A proposed auditing standard for Less Complex Entities
Overview of the proposed new approach and what it means for you
If you’re an organisation that regularly requests and uses audit reports, or an entity subject to audits, a new approach is being proposed for audits of Less Complex Entities (LCEs) and we want to hear from you on what you think about it.
What are LCEs?
In the auditing world, entities that have simple business structures, straightforward types of business transactions and simple record keeping practices can be referred to as Less Complex Entities (LCEs). This description contrasts them from more sophisticated and complex entities like listed companies such as Air New Zealand for example.
LCEs span the for-profit, not-for-profit and Public sectors, and may:
- Be owned or managed by a small number of people with responsibility for a broad range of controls
- Have few personnel that conduct a wide range of duties
- Conduct straightforward transactions
- Practice simple record-keeping and have few internal controls
- Have limited lines of business and products.
Current auditing approach
Currently, all entities, regardless of complexity, are audited in accordance with the same standards - the International Standards on Auditing (ISAs). However, there has been growing concern about the length, relevance, and understandability of the ISAs, and their application to audits of LCEs.
A proposed solution
In response to these concerns, the International Auditing and Assurance Standards Board (IAASB) have developed a draft stand-alone standard, that will allow audits to be scalable and proportionate for LCEs. The draft standard is designed to:
- Be understandable, clear and concise
- Support global consistency and comparability and;
- Enable quality audits.
What the proposed LCE Standard means
The proposed standard is based on the same principles as the ISAs but its requirements are designed specifically for audits of LCEs. An audit in accordance with the proposed LCE auditing standard would therefore, provide the same level of confidence as an audit in accordance with the ISAs.
The proposed standard prohibits auditors from auditing certain types of entities using the proposed LCE auditing standard (like listed entities, entities with significant financial public accountability (e.g. banks, insurers, etc)) as they are complex by nature.
The proposed standard further requires the auditor to consider certain qualitative characteristics (such as the complexity of the nature and extent of the entity’s business activities, operations and related transactions) to conclude whether an entity is indeed a LCE.
If the auditor, after due consideration, concludes that the entity is a LCE, they are allowed to conduct the audit in accordance with the proposed auditing standard.
For users of financial statement:
You will continue to receive an auditor report that lets you know whether the auditor is of the opinion that the financial statements are fairly presented in all material respects. However, the auditor will let you know that they have conducted their audit in accordance with the proposed auditing standard for LCEs (instead of the ISAs).
Let us know what you think
The External Report Board (XRB) now seeking feedback from auditors of LCEs and users of auditor reports on this proposed standard. Further information can be found here. Comments and feedback are due by 5 November 2021.
Below are some questions to consider.
For audited entities:
- Would you like to know in advance (i.e., before the audit engagement starts) whether the auditor intends to use the proposed LCE auditing standard?
- Would you be happy for the audit to be provided in accordance with the proposed LCE auditing standard?
For users of audited financial statements:
- Does it make a difference to you which auditing standard (the proposed LCE auditing standard or ISAs) the auditor has applied in conducting their audit?
- Do you believe that an audit in accordance with the proposed LCE auditing standard would meet your needs?
- Peyman to add
How to provide feedback
There are a number of ways you can provide feedback:
- Email us at firstname.lastname@example.org
- Submit via our comment form
- Participate in one of our evens (see below)
Webinar – Overview of the proposed LCE auditing Standard. Register here for the webinar
Virtual Feedback Forum – For users of financial statements of LCEs, owners and/or governance providers of LCEs Register here for the Virtual Roundtable
Join our webinar and participate in our virtual roundtable
We want to provide you with the chance to work through the proposed new standard and we want to know your views about the matters discussed above.
- Webinar – targeting all interested stakeholders to provide an overview of the proposed LCE auditing Standard.
- Virtual Feedback Forum – targeting users of financial statements of less complex entities, owner and those charged with governance of LCEs and those who may require an audit from LCEs.
We look forward to you participating in these important events!