In July 2021, the International Auditing and Assurance Standards Board (IAASB) issued the exposure draft of a “simplified” auditing standard, Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE).
The International Standards on Auditing (ISAs) are designed to be applied to a wide variety of entities with differing circumstances and sizes and are continually updated to address the evolving business environment and changing reporting landscape. Some stakeholders have therefore questioned whether the ISAs remain relevant and can be applied in a cost-effective manner to all audits. For example, increases in length and details of the ISAs can be a barrier to auditors’ reading and understanding of the requirements. The complexity of ISAs may also result in a perceived “checklist-approach” to perform audit engagements, with a greater focus on compliance rather than using professional judgement.
In response to these concerns, the IAASB issued a discussion paper in 2019 exploring possible options to address the challenges of applying ISAs. Following responses to the paper, the IAASB developed two work streams to address the issues and challenges with the broader suite of ISAs:
- A separate standard for audits of financial statements of LCEs.
- Address issues related to complexity, understandability, scalability and proportionality (CUSP) in the ISAs more broadly.
Key principles of the proposed standard
The proposed standard is separate from the ISAs. Its standalone nature means that there is no ability to directly reference back to the ISAs. Auditors are not allowed to use ISA requirements for matters or transactions that are not included in the proposed standard.
Requirements in the proposed standard are proportionate to the nature and circumstances that would be typical of audits of LCEs. They are principles-based, and utilize a risk-based approach to an audit to address the need to obtain sufficient appropriate audit evidence to support an audit opinion.
To develop a standard that will achieve reasonable assurance, the IAASB has used the requirements in the ISAs relevant to the nature and circumstances of LCEs. Audit procedures not relevant to LCEs such as those specific to listed entities are not included in the proposed standard. As such, the proposed standard would have the same overall objectives and inherent limitations as an ISA audit, while it is not envisioned that it will necessarily reduce the core procedures an auditor is required to perform under ISAs to support the overall quality of the audit.
The underlying concept of professional scepticism in the proposed standard continues to apply in the same way as any other audit. Some of the changes to enhance the auditor’s exercise of professional scepticism that were introduced in ISA 540 (Revised) Auditing Accounting Estimates and Related Disclosures and ISA 315 (Revised 2019) Identifying and Assessing the Risks of Material Misstatement, for example around corroborative or contradictory audit evidence, have also been incorporated within the proposed standard.
Authority (scope) of the proposed standard
The IAASB describes the eligibility to apply the proposed standard through prohibiting certain classes of entities from using it. Where an entity is not restricted by the limitations as described below, the proposed standard is appropriate to use for an audit engagement:
(a) Specific classes of entities for which the use of the standard is prohibited, such as outright prohibition by law or regulation; the entity is a listed entity; an entity whose main function is to take deposits from the public, provide post-employment benefits etc.; the audit is an audit of group financial statements.
(b) Qualitative characteristics exhibited by an entity which are indicators of, or proxies for, matters or circumstances for which the proposed standard has not been designed. They include:
– Complex matters or circumstances relating to the nature and extent of the entity’s business activities, operations and related transactions and events relevant to the preparation of the financial statements.
– Topics, themes and matters that increase, or indicate the presence of, complexity, such as those relating to ownership, corporate governance arrangements, policies, procedures or processes established by the entity.
Main areas for comments
The IAASB is inviting comments on the proposed standard, and the Institute has issued an invitation to comments with consultation documents for our stakeholders available via the Standard Setting Department’s “Open for comment documents” webpage on the Institute’s website. The IAASB’s exposure draft contains specific matters for feedback including:
- Do you agree with the standalone nature of the proposed standard? Will there be any possible obstacles that may impair this approach?
- Do you agree with the approach to how the ISA requirements have been incorporated in the proposed standard, and the principles in relation to professional scepticism and professional judgement?
- Do you agree with the proposed limitations relating to the use of the proposed standard? Are there unintended consequences that could arise that the IAASB has not yet considered?
- Whether group audits should be excluded from (or included in) the scope of the proposed standard?
The Institute is interested in hearing your views about the proposed standard. To collect these views, you are invited to participate at the Institute’s roundtable on 9 November, or take part in the Institute’s survey which highlights the key attributes of the proposed standard followed by yes/no questions. Visit the Institute’s website for enrolment details and the survey link.
Visit the IAASB’s designated webpage for more information on the proposed standard.
This article was contributed by the Institute’s Standard Setting Department.