Trading Company Audit Requirements in Dubai: Complete 2025 Guide

Trading companies form the backbone of Dubai's economy, with thousands of businesses engaged in import, export, and distribution activities. Whether you operate a mainland trading company or a free zone entity, understanding audit requirements is crucial for maintaining compliance and avoiding penalties.

Who Needs an Audit?

Mainland Trading Companies

All mainland trading companies registered with the Dubai Department of Economic Development (DED) must conduct annual audits if they meet any of these criteria:

• Annual Revenue: Exceeding AED 50 million
• Total Assets: More than AED 25 million
• Employee Count: 50 or more employees
• Corporate Structure: Limited Liability Companies (LLCs) or Public/Private Joint Stock Companies
• Government Contracts: Participating in government tenders or contracts

Important: Even if not legally mandated, many banks and partners require audited financial statements for credit facilities and business relationships.

Free Zone Trading Companies

Requirements vary by free zone authority:

• DMCC: Mandatory audit for all companies regardless of size
• JAFZA: Required for companies with turnover above AED 1 million
• DAFZA: Annual audit mandatory for all license holders
• Dubai South: Required based on business activities and turnover

Documents Required for Trading Company Audits

Financial Records

1. Sales and Purchase Registers

   • Detailed records of all trading transactions
   • Supplier and customer ledgers
   • Purchase orders and sales invoices
   • Delivery notes and shipping documents

2. Inventory Records

   • Opening and closing stock valuations
   • Inventory movement records
   • Stock count sheets
   • Goods-in-transit documentation
   • Write-off and obsolescence registers

3. Banking Documents

   • All bank statements for the financial year
   • Bank reconciliation statements
   • Letters of credit (LCs)
   • Bank guarantees
   • Foreign exchange contracts

Statutory Documents

• Trade license (current and valid)
• Memorandum and Articles of Association (MOA/AOA)
• Share certificate and shareholder register
• Board resolutions
• Tenancy contract (Ejari)
• Partner/shareholder agreements

Tax and Compliance Records

• VAT returns and certificates
• Corporate tax registration (if applicable)
• WPS (Wage Protection System) reports
• MOHRE documentation
• Customs declarations (if applicable)

Key Audit Areas for Trading Companies

1. Revenue Recognition

Auditors will scrutinize:

• Timing of recognition: When is revenue recorded (shipment vs. delivery)?
• Cut-off procedures: Proper recording at year-end
• Multi-currency transactions: Foreign exchange gains/losses
• Related party sales: Arms-length pricing verification

Common Issue: Revenue recognized before goods shipped or delivered. Ensure your accounting policy aligns with IFRS 15.

2. Inventory Valuation

Critical focus areas:

• Physical count verification: Auditors typically attend year-end counts
• Valuation method: FIFO, weighted average (LIFO not permitted under IFRS)
• Net realizable value: Ensuring inventory not overstated
• Obsolete stock: Adequate provisions for slow-moving items
• Goods in transit: Proper recording of FOB vs. CIF shipments

Best Practice: Conduct inventory counts at year-end and maintain detailed records of count procedures.

3. Trade Receivables

Examination includes:

• Aging analysis: Outstanding receivables by period
• Credit control procedures: Assessment of collection policies
• Provision for doubtful debts: Adequacy of allowances
• Concentration risk: Heavy reliance on few customers

Red Flag: Receivables over 90 days without adequate provisions typically result in audit adjustments.

4. Payables and Supplier Relationships

Audit procedures cover:

• Supplier confirmations: Direct verification of balances
• Cut-off testing: Ensuring expenses recorded in correct period
• Related party payables: Proper disclosure required
• Unrecorded liabilities: Search for post-year-end invoices

5. Customs and Import/Export Compliance

Trading-specific requirements:

• Customs declarations: Consistency with financial records
• Import duties: Proper recording and payment
• Free zone vs. mainland: Compliance with re-export requirements
• Certificate of origin: Proper documentation

Timeline and Deadlines

Standard Audit Timeline

• Pre-audit planning: 3-4 weeks before year-end
• Fieldwork: 2-3 weeks after year-end
• Draft report: 1 week after fieldwork completion
• Final report: Within 90-120 days of year-end (depending on company size)

DED Filing Deadlines (2025)

• Large companies (Revenue > AED 100M): 90 days from year-end
• Medium companies (AED 10-100M): 120 days from year-end
• Small companies (< AED 10M): 150 days from year-end

Late filing penalties: AED 10,000 to AED 50,000 depending on delay period.

