- The 'Audits of Less Complex Entities' discussion paper presents the IAASB's response to growing concerns surrounding the unnecessary complexity of audit standards
- There are three potential solutions under consideration
- This case highlights the importance of a central international standards body in the audit profession
Multiple regulatory reviews are being conducted on the procedures, scope and quality of audit practices around the world, and significant reforms may emerge in the near future. One such review is the IAASB's project into how less complex entities (LCEs) are audited, and how relevant standards could be improved. Lyn Provost CNZM, along with Sylvia van Dyk provide insights into the ongoing investigation.
The purpose of the LCE discussion paper
The IAASB has, for many years, undertaken work to review the effectiveness of auditing and assurance standards. As Provost explains, this is one of the core ways the IAASB serves the public interest.
"Ultimately the IAASB is here to support the profession in providing consistent, high quality audits that fulfil the needs of users. Developing and maintaining globally relevant standards that are applicable to entities of all sizes, is core to our purpose," Provost says.
The LCE discussion paper places specific focus on how to reduce the unnecessary complexity of audit standards for LCEs. Regarding the research findings, van Dyk explains the IAASB has heard the audit community’s call for change.
"The purpose of the investigation and discussion paper is to respond to growing concerns that auditing standards for LCEs are too complex, too long, and create unnecessary challenges for auditors. I think there are more LCEs being audited than large ones, so it's very much in the public interest," van Dyk says.
The objective of the discussion paper is to understand exactly what challenges auditors of LCEs are facing. Led by a specialist task force, the IAASB is consulting widely with the audit community.
"We're engaging with our stakeholders in a timely and meaningful way to understand their needs and to ensure we have an accurate understanding of what the problem is before we begin addressing it. The discussion paper presents a high-level overview of various challenges, but we are asking submissions to identify specific problems to be fixed" Provost says.
The options on the table
The discussion paper presents three potential solutions and encourages submissions to assess their viability:
- To revise current International Standards on Audits (ISA), to reduce their complexity and increase their scalability.
- To produce an entirely new set of ISAs that would include a clear definition of an LCE, and when the standards should be applied.
- To leave the current ISAs unchanged, and instead develop better guidance for auditors on how to use them when auditing an LCE.
Although submissions are still open and yet to be reviewed in entirety, van Dyk believes the audit community shows a preference for the first and second options - signalling a need for change.
The issue with the third option is a lot of guidance already exists, and yet the problem persists. Based on the outreach we've conducted so far, the idea of developing more guidance is the least favourable option," van Dyk says.
"In regard to the other two options, there's almost an even split in the community, it's not clear where people are landing. But submissions close this September so we will have a better idea after that," van Dyk says.
The future of the audit standards for LCEs
Regardless of the IAASB's ultimate decision, van Dyk believes this case reaffirms the essential role of the Board. The audit profession is global and requires international solutions, something which only the IAASB can facilitate.
"Years ago, the Nordic Federation developed their own standard for LCEs, and even though people generally agreed it would be helpful, it was never adopted in their region because the larger international firms wanted to avoid problems of being inconsistent with international standards. This situation highlighted that only the IAASB could effectively address this issue," van Dyk explains.
Looking to the future, van Dyk sees technology presenting both challenges and opportunities for setting standards in accounting and auditing. The rate of change in technology will require standard setters to respond quickly, and technology may assist them to become more agile at the same time.
"Adapting to and utilising new technology is a big item on the IAASB's agenda. It's really exciting and we need to assess how we can use technology to improve our operations and become more efficient." Van Dyk says.
"Change is happening so fast now, we need to keep up."