Audits of ‘less complex entities’ (LCEs)

Smaller entities make a critical contribution to the world economy and quantitatively the majority of audits globally are audits of smaller entities. The International Auditing and Assurance Standards Board (IAASB) has at long last acknowledged the unique challenges in implementing ISAs where the audited entity is less complex – and of course the vast majority of smaller entities fall into this category.

The eagerly-anticipated discussion paper on the audit of LCEs has now been published by the IAASB. It starts off by looking at the current description of a smaller entity and noting that many less complex entities are smaller and vice versa. The project would not have worked internationally if it focussed solely on smaller entities, partly because there is too much variation in what is considered small; but also because in many jurisdictions  - including the USA – smaller entities have never been audited.

The paper sets out a number of issues that are beyond IAASB’s control: legal and regulatory requirements, commercial, technological and methodological issues, auditor education, expectations gaps and the perceived value of an audit. IAASB acknowledges, however, that it can do something about language, which has become more complex, harder to understand, less principles-based, and more detailed, driving a compliance approach.

IAASB recognises that:

  • the sheer length of the ISAs is an issue;
  • documentation requirements are unclear, leading to inconsistency, both over and under-documentation, the performance of unnecessary procedures and the omission of some that are necessary;
  • there is a lack of implementation guidance; and
  • there are a number of particularly problematic ISAs including ISA 315 (over-engineering generally and required work on controls particularly unclear), ISA 240 (onerous requirements relating to fraud), and ISA 540 (excessively complex for simply estimates).

In the paper, IAASB sets out some proposed solutions:

  • revise the entire suite of ISAs (which seems unlikely to happen under any circumstances given resource constraints);
  • develop new ISAs on a revised basis, leading to two ‘types’ of ISA for a time;
  • develop guidance for LCE auditors;
  • make ISAs more accessible through technology, which should probably be happening anyway; and
  • develop a new ISA, either based on and/or tied to the existing ISAs or starting from scratch, despite concerns about the creation of a two-tier profession.

IFAC will be conducting a very short survey of practitioners to obtain input and we will be promoting that survey when it opens. We have a working group developing the response chaired by Catherine Willshire, of Price Bailey, and we will of course be seeking extensive input from smaller firms in developing our response

If you have comments on the discussion paper you would like us to consider, please do email Katharine Bagshaw at The response deadline is 12 September, but comments are needed as soon as possible as we will be seeking to finalise the response in July.

As it is an open public consultation, you may also wish to reply directly to the IAASB, and we encourage practitioners to do so. This is a window of opportunity that is not likely to arise again for quite some time.