Common Audit Findings in Trading Companies

1. Inadequate Inventory Controls

Issue: Lack of proper inventory management systems leading to discrepancies

Solution:

• Implement inventory management software
• Conduct regular cycle counts
• Establish clear receiving and dispatch procedures
• Maintain detailed bin location records

2. Revenue Recognition Errors

Issue: Recording sales before goods delivered or title transferred

Solution:

• Establish clear revenue recognition policy
• Implement cut-off procedures at year-end
• Train accounts team on IFRS 15 requirements
• Use shipping/delivery dates as recognition trigger

3. Foreign Exchange Management

Issue: Improper recording of foreign currency transactions and revaluations

Solution:

• Record transactions at spot rate on transaction date
• Revalue monetary items at year-end
• Properly classify exchange differences (operating vs. financing)
• Maintain foreign currency exposure schedule

4. Related Party Transactions

Issue: Transactions with related parties not properly disclosed or not at arm's length

Solution:

• Maintain comprehensive related party register
• Document rationale for transaction terms
• Obtain board approval for significant transactions
• Ensure full disclosure in financial statements

Industry-Specific Considerations

Electronics and Consumer Goods Trading

• Rapid technological obsolescence
• Warranty provisions
• Returns and allowances
• Brand principal agreements

Food and Beverage Trading

• Expiry date management
• Cold chain integrity
• ESMA (Emirates Authority for Standardization and Metrology) compliance
• Dubai Municipality approvals

Construction Materials Trading

• Project-based revenue
• Retention management
• Long-term supplier agreements
• Quality certifications

Automotive Parts Trading

• Serial number tracking
• Warranty claims from suppliers
• Aftermarket vs. OEM distinction
• Distribution agreements

Cost Optimization Strategies

1. Early Planning

Start audit preparation 6-8 weeks before year-end:

• Resolve outstanding issues
• Complete bank reconciliations
• Update fixed asset registers
• Review provisions and accruals

2. Maintain Organized Records

• Use cloud-based accounting systems
• Implement document management
• Digitize supporting documentation
• Create audit trail for all transactions

3. Pre-audit Review

Consider engaging auditors for pre-audit review:

• Identify potential issues early
• Resolve accounting treatments proactively
• Reduce final audit time and cost

Penalties for Non-Compliance

Administrative Penalties

• No audit report: AED 20,000 fine + license suspension risk
• Late filing: AED 10,000 to AED 50,000
• Incorrect information: Up to AED 100,000

Business Impact

• Bank credit facilities restricted
• Inability to bid on government tenders
• Customs clearance issues
• Visa processing delays
• Potential license cancellation

Best Practices for Trading Companies

1. Implement ERP System: Tally, Zoho Books, or SAP Business One
2. Monthly Reconciliations: Complete all reconciliations monthly, not at year-end
3. Inventory Management: Invest in barcode/RFID systems for large inventories
4. Document Everything: Maintain digital copies of all transactions
5. Regular Auditor Communication: Don't wait until year-end to contact auditors
6. Compliance Calendar: Track all filing deadlines and requirements
7. Staff Training: Ensure accounts team understands IFRS requirements

Choosing the Right Auditor

Key Criteria for Trading Companies

• Experience: Track record with trading sector
• Industry knowledge: Understanding of trading operations
• Ministry approval: Current DED/MOE approval status
• Responsiveness: Timely communication and support
• Value-added services: Management recommendations, not just compliance

Questions to Ask Potential Auditors

1. How many trading companies do you currently audit?
2. Do you have experience with our specific trade category?
3. What is your typical timeline from start to final report?
4. Can you assist with mid-year reviews?
5. What technology do you use for audit procedures?
6. Will you attend our physical inventory count?

