Audits of less complex entities – Phase II [ED]
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The comment period of the current IAASB Exposure Draft ended on May 2, 2023 |
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Next steps: |
The IAASB plans to approve the final ISA for LCE before the end of the year. The AASB will be considering the way forward in Canada at a future meeting. |
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Last updated: |
September 2023 |
Overview
On April 29, 2019, the International Auditing and Assurance Standards Board (IAASB) published a Discussion Paper, Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges in Applying the International Standards on Auditing (ISAs). The purpose of the IAASB was to further understand the challenges of using ISAs in audits of less complex entities (LCEs) —and views about possible actions to address these challenges. For the initial stage of this project see - Audits of less complex entities – Phase I [Completed]
Following a review of the responses by stakeholders and a discussion with its Task Force, at its meeting on December 7-11, 2020, the IAASB concluded that the appropriate next step (Phase II) was to develop a separate standard for audits of the financial statements of LCEs.
On December 15, 2020, the IAASB published a new communique detailing plans for the new standard, including current thinking on what the standard will look like, what entities it will apply to, and the development timeline.
At the June 22/23, 2020 meeting of the AASOC, Mr. Eric Turner, Director of the AASB noted the following with respect to this project: (i) the audit of LCEs is a key initiative for the AASB; (ii) at its June 2020 meeting, the IAASB sought input from its members to allow it to proceed with the development of a separate standard for LCEs. It also set out principles to abide by in development of this standard. The AASB had a robust discussion of these principles and did not support the IAASB’s direction for this project, that is to say the AASB does not endorse a separate standard as the preferred solution. It believes that the most effective and timely solution to address the key issues respondents identified in the IAASB’s Discussion Paper is to make limited revisions to the ISAs or develop non-authoritative guidance. It believes that complexity cannot be defined at an entity level, but rather it is related to a particular area of a business’ operations or its financial statements; (iii) unlike the ISAs, each jurisdiction will need to decide whether or not to adopt this separate LCE standard, that is to say the AASB could decide that Canada will not adopt the separate LCE standard or restrict its use in Canada; and (iv) the separate standard for LCEs will not be applicable for the audits of listed entities as the IAASB believes that only the ISAs would meet the public interest in this case. The IAASB will also consider further limitations to the use of the separate standard for LCEs as the project proceeds.
On January 24, 2023, the IAASB opened the public consultation for a group audit-specific section of the proposed auditing standard for less complex entities (LCEs). The proposed section, Part 10, Audits of Group Financial Statements, is intended to form part of the proposed ISA for LCEs when finalized. The Exposure Draft is open for public comment until May 2, 2023.
On May 1, 2023, the AASB submitted a comment letter responding to the Exposure Draft, where it indicated that it has not yet decided whether having a separate standard for LCE audits is an appropriate solution for the Canadian environment. In making its decision, it will consider the revisions made in finalizing the ISA for LCE, and the implications of having two sets of auditing standards.
In its letter, the AASB shared its concerns with the proposed “bright line” exclusion of the use of the proposed ISA for LCE when component auditors are involved. It believes that the proposed prohibition could increase the complexity of the auditor’s decision-making process regarding the use of the proposed ISA for LCE. The AASB recommends not to include a prohibition when component auditors are involved. In its view, the qualitative characteristics that describe the typical LCE, in addition to the group-specific qualitative characteristics set out in ED-ISA for LCE Part 10, should be adequate for the purpose of determining the appropriate use of the proposed ISA for LCE for group audits.Consistent with its report, “Audits of Less Complex Entities – Our Progress Toward a Solution”, the AASB will continue to monitor and provide input to the IAASB’s as it works towards providing solutions in this area.
Other Developments
January 2023
On January 24, 2023, the IAASB opened the public consultation for a group audit-specific section of the proposed auditing standard for less complex entities (LCEs). The proposed section, Part 10, Audits of Group Financial Statements, is intended to form part of the proposed ISA for LCEs when finalized. The Exposure Draft is open for public comment until May 2, 2023.
September 2021
On September 10, 2021, the AASB issued a Discussion Paper to obtain stakeholder input on options that might be explored in Canada to address the challenge of applying the CASs to audits of less complex entities. Comments are requested by December 10, 2021.
July 2021
On July 23, 2021, the IAASB published an exposure draft of its new, stand-alone standard for audits of financial statements of less complex entities. Comments are requested by January 31, 2022.
December 2020
On December 15, 2020, the IAASB published a new communique detailing plans for the new standard, including current thinking on what the standard will look like, what entities it will apply to, and the development timeline.