Import/Export Business Audit UAE 2025: Trade Compliance & Customs Procedures

Import/export trading represents a cornerstone of UAE's economy, with Dubai positioning itself as a global trade hub connecting East and West. However, the complexity of international trade operationsspanning customs regulations, foreign exchange controls, letters of credit, and Incotermscreates significant audit challenges unique to trading businesses.

As Ministry-approved auditors with extensive experience auditing UAE trading companies ranging from small importers to multinational commodity traders, we've identified the specific audit considerations, compliance requirements, and common pitfalls that import/export businesses face during their annual statutory audits.

Understanding Import/Export Business Audit Scope

What Makes Trading Audits Different

Trading company audits differ fundamentally from service or manufacturing audits due to:

High Transaction Volume: Import/export businesses process hundreds or thousands of transactions monthly, requiring sophisticated sampling methodologies and data analytics during audits.

Complex Documentation: Each import/export transaction generates 10-15 supporting documents (commercial invoices, bills of lading, customs declarations, LC documents, certificates of origin), all requiring verification during audits.

Foreign Exchange Risk: Trading in multiple currencies creates FX gain/loss accounting complexities and requires auditors to verify exchange rate applications and hedge accounting treatment.

Multiple Regulatory Jurisdictions: Import/export operations must comply with UAE Federal Customs Authority, origin country export regulations, and destination country import requirements simultaneously.

Credit Risk: Trading businesses typically extend credit to international customers or receive credit from foreign suppliers, requiring careful aging analysis and provision assessment during audits.

Customs Compliance & Documentation Audit

Required Customs Documents for Audit Verification

For Imports:

• Customs declaration (Form 1) filed with UAE Federal Customs Authority
• Commercial invoice from foreign supplier (showing CIF/FOB values, Incoterms)
• Bill of Lading or Airway Bill (proof of shipment and ownership transfer)
• Packing list (detailed item quantities and weights)
• Certificate of Origin (required for preferential tariff treatment)
• Insurance certificate (if applicable)
• Import permit (for restricted/controlled goods)
• Payment proof (bank transfer, LC settlement)

For Exports:

• Export customs declaration
• Commercial invoice to foreign customer
• Shipping documents (B/L, AWB)
• Certificate of Origin (often required by destination country)
• Export proceeds receipt (proving repatriation of foreign currency)
• Quality certificates or inspection reports (as required)

Audit Procedures for Customs Documentation:

Auditors select sample transactions across the financial year and verify:

1. Completeness: All required documents present for sampled transactions
2. Accuracy: Values on customs declarations match invoices and books
3. Valuation: Import values properly calculated (CIF basis for customs duty)
4. Classification: HS codes correctly applied (affects duty rates)
5. Duty Calculation: Customs duties and taxes correctly computed and paid

Common Customs-Related Audit Findings

Improper Valuation: Companies sometimes understate import values to reduce customs duties, creating significant audit risk and potential regulatory penalties.

Misclassification: Incorrect HS code classification (either intentional or due to complexity) results in wrong duty rates being applied.

Missing Documentation: Incomplete customs files make audit verification difficult and may indicate control weaknesses.

Transfer Pricing Issues: Related-party imports/exports require arm's length pricing verification, ensuring values are commercial and not artificially manipulated.

Letter of Credit (LC) Accounting & Audit

How Letters of Credit Work in Trading

Letters of Credit are the most common payment mechanism for international trade, providing payment security for both exporters (beneficiaries) and importers (applicants). The typical LC process involves:

1. LC Application: Importer applies to bank to open LC in favor of exporter
2. LC Issuance: Bank issues LC with specific terms (amount, shipping deadline, document requirements)
3. Shipment: Exporter ships goods and prepares documents per LC terms
4. Presentation: Exporter presents documents to bank within LC validity
5. Examination: Bank examines documents for compliance with LC terms
6. Payment: Bank pays exporter if documents comply (importer's bank debits importer's account)

Accounting for Letters of Credit

Upon LC Opening (Importer Books):

• No journal entry (off-balance sheet commitment)
• Note: Disclose LC commitments in financial statement notes

Upon Shipment & Document Receipt:

• Dr. Purchases/Inventory [CIF Value]
• Dr. Customs Duty [Duty Amount]
• Cr. LC Liability [Total Amount]

Upon LC Payment by Bank:

• Dr. LC Liability [Total Amount]
• Cr. Bank Account [Total Payment]

For Exporters: Accounting is simpler record revenue upon shipment (when control transfers per Incoterms) and recognize receivable from bank.

