid being penalised, you should keep your book of accounts properly and get it audited.

Audit Report

An audit report is the official document that summarises the findings of an audit, providing an objective and independent assessment of a company’s financial records and internal control system. This report is crucial for demonstrating compliance with applicable laws and regulations, as set by the Federal Tax Authority (FTA) and other regulatory bodies in the UAE. The audit report typically includes the auditor’s opinion on the accuracy of the financial statements, details of any deficiencies or weaknesses in the internal control system, and recommendations for improvement. For stakeholders such as investors, creditors, and regulatory authorities, audit reports offer valuable insights into a company’s financial health and compliance status. In the UAE, audit reports must be prepared in accordance with FTA standards, ensuring that all relevant financial statements and findings are clearly presented and that any issues identified during the audit are transparently disclosed.

Mandatory audit requirement for a Free Zone Company under the Corporate Tax Law

Free Zone Companies are mandatory to get audited to obtain the status of Free Zone Person. Do you know the benefits of being a Free Zone Person in the Free Zone in the UAE? If so, you may feel happy after learning that the Free Zone Person is subject to 0 per cent of Corporate Tax on the profit of their free zone company, subject to conditions. It is also important for free zone companies to comply with UAE laws regarding taxes, including VAT obligations and other taxes payable on goods and services, to ensure full compliance and avoid penalties. Additionally, some free zone companies may require an audit for immigration purposes, even if not mandated for business operations. Therefore, you should get your books of accounts audited because it is among the mandatory requirements to be a Free Zone Person to get 0% Corporate Tax. 

Fraud Risk and Prevention

Managing fraud risk is a critical aspect of the audit process for free zone companies in the UAE. Auditors are responsible for assessing the effectiveness of a company’s internal control system and identifying any vulnerabilities that could expose the business to fraud risk. By conducting thorough audits, companies can detect and prevent fraudulent activities, safeguarding their assets and reputation. Implementing strong internal controls, such as segregation of duties and regular review of financial transactions, is essential for minimising fraud risk. Additionally, companies in the UAE must comply with anti-money laundering (AML) regulations and are required to report any suspicious activities to the relevant authorities. Regular audits not only help companies meet regulatory requirements but also reinforce a culture of integrity and accountability within the organisation.

Audit Results and Analysis

Once the audit is completed, the auditor compiles and analyses the audit results, providing a comprehensive evaluation of the company’s financial statements and internal control system. These findings are documented in the audit report, which includes the auditor’s opinion on whether the financial statements present a true and fair view of the company’s financial position and whether the company is in compliance with applicable laws and regulations. The audit results are critical for companies, as they highlight areas of strength and identify any deficiencies or weaknesses that need to be addressed. In the UAE, companies must ensure that their financial statements are accurate and comply with the requirements of the Federal Tax Authority (FTA). The objective assessment provided by the auditor helps companies improve their internal control systems, enhance compliance, and maintain the trust of stakeholders. Accurate audit results also support better decision-making and long-term business success.

Are audits compulsory for Free Zone Companies or FZCO in the UAE?

Audits of accounts are mandatory for your company if your company is a Free Zone Company (FZCO) or Free Zone Establishment (FZE). However, it may not be compulsory for some foreign or local companies in the Free Zone in the UAE. Still, the companies must maintain the accounting reports and documents to finalise the audits.

As we discussed in the previous section, auditing for Free Zone Company (FZCO) is also mandatory to become a Free Zone Person and enjoy the benefit of 0 per cent of Corporate Tax according to the Corporate Tax law. 

When should you submit the audited financial statement?

As you have understood now the Free Zone Companies (FZCO) must conduct and submit audits within their organization. However, you should submit the audited financials at the right time. The top free zones and their due dates for submitting the audited financial statements are mentioned below:
 

The dates mentioned in the table above may differ based on the decision of the respective free zone authority. Therefore, you should contact the free zone authority and reconfirm the final date before you make any decision. However, Flying Colour Auditors can also help you determine the final date for submitting the audited financial statements. Audited financial statements for Free Zone Companies must be submitted based on the respective financial year's end date. A follow-up audit will be conducted approximately six months after the publication of the audit report to determine whether corrective actions were taken. The FTA issues an audit report that contains findings, observations, and tax amounts owed by the taxpayer.

How can Flying Colour Auditing Firm help you?

Most free zone companies are required to be audited in the UAE. However, some of them might not need to go through these audits compulsorily. Flyingcolour Auditing Firm can help you determine whether your free zone company is required to submit and conduct the audit. Companies should seek expert advice to prepare for a tax audit and ensure compliance with legal requirements. Audit firms in the UAE also provide consulting services to help businesses prepare for audits and manage tax liabilities effectively. Taxpayers have the right to appeal the FTA's assessment or audit findings within 30 days. In addition, our experts will conduct audits in your company if you want. Plus, we will clear your doubts about the UAE free zone audit requirements.

To learn more about Audit in UAE for Free Zone Companies, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.