IAASB to develop audit standard for less complex entities

The International Auditing and Assurance Standards Board (IAASB) plans to create a separate standard for audits of financial statements of a less complex entity (LCE) and will consult on proposals in early 2021

The global audit standard setter’s December 2020 board meeting focused on specific matters related to the initial working draft and established a preliminary timeline with a spring consultation period and approval of the exposure draft slated for June 2021.

The move comes after calls for a LCE standard reflecting the nature of these businesses, with less complex requirements, particularly as the current audit framework does not offer enough flexibility on ‘scalability and proportionality’, issues which the IAASB is keen to address.

The separate standard will use similar concepts and principles as the International Standards on Auditing (ISAs) – the audit approach will be risk-based, to obtain sufficient appropriate audit evidence to result in a reasonable assurance opinion.

It will contain all requirements relevant to an audit of an LCE within a ‘standalone’ standard. These requirements are based on core requirements from the ISAs, ie, those requirements that the IAASB considers core to an audit that would be applicable in the circumstances of an audit of an LCE.

The aim is to keep the LCE auditing standard in line with the current audit framework for largest entities with the same underlying concepts as ISAs, including professional judgment and scepticism, ethical and quality management requirements, clear and consistent documentation requirements, reasonable assurance opinion and objectives for auditor’s procedures.

The new standard will be divided into parts following the flow of an audit and setting out the relevant requirements for the various components within an audit. This will be based on issues include audit evidence, acceptance or continuance of an audit engagement, risk identification and assessment, and the audit conclusion and reporting requirements.

An introductory section will explain the applicability of the standard (ie, the types of audits for which it will be suitable) – this is still under discussion by the IAASB and so may change as the separate standard is further developed.

The applicability section will set out any restrictions on use of the standard, as well as the characteristics of an audit for which the separate standard is appropriate.

At its December meeting, the IAASB reaffirmed its position that this standard will not be appropriate for use for audits of listed entities (i.e., it will contain no requirements that are unique to listed entities, the IAASB believes only the ISAs would meet the public interest in this case). At future meetings, the IAASB will consider further limitations.

Additionally, the IAASB stressed that each jurisdiction will need to decide whether the separate standard for audits of LCEs is appropriate for use within their local environment, and appropriate authorities may also further restrict use of the separate standard.

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