This External Reporting Board (XRB) consultation document seeks feedback on two matters affecting the International Standard on Auditing (New Zealand) for Audits of Financial Statements of Less Complex Entities (ISA (NZ) for LCE):

1. Targeted New Zealand-specific amendments to enable auditors to use type 1 and type 2 controls reports from service organisations as audit evidence.
2. International amendments developed by the IAASB to maintain the ISA for LCE standard following recent changes to auditing standards.

Our submission supports the NZ-specific amendments to the ISA (NZ) for LCE standard, viewing them as a practical and proportionate response to concerns raised by auditors during the implementation of the standard. The issue relates to situations where auditors seek to rely on service organisation controls reports (type 1 and type 2 reports), particularly in audits of charities that outsource investment management services.The primary way auditors obtain evidence over ownership of investments is through obtaining the service organisation’s type 2 controls report. However, the ISA (NZ) for LCE standard currently does not include any requirements addressing what an auditor needs to do when they intend to use a controls report as audit evidence. The wording in the extant standard has been interpreted by some auditors to mean that the ISA (NZ) for LCE standard cannot be used where the auditor would need to use type 1 or type 2 reports. We agree that targeted amendments drawing on ISA (NZ) 402 are necessary to address this gap and recommend some changes to further enhance application.

We will be making a submission directly to the IAASB on the proposed international amendments to the ISA for LCE standard related to fraud, going concern, ‘listed entity’ and ‘public interest entity’ definitions, and the use of experts. We support maintaining alignment with international auditing standards while limiting NZ-specific modifications to circumstances where they are genuinely necessary.