The UAE is a strategically advantageous region for entering global markets and serves as a trading hub providing access to nearly two billion consumers. The country aims to remain the best and safest trading centre in the world, so it imposes high standards on businesses. Proving that a company operates legally and conducts profitable activities can be done through an independent financial audit in UAE. This process involves an independent assessment of a company’s financial statements to ensure compliance with local laws and international standards.
The main objective of an audit is to verify that the financial results of the company are accurately reflected in the tax reports, as well as to identify potential risks of money laundering and other discrepancies. In the UAE, audits are mandatory for nearly all registered companies, and they are often conducted by accredited external auditors. In this article, experts from Dynasty Business Adviser provide information on when and why companies need to undergo audits, as well as which companies are required to have mandatory audits in 2024.
Do all companies need to undergo mandatory auditing in UAE?
The UAE government requires mandatory financial audits for all companies registered on the UAE mainland. However, there are Free Zones and Designated Zones (SEZs) in the UAE where specific regulations are governed by the local authorities.
As a result, some companies located in certain SEZs may be exempt from audit requirements. However, there are Free Zones in Dubai that adhere to the general UAE regulations, such as Dubai World Central (DWC), Dubai Airport Free Zone (DAFZA), Dubai Multi Commodities Centre (DMCC), Jebel Ali Free Zone (JAFZA). Companies operating in these zones must also undergo annual audits.
To avoid confusion with rules and exceptions, consider seeking legal advice. Our consultants at Dynasty Business Adviser are always ready to advise whether your company is subject to mandatory audit requirements.
Why companies are required to undergo financial audits
There are several reasons why companies in Dubai (UAE) are required to undergo an audit:
- compliance with tax regulations;
- optimization of internal operations for financial planning;
- adherence to AML financial monitoring requirements;
- renewal of business licenses;
- attracting investments or obtaining loans;
- selling or closing (liquidating) the business.
Let’s look at each of these cases in more detail.
Compliance with legal requirements
According to Federal Law No. 32 of 2021 on Commercial Companies, all businesses, regardless of their type of activity, are required to appoint an auditor for routine inspections and submission of financial statements. These statements must be prepared in accordance with International Financial Reporting Standards (IFRS).
The auditor conducting the inspection must be licensed and registered with the UAE Ministry of Economy. The federal law also mandates that free zone companies undergo an annual audit and submit financial reports for the renewal of their business licenses. A general requirement for all businesses is that accountants must retain financial documents for at least five years under Federal Law No. 2 of 2015 “On Commercial Companies”.
Additionally, UAE corporate legislation requires that foreign companies and their branches undergo mandatory audits and submit financial reports to the relevant authorities annually. As of 2024, this applies to companies with a turnover of AED 375,000 or more. Once this threshold is reached, companies will need to pay VAT, corporate tax, and undergo a tax audit.
Optimization of internal controls
Companies may choose to commission an external audit not only to comply with government regulations but also for internal purposes. For example, an audit can help improve the efficiency of operations and correctly allocate priorities for business development expenses. The information provided in the report by independent experts can also be valuable to shareholders when making critical decisions.
Adherence to AML norms and fraud prevention
Certain companies and self-employed individuals providing legal and financial services may fall under the scope of AML (Anti-Money Laundering) regulations. To confirm compliance with international standards and to demonstrate a spotless reputation, these businesses and professionals should regularly engage independent auditors.
The need for license renewal
Companies in the UAE need to renew their trade licenses every one or two years, depending on the type of activity and the company’s location. Businesses operating in free zones are required to provide audit reports to the SEZ management authorities upon request to renew their licenses.
Obtaining loans and attracting investments
Creditors, suppliers, and dealers often need to ensure that a company can meet its obligations. They have the right to insist that an audit be conducted by an independent licensed firm. This external evaluation allows them to make an informed decision. For investors, information such as profitability, stability, market demand for the business, and the owners’ ability to manage financial risks is crucial. In this case, a financial audit is also indispensable.
Other situations
- Accuracy of reports and error correction. Sometimes, an external audit is necessary to help young specialists handling financial reporting to identify and correct mistakes. Accounting standards in UAE must comply with international rules, and accurate reporting requires experience.
- Business sale. Buyers need an independent evaluation to not only get an accurate market valuation of the company but also to understand its potential profitability.
- Company liquidation. If the owners decide to liquidate the company, independent auditors are essential. The process requires asset evaluation and proper distribution among creditors.
Legal requirements for auditing in UAE
- Financial statements of companies located on the mainland are subject to mandatory audits.
- The financial or fiscal period should last no more than 18 months and no less than 6 months for newly established enterprises.
- Audits must be conducted by a licensed registrar appointed by the company at least once a year.
- According to Article 103 of the Federal Law “On Commercial Companies,” limited liability companies must allocate 5% of profits to form a reserve, while joint-stock companies must allocate 10%. This must be reflected in their reports.
- Accountants for mainland and Free Zone companies are required to keep primary documentation for at least 5 years, while offshore companies must keep records for at least 10 years. These documents must be stored at the company’s office.
- Subsidiaries may be exempted from the requirement to undergo a tax audit if the parent company provides guarantees and includes the subsidiary’s income in its consolidated financial statements.
Conclusion
In this material, we have covered the cases in which an audit is required in the UAE and some key legal requirements. However, this article cannot replace professional consultation. Moreover, legal nuances depend on many factors, including the company’s activity, size, number of employees, number of branches, and place of registration.
You can contact our Company for both consulting assistance and conducting financial audits for annual reporting in the UAE or company valuation. Our Company is licensed and has the necessary experience to perform these activities. Among other services that may be useful to you are qualified auditing of accounts Dubai and the rest of the emirates, including tax reporting.
We handle projects of any complexity. By turning to us, you can be confident in the high quality of the work performed, which will surely satisfy regulatory authorities. Our experts have high qualifications and extensive practice, which have provided them with knowledge of the slightest nuances in working with both mainland and Free Zone companies.