2025 Updates and Changes

New Requirements

• Enhanced disclosure: Beneficial ownership information mandatory
• Sustainability reporting: Large trading companies (revenue > AED 500M) must include ESG disclosures
• Digital reporting: Electronic filing through DED portal mandatory
• Audit quality review: Random quality reviews by MOE oversight board

Corporate Tax Impact

With corporate tax introduced in June 2023:

• Tax audits becoming more common
• Transfer pricing documentation needed
• Reconciliation between accounting and tax profits
• Group structures require consolidated audit approach

Real-World Trading Company Audit Case Studies

Case Study 1: Electronics Trading Company - Inventory Discrepancy Resolution

Company Profile:

• Industry: Consumer electronics and accessories
• Annual Revenue: AED 85M
• Locations: 1 warehouse + 3 retail outlets
• Year-End: December 31, 2024

Challenge: Year-end physical inventory count revealed AED 2.1M discrepancy (inventory per books: AED 8.3M, physical count: AED 6.2M).

Root Causes Identified:

1. Obsolete smartphones (older models): AED 850K unsellable (still carried at cost)
2. Unrecorded sales returns: AED 420K in returns from retailers not processed
3. Theft/shrinkage: AED 380K estimated shrinkage (no CCTV, weak controls)
4. Goods in transit confusion: AED 280K shipped to customers but still in inventory
5. Data entry errors: AED 170K counting/recording mistakes

Audit Impact:

• Required AED 2.1M inventory write-down
• Reduced net profit by 74% (from AED 2.8M to AED 700K)
• Audit fee increased by AED 9,500 (extended fieldwork: 5 days vs. planned 2 days)
• Management letter with 8 control deficiencies

Remediation (Implemented Next Year):

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Year 2 Results:

• Inventory discrepancy: AED 45K (vs. AED 2.1M prior year)
• Audit completed in 12 days (vs. 19 days)
• Audit fee reduced by AED 11,000
• Clean audit opinion with no control findings

CFO Quote: "That AED 2.1M write-off was painful but necessary. We now have real-time inventory visibility and haven't had a material discrepancy in 3 years. Best investment we made."

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Case Study 2: FMCG Import/Export Company - Revenue Recognition Correction

Company Profile:

• Industry: Fast-moving consumer goods (food products)
• Annual Revenue: AED 120M
• Operations: Import from Asia, distribute GCC-wide
• Year-End: December 31, 2024

Issue Discovered: Auditors identified revenue recognition policy violation: Company recognizing revenue when goods shipped from supplier (Asia), not when delivered to UAE customers.

Financial Impact:

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Why It Happened:

• Shipping terms: FOB (Free on Board) at origin port
• Company recorded revenue when goods left supplier warehouse (Asia)
• Transit time: 18-25 days to UAE
• At year-end, AED 2.7M worth of goods were on ships/in customs

IFRS 15 Requirement: Revenue should be recognized when customer obtains control of goods:

• FOB shipments: Control transfers at destination port (UAE), not origin (Asia)
• CIF/DDP shipments: Control transfers when customer receives goods

Resolution:

• Restated Dec 2024 revenue downward by AED 2.7M
• Recorded goods in transit as inventory
• Updated revenue recognition policy
• Implemented cut-off procedure: Track all shipments in transit at month-end

Lesson Learned: Revenue recognition timing is critical. Audit your shipping terms (FOB vs. CIF) and ensure accounting policy matches IFRS requirements.

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Case Study 3: Automotive Parts Trading - Related Party Transaction Disclosure

Company Profile:

• Industry: Automotive parts and accessories
• Annual Revenue: AED 45M
• Shareholders: 2 partners (60%/40% ownership)
• Year-End: December 31, 2024

Issue: Auditors discovered undisclosed related party transactions totaling AED 8.2M.