LC Audit Procedures

Documentary Credit Examination:

• Auditors obtain copies of LC terms and compare to underlying sales/purchase contracts
• Verify that goods shipped match LC specifications
• Check that documents were presented within LC validity period
• Confirm discrepancies (if any) were resolved before payment

Balance Sheet Classification:

• LC liabilities should be classified as current (typically 90-120 day payment terms)
• Verify that paid LCs are removed from books
• Unpaid/outstanding LCs properly disclosed in notes

Common LC-Related Issues:

• Discrepancies: Documents didn't strictly comply with LC terms, creating negotiation delays and potential losses
• LC Charges: Bank fees for LC opening, amendments, and payments must be properly expensed
• Foreign Exchange: LC amounts typically in USD/EUR but books in AED, requiring careful FX accounting

Incoterms & Revenue Recognition Audit

Understanding Incoterms 2020

Incoterms (International Commercial Terms) define when risk and ownership transfer in international sales, directly impacting revenue recognition timing. Key Incoterms for UAE trading:

EXW (Ex Works): Buyer collects from seller's premises

• Risk Transfer: At seller's warehouse
• Revenue Recognition: When goods available for pickup

FOB (Free On Board): Seller delivers goods onto vessel

• Risk Transfer: When goods cross ship's rail at named port
• Revenue Recognition: When goods loaded on vessel (shipping date)

CIF (Cost, Insurance, Freight): Seller pays freight and insurance to destination

• Risk Transfer: When goods cross ship's rail (same as FOB)
• Revenue Recognition: When goods loaded (despite seller paying freight)
• Note: Freight and insurance are separate performance obligations

DDP (Delivered Duty Paid): Seller delivers to buyer's premises, duty paid

• Risk Transfer: When goods available at destination
• Revenue Recognition: When goods delivered to buyer's location

Revenue Recognition Audit Procedures

Auditors verify correct revenue timing based on Incoterms:

1. Contract Review: Identify Incoterms stated in sales contract
2. Shipping Documentation: Obtain B/L or AWB showing shipment date
3. Cut-off Testing: Verify December sales weren't shipped in January (or vice versa)
4. Bill & Hold: Ensure no premature revenue recognition for unshipped goods
5. Transit Inventory: Goods in transit at year-end properly classified (not revenue)

Common Revenue Recognition Errors:

• Recording CIF sales when invoice issued (not when shipped)
• Recognizing DDP sales at shipment (should be upon delivery)
• Including freight/insurance in CIF revenue (should be separate)

Trade Finance & Working Capital Audit

Trade Financing Mechanisms

Import/export businesses use specialized financing to bridge cash flow gaps:

Pre-Shipment Finance: Bank finances exporter before goods shipped

• Accounting: Treated as short-term loan; interest expense recognized
• Audit: Verify loan agreement terms, interest calculation, security provided

Post-Shipment Finance: Bank finances exporter after shipment (against documents)

• Typical: 80-90% of invoice value advanced immediately
• Balance: Paid when customer settles (LC matures or direct payment received)
• Audit: Reconcile advances to sales invoices; verify customer collections

Bill Discounting: Exporter sells receivable (bill of exchange) to bank at discount

• Accounting: Recognize factoring loss; remove receivable from books
• Audit: Verify factoring arrangement terms; ensure receivable properly derecognized

Supplier Credit: Supplier finances buyer's purchases (extended payment terms)

• Common: 90-180 day payment terms for inventory purchases
• Audit: Verify aging of payables; check for disputed amounts

Working Capital Audit Considerations

Trading businesses typically have:

• High Inventory: Goods in transit, customs warehouses, and local storage
• High Receivables: Extended credit to international customers
• High Payables: Supplier credit from foreign vendors

Audit Focus Areas:

Inventory Valuation:

• Physical count of local inventory
• Verify goods in transit with shipping documents
• Assess obsolescence risk (slow-moving inventory)
• Confirm customs warehouse stocks

Receivables Verification:

• Customer confirmations (especially foreign customers)
• Aging analysis and provision adequacy
• Verify collections after year-end
• Export proceeds repatriation confirmation

Foreign Exchange Controls & Central Bank Compliance

UAE Central Bank FX Regulations for Traders

Export Proceeds Repatriation: UAE Central Bank requires export proceeds be repatriated within 180 days of shipment. Trading companies must:

• Track export shipments and payment receipt dates
• Ensure compliance with 180-day rule
• File reports for delayed receipts
• Obtain Central Bank approval for extended collection periods

Import Payment Regulations: Advance payments for imports exceeding USD 50,000 require supporting documentation (proforma invoice, contract).

