- Less complex entities (LCEs) are a vital sector of the world’s economy that require the value an audited financial report can bring
- Developing a standalone standard for LCE audits is complex but the effort will be worthwhile
- We need your feedback to make sure we get to the right result for LCE audits
Less complex entities (LCEs) are a vital and very large sector of the world’s economy that require the value an audited financial report can bring. So how do we best deliver that to them?
Think about the huge population of SMEs, not-for-profits, clubs, strata and community living, small charities, SMSFs etcetera. The destination – reasonable assurance – is the same for these entities and their stakeholders as it is for the largest companies. But given the very different context, is a full International Standards on Auditing (ISA) audit the only way to get there?
Henry Ford famously told customers they could have any colour car they wanted so long as it was black. That reflected the constraints of the 1900s production lines, but technology has changed and now we can have whatever colour, size and shape of car we want.
Of course, there are still some non-negotiable fundamentals. Cars have to be safe and reliable so they get you where you need to go. For some time now, auditors of less complex entities have been asking if maybe there isn’t a better vehicle for their road.
In fact, a recent AUASB survey showed that 97% of its respondents regarded the development of auditing guidance specific for LCEs as very important.
Which brings us to the IAASB’s less complex entities project. In 2019, following decades of advocacy from small and medium practices worldwide, the IAASB issued a discussion paper to finally have the conversation about how to build a better less complex entity audit.
The feedback has resulted in two projects – one to address the drafting of the full ISAs and how to make sure they are as scalable and understandable as possible. The second will develop a standalone standard for audits of less complex entities. An exposure draft detailing what that might look like was issued in June.
For some time now, auditors of less complex entities have been asking if maybe there isn’t a better vehicle for their road.
The IAASB’s aim is that the end product, a reasonable assurance audit, would be the same but getting there would be much simpler. The proposed LCEs standard responds to stakeholder needs by providing audit requirements that are proportionate to the typical nature and circumstance of an audit of a less complex entity.
The idea is that by consolidating the requirements of the ISA where appropriate, and providing simplified explanatory materials, ISA for LCEs should mean auditors are more able to focus on doing a high-quality audit suited to the entities involved rather than contorting their work to fit standards designed with much more complex situations in mind.
A standalone simplified audit standard is a pragmatic, but not a conceptually or technically pure, response to the challenges of applying ISA to these entities. This is one reason it has taken so long to see an ED of this kind, and why the prototype deserves to be fully road tested.
We will be looking for a few key things under the bonnet – first, it must be genuinely simpler and remove superfluous effort involved in crossing off or wading through material clearly not applicable to LCEs. Second, what has been removed is just as important. It is of no benefit to remove helpful application and guidance materials just to lighten up the page count. Finally, does the standard remain a self-contained vehicle to get that huge population of LCEs to reasonable assurance – if you’re having to flag down help at every corner (i.e. using the full ISA) it’s not going to be more efficient.
These are some really challenging design specs. The proposed standard no doubt will need bolts tightened and parts reshaped, but it’s still a solid starting point that can evolve with time.
At some point you have to stop arguing about what the perfect blueprint looks like and build a prototype that can be tested and refined in the real world. ISA for LCEs gives us that prototype.
So, if you are the auditor of an SME, I’d recommend putting the LCE exposure draft on your summer reading pile and providing feedback to us or to the boards to help kick the tyres and get the journey underway.
A new approach for audits of less complex entities
Read more about the proposals.Read more