Transactions Identified:

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Regulatory Violations:

1. IFRS requirement: All related party transactions must be disclosed in financial statement notes
2. Corporate governance: Board approval required for material related party transactions
3. Commercial Companies Law: Transactions must be at arm's length or properly disclosed
4. Tax implications: Transfer pricing rules apply (new corporate tax regime)

Audit Impact:

• Modified audit opinion: "Except for" qualification due to inadequate disclosures
• Bank credit facility frozen until clean audit obtained
• DED inquiry triggered (non-compliance with disclosure requirements)

Remediation:

1. Comprehensive disclosure added to financial statements:
   • Nature of relationships
   • Transaction amounts by type
   • Outstanding balances
   • Terms and conditions
2. Formalized loan agreement with Shareholder A (market interest rate: 5% p.a.)
3. Board approval policy established for related party transactions > AED 50K
4. Quarterly review of related party transactions implemented
5. Reissued financial statements with proper disclosures

Follow-Up Audit (Next Year):

• Clean unmodified opinion obtained
• Bank credit facility restored
• Related party register maintained throughout year (no surprises at audit)

Managing Partner Quote: "We didn't realize how serious related party disclosure requirements were. Now we maintain a quarterly register and get board approval for everything. Lesson learned the expensive way."

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Comprehensive FAQ for Trading Companies

1. What documentation do I need for a trading company audit in Dubai?

Essential Documents Checklist:

Financial Records:

• Complete sales and purchase registers (all 12 months)
• Supplier invoices and customer invoices (organized by month)
• Bank statements for ALL accounts (current and savings)
• Bank reconciliations (monthly, all accounts)
• Inventory records: Opening stock, purchases, sales, closing stock
• Physical stock count sheets (signed and dated)
• Fixed asset register with depreciation calculations
• Accounts receivable and payable aging reports

Statutory Documents:

• Trade license (current and valid through audit period)
• Memorandum of Association (MOA)
• Articles of Association (AOA)
• Shareholder register and share certificates
• Tenancy contract (Ejari registered)
• Partner agreements (if applicable)

Tax & Compliance:

• All VAT returns (Q1-Q4 or monthly)
• VAT certificates
• Corporate tax registration (if applicable)
• WPS reports (Wage Protection System) - all months
• Customs declarations (if import/export)

For Import/Export Specifically:

• Bills of lading / Airway bills
• Commercial invoices
• Packing lists
• Certificates of origin
• Letters of credit (LC) documentation
• Customs duty payment receipts

Pro Tip: Organize documents in a cloud folder (Google Drive, Dropbox) by month and category. This can reduce audit time by 30-40%.

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2. How long does a trading company audit take in Dubai?

Typical Timeline:

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Factors Affecting Duration:

Faster Audits (8-12 days):

• Well-organized records (digital, categorized)
• Monthly reconciliations already complete
• Clean books with minimal errors
• ERP system in place (Tally, Zoho, SAP)
• Prior year audit was clean
• Dedicated staff person supporting auditor

Slower Audits (20-40 days):

• Disorganized records (paper-based, missing documents)
• Reconciliations not done (auditor must complete)
• Significant errors or discrepancies found
• Manual/Excel-based accounting
• First-time audit or prior year issues
• Limited availability of accounting staff

Phase-by-Phase Breakdown:

Week 1: Planning & Interim Work

• Understanding business and systems
• Assessing internal controls
• Planning audit approach
• Requesting preliminary documents

Week 2-3: Detailed Testing

• Inventory observation and testing
• Revenue and expense substantive testing
• Bank confirmations and reconciliations
• Receivables/payables confirmations
• Related party transaction review

Week 4: Finalization

• Resolving outstanding items
• Management representation letter
• Drafting audit report
• Review and sign-off

How to Minimize Audit Time:

1. Start preparation 60 days before year-end
2. Complete all reconciliations before audit starts
3. Organize documents digitally in advance
4. Assign one person as auditor liaison
5. Respond to auditor requests within 24 hours

Real Example:

• Company A (disorganized): 28 days, AED 42K
• Company B (well-prepared, same revenue): 14 days, AED 24K
• Savings: AED 18K (43% reduction) through preparation

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3. Do free zone trading companies have different audit requirements than mainland?

Yes - requirements vary significantly by jurisdiction.