Foreign Currency Accounts: Trading companies often maintain FX accounts (USD, EUR, GBP) for trade settlement. Audit procedures include:

• Verify Central Bank approval for FX accounts
• Bank confirmations for foreign currency balances
• Year-end FX revaluation of foreign balances
• Proper disclosure in AED equivalent

FX Gain/Loss Accounting

Trading companies face FX exposure on:

• Foreign currency receivables (export sales in USD/EUR)
• Foreign currency payables (import purchases in USD/EUR)
• FX bank accounts

Accounting Treatment:

• Transaction FX Loss: Realized when invoice paid at different rate than booked
• Translation FX Loss: Unrealized revaluation of outstanding balances at year-end

Audit Verification:

• Auditors recalculate year-end FX revaluation
• Verify exchange rates applied (typically Central Bank rates)
• Ensure material FX movements separately disclosed

Trade Compliance & Regulatory Audit

Restricted & Prohibited Goods

UAE Federal Customs Authority maintains lists of:

• Restricted Goods: Requiring special permits (medicines, chemicals, food)
• Prohibited Goods: Banned from import/export (counterfeit goods, certain publications)

Audit Procedures:

• Review nature of goods traded
• Verify appropriate permits obtained for restricted items
• Confirm no prohibited goods transactions

Anti-Money Laundering (AML) Compliance for Traders

Trading businesses face heightened AML scrutiny due to:

• Large cash flows
• International transactions
• Complex supply chains

Auditor Obligations:

• Report suspicious transactions to Financial Intelligence Unit (FIU)
• Verify company maintains AML compliance program
• Check customer due diligence procedures

Economic Substance Regulations (ESR) for Trading

If trading company claims tax residency benefits, it must demonstrate:

• Core income-generating activities conducted in UAE
• Adequate full-time employees in UAE
• Adequate operating expenditure in UAE
• Adequate physical assets in UAE

Audit Documentation:

• Employee contracts and payroll records
• Office lease agreements
• Supplier and customer contracts
• Proof of decision-making in UAE

Common Import/Export Audit Findings

Based on our audit experience, typical findings include:

1. Inadequate Customs Documentation

• Missing certificates of origin
• Incomplete shipping documents
• Customs declarations not matching invoices

2. Incorrect Revenue Cut-Off

• December shipments recorded in January revenue
• Incoterms not properly applied for revenue timing

3. Inventory Valuation Errors

• Goods in transit not identified at year-end
• Customs duties not included in inventory cost (should be)
• Obsolete inventory not written down

4. FX Losses Not Recognized

• Outstanding foreign receivables/payables not revalued at year-end
• Incorrect exchange rates applied

5. Related Party Pricing Not at Arm's Length

• Imports from related entities priced below market (TP issue)
• Exports to related entities priced above market

Preparing for Import/Export Audit

Documents to Organize Before Audit

Customs & Shipping:

• All customs declarations (imports and exports)
• Bills of lading / Airway bills
• Commercial invoices (sales and purchases)
• Packing lists
• Certificates of origin

Banking & Finance:

• LC opening applications and amendments
• LC settlement statements
• Trade finance facility agreements
• Bank statements (AED and foreign currency accounts)
• FX transaction confirmations

Sales & Purchases:

• Sales contracts with Incoterms clearly stated
• Purchase orders from customers
• Supplier agreements
• Price lists

Inventory:

• Year-end physical inventory count sheets
• Goods in transit reconciliation
• Customs warehouse stock statements
• Inventory movement register

Control Recommendations

To streamline future audits and strengthen controls:

Implement Trade Management System: Use ERP or specialized trade software to track:

• Purchase orders to delivery
• LCs from opening to settlement
• Inventory from receipt to sale
• Customs compliance documentation

Centralize Document Management:

• Digitize all trade documents
• Link documents to transactions
• Ensure audit trail from invoice to shipment to customs to payment

Monthly Reconciliations:

• Reconcile inventory register to GL
• Age analysis of receivables and payables
• FX position report
• Customs duty accruals vs. paid

Quarterly Compliance Review:

• Export proceeds repatriation status
• LC outstanding report
• Inventory obsolescence assessment
• Transfer pricing documentation update

Conclusion

Import/export business audits require specialized expertise in international trade, customs regulations, foreign exchange accounting, and trade finance instruments. The combination of high transaction volumes, complex documentation, and multiple regulatory jurisdictions makes trading company audits among the most challenging in UAE.

As Ministry-approved auditors with deep experience in import/export audits, Farahat & Co understands the unique compliance requirements and audit considerations facing UAE trading businesses. Our systematic approach ensures thorough verification of customs documentation, proper revenue recognition under Incoterms, accurate FX accounting, and compliance with Central Bank regulations.

Whether you're a small importer, commodity trader, or large multinational trading operation, we provide audit services tailored to the complexities of international trade while ensuring timely completion and regulatory compliance.