Comparison Table:

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Specific Free Zone Requirements:

DMCC:

• Audit mandatory for ALL companies (no exemptions)
• Deadline: 6 months from year-end
• Must use DMCC-approved auditor
• Electronic filing through DMCC portal
• License renewal dependent on audit filing

JAFZA:

• Audit required if turnover > AED 1M
• Deadline: 6 months from year-end
• Auditor must be JAFZA-approved
• ESR filing required annually

DAFZA (Dubai Airport Free Zone):

• Audit mandatory for all license holders
• Deadline: 6 months from year-end
• Stricter inventory controls (bonded warehouse)

DIFC:

• Audit mandatory (no exemptions)
• Deadline: 4 months from year-end
• DFSA regulations apply (if financial services)
• Higher audit quality standards
• Typically higher audit fees (15-25% vs. mainland)

Key Differences:

1. Auditor Qualification:

• Mainland: Must be UAE Ministry of Economy approved
• Free zones: Must have zone-specific approval (easier for international firms)

2. Re-export Requirements:

• Mainland: Can sell locally without restrictions
• Free zone: Re-export documentation required if selling to UAE mainland (triggers customs duty)

3. VAT Implications:

• Mainland: Standard VAT applies (5%)
• Free zone: "Designated zone" status affects VAT treatment (goods to other GCC = 0%)

4. Corporate Tax:

• Mainland: Subject to 9% corporate tax
• Free zones: "Qualifying free zone person" may get 0% rate (strict conditions)

Which is Better for Trading?

Choose Mainland if:

• Primary market is UAE local
• Need physical retail presence
• Want flexibility in business activities

Choose Free Zone if:

• Focus on import/export/re-export
• International customer base
• Want 100% foreign ownership
• Prefer streamlined setup

Pro Tip: Some companies maintain both - free zone for import/export operations, mainland for local distribution.

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4. What are the most common audit issues for trading companies in UAE?

Based on 500+ trading company audits by Farahat & Co, these are the top 10 most common issues:

1. Inventory Valuation Errors (68% of trading audits)

• Physical count doesn't match books
• Obsolete stock not written down
• FIFO vs. weighted average confusion
• Goods in transit not properly recorded
• Average adjustment: AED 250K-800K

2. Revenue Recognition Timing (54%)

• Revenue recorded when shipped (not delivered)
• FOB vs. CIF confusion
• Cut-off errors at year-end (Dec transactions in Jan, vice versa)
• Average adjustment: AED 180K-650K

3. Bank Reconciliations Incomplete (47%)

• Outstanding items > 90 days not investigated
• Missing month-end reconciliations
• Unrecorded bank charges/interest
• Typical delay: 3-5 audit days

4. Receivables Provision Inadequate (43%)

• No provision for > 180-day receivables
• Disputed amounts not provided
• Related party receivables treated same as arms-length
• Average adjustment: AED 120K-400K

5. Foreign Exchange Gains/Losses (39%)

• Monetary items not revalued at year-end
• Exchange differences not properly classified
• Forward contracts not recorded
• Average adjustment: AED 80K-250K

6. Related Party Transactions Not Disclosed (31%)

• Sales/purchases from shareholder companies not identified
• Loans to/from shareholders undocumented
• Management fees to related entities
• Impact: Qualified audit opinion if material

7. VAT Reconciliation Issues (28%)

• VAT return doesn't match books
• Input VAT claimed on personal expenses
• Zero-rated vs. exempt confusion (exports)
• Average exposure: AED 50K-180K penalties

8. Cost of Goods Sold Calculations (24%)

• Opening/closing inventory errors
• Freight costs not capitalized
• Customs duty treatment inconsistent
• Average adjustment: AED 150K-500K

9. Fixed Assets & Depreciation (18%)

• Assets still on books after disposal
• Depreciation rates inconsistent
• Leasehold improvements not amortized
• Average adjustment: AED 40K-120K

10. Provisions & Accruals Missing (16%)

• Audit fees not accrued
• 13th month salary not accrued
• Warranty provisions inadequate
• Average adjustment: AED 60K-180K

Prevention Strategy:

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Bottom Line: 80% of trading company audit issues can be prevented through monthly bookkeeping discipline.

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5. How much does a trading company audit cost in Dubai?

Audit Fee Structure (2025 Market Rates):

By Company Size:

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Additional Cost Factors:

Increases Fees (+20-50%):

• First-time audit (no prior year comparison)
• Disorganized records (auditor must organize)
• Multiple locations/warehouses
• Significant related party transactions
• Prior year qualified opinion or findings
• Complex inventory (high SKU count)
• Rush job (< 30 days to deadline)

Reduces Fees (-10-30%):

• Well-organized digital records
• Clean prior year audit
• Monthly reconciliations complete
• ERP system with good controls
• Dedicated accounting staff support
• Early engagement (60+ days before year-end)
• Multi-year engagement commitment

What's Typically Included:

Standard Audit Package:

• Statutory audit as per UAE regulations
• Audit report signed by approved auditor
• Basic financial statement review
• Management representation letter
• Electronic filing with DED/authority
• 1 round of review/amendments

NOT Typically Included (Additional Fees):

• Tax return preparation (add AED 5K-15K)
• Detailed management letter (add AED 3K-8K)
• Quarterly interim reviews (add AED 8K-20K each)
• Bookkeeping/reconciliation services (add AED 2K-5K/month)
• ESR reporting (add AED 5K-10K)
• Transfer pricing documentation (add AED 15K-40K)

Cost Optimization Tips:

1. Engage Early: Auditors charge 30-50% premium for rush jobs (< 2 weeks)

2. Prepare Well:

• Company A (unprepared): AED 38K for AED 45M revenue company
• Company B (prepared): AED 24K for similar company
• Savings: AED 14K (37%) through preparation

3. Multi-Year Commitment: Negotiate 5-10% discount for 2-3 year engagement

4. Bundle Services: Tax + audit package often cheaper than separate

5. Mid-Year Review: AED 8K mid-year review can save AED 12K+ at year-end (faster, cleaner audit)

How to Get Quotes:

1. Contact 3-4 auditors
2. Provide: Revenue, # locations, industry, year-end date
3. Ask for detailed breakdown
4. Compare scope carefully (not just price)
5. Check auditor credentials (MOE approval, insurance, experience)

Red Flags:

• ⚠️ Fees significantly below market (< AED 10K for AED 20M+ company) = quality concerns
• ⚠️ No written engagement letter with clear scope
• ⚠️ Auditor not MOE-approved (check Ministry website)

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6. Can my trading company get audited mid-year instead of year-end?

Yes, but with important considerations:

Mid-Year Audit Options:

Option 1: Change Financial Year-End

• Process: Apply to DED/free zone authority
• Approval time: 2-4 weeks
• Common switches:
  • Dec 31 → March 31 (avoid peak audit season)
  • Dec 31 → June 30 (align with parent company)
• Requirements: Board resolution, valid business reason
• Cost: AED 500-2,000 administrative fees

Option 2: Interim Review (Not Full Audit)

• What it is: Review of 6-month or 9-month financials
• Scope: Less detailed than full audit (inquiry + analytical procedures only)
• Cost: 40-50% of annual audit fee
• Benefit: Identify issues early before year-end
• Best for: Companies > AED 50M revenue with in-house teams

Option 3: Rolling Quarterly Audits

• What it is: Auditor reviews each quarter throughout the year
• Year-end: Only Q4 + year-end finalization (faster)
• Cost: Usually 10-15% more than traditional audit (but spread throughout year)
• Benefit:
  • Issues resolved quarterly (no year-end surprises)
  • Year-end audit only 1-2 weeks (vs. 3-4 weeks)
  • Better cash flow (pay quarterly vs. large year-end invoice)

Pros and Cons:

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When to Consider Mid-Year Audit:

Good Reasons:

• Part of group requiring different year-end
• Seasonal business (peak revenue in Q4)
• Avoid January-March auditor availability issues
• Bank/investor requires semi-annual audited financials

Not Good Reasons:

• Trying to hide year-end losses (auditors will catch this)
• Just missed the deadline (can't change retroactively)

How to Change Year-End:

Step 1: Board meeting and resolution Step 2: Apply to licensing authority (DED/free zone) Step 3: Notify auditor, bank, and stakeholders Step 4: Prepare short-period financial statements (e.g., Jan-June if switching from Dec to June) Step 5: Conduct short-period audit (prorated fees) Step 6: Resume normal annual cycle

Pro Tip: Many companies switch from Dec 31 to March 31 year-end to avoid the January-March audit crunch when auditors are busiest.

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7. What happens if my trading company's audit reveals significant inventory write-offs?

This is one of the most common and painful scenarios for trading companies.

Typical Inventory Write-Off Scenarios:

1. Obsolete Stock

• Cause: Technology changes, fashion shifts, expired products
• Example: Electronics retailer with 2-year-old smartphone models
• Typical write-off: 40-60% of obsolete inventory cost

2. Damaged Goods

• Cause: Poor storage, handling, transit damage
• Example: Food importer with water-damaged packaging
• Typical write-off: 100% of damaged inventory

3. Theft/Shrinkage

• Cause: Weak controls, no CCTV, poor receiving procedures
• Example: Small-item trader (accessories, cosmetics)
• Typical write-off: 2-8% of total inventory value

4. Pricing Below Cost

• Cause: Market price dropped below purchase cost
• Example: Commodity trader (metals, petrochemicals)
• Typical write-off: Write-down to net realizable value

Financial Impact:

Example: AED 50M Trading Company

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What Happens Next:

Immediate Actions:

Step 1: Verify the Write-Off

• Challenge auditor's assessment (provide evidence if you disagree)
• Conduct additional physical verification if needed
• Review pricing data (recent sales of similar items)
• Document obsolescence criteria

Step 2: Financial Statement Impact

• Write-off recorded as "Cost of Goods Sold" or "Impairment Loss"
• Profit reduced by write-off amount
• Balance sheet: Inventory reduced, equity reduced
• Cannot be avoided if material and supported

Step 3: Stakeholder Communication

Banks:

• Notify immediately if covenant violations occur
• Provide explanation and remediation plan
• May require:
  • Additional collateral
  • Temporary waiver
  • Increased interest rate

Shareholders:

• Present at AGM (Annual General Meeting)
• Explain root causes
• Outline prevention measures

DED/Authorities:

• No additional filing required (part of normal audit)
• Ensure disclosure in financial statements

Step 4: Tax Implications

Corporate Tax Impact:

• Inventory write-off is deductible for tax purposes (reduces taxable income)
• Benefit: 9% × write-off amount
• Example: AED 1M write-off = AED 90K tax savings

VAT Implications:

• Output VAT on obsolete inventory cannot be recovered
• If inventory destroyed: Must adjust VAT return
• Ensure proper documentation (destruction certificates if required)

Prevention for Next Year:

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Real Recovery Example:

Electronics Trader (After AED 2.1M Write-Off):

• Year 1: Massive write-off, profit wiped out
• Year 2 Actions:
  • Implemented 90-day aging review
  • Markdown after 6 months (20% discount)
  • Clearance sales after 9 months (40% discount)
  • Written off proactively throughout year (small amounts)
• Year 2 Results:
  • Year-end write-off: Only AED 85K
  • Improved cash flow (sold aging inventory vs. write-off)
  • Gross margin reduced slightly (discounts) but much healthier overall

Key Lesson: Inventory write-offs are PREVENTABLE through monthly monitoring. Don't wait until year-end audit to discover obsolete stock.

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Conclusion

Trading company audits in Dubai require careful preparation, organized record-keeping, and understanding of specific industry requirements. By starting early, maintaining proper documentation, and working with experienced auditors, you can ensure a smooth audit process and full compliance with UAE regulations.

Key Takeaways for Trading Companies:

Start Preparation Early: 60-90 days before year-end Focus on Inventory Controls: #1 issue in trading audits Maintain Monthly Reconciliations: Bank, AR, AP, inventory Document Related Party Transactions: Critical for compliance Understand Revenue Recognition: FOB vs. CIF implications Organize Records Digitally: Can reduce audit time by 30-40% Budget Appropriately: AED 15K-65K depending on size

At Farahat & Co, we've audited over 500 trading companies across various sectors including electronics, FMCG, automotive parts, construction materials, and healthcare products. Our team understands the unique challenges of trading businesses and provides efficient, value-added audit services.

Our Trading Company Audit Services:

• Pre-audit readiness reviews
• Inventory observation and testing
• Import/export compliance review
• VAT and corporate tax advisory
• Management advisory services
• Express audit services (if deadline approaching)

Need assistance with your trading company audit? Contact us for a free consultation and competitive quote. Our Ministry-approved auditors are ready to help you achieve a smooth, efficient audit process.

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• Trading Industry Audit Services - Specialized trading company auditors
• External Audit Services - Statutory audit services
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