Audits of less complex entities – Phase II [ED]
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The standard is effective for audits beginning on or after December 15, 2025, for jurisdictions that adopt or permit its use. |
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Next steps: |
The AASB will continue to discuss possible alternative options for addressing challenges faced by LCEs and the audit of LCEs |
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Last updated: |
March 2024 |
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.
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 was open for public comment until May 2, 2023.
On May 1, 2023, the Auditing and Assurance Standards Board (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 was 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.
On December 6, 2023, the IAASB published the ISA for LCE. Built on the foundation of the ISAs, audits performed using this standard provide the same level of assurance for eligible audits: reasonable assurance. The standard is effective for audits beginning on or after December 15, 2025, for jurisdictions that adopt or permit its use. It is the nature of the business that determines if this standard can be used i.e., how complex the business activities, organizational and ownership structures, finance function, technology, accounting & reporting are. It also cannot be used by entities that are listed or have public interest characteristics. Further, the auditor’s report will have to refer to the ISA for LCE for transparency.
Released alongside the ISA for LCE is a Basis for Conclusions, which details feedback from the public consultation period, a high-level fact sheet, and a frequently asked questions document. Additional materials to help jurisdictions navigate adoption is expected to be issued, including supplementary guidance, a fact sheet on adoption, and a first-time implementation guide.
At its March 2024 meeting, the AASB considered whether to adopt the ISA for LCE, which the IAASB approved at its September 2023 meeting. After careful consideration, the AASB decided not to adopt the ISA for LCE. The AASB believes the ISA for LCE would not adequately meet the needs of interested and affected parties in Canada nor serve the Canadian public interest. The Board based its decision primarily on the observation that the specific aspects of the ISAs identified by Canadian practitioners as challenging to apply in the audits of LCEs have not been sufficiently tailored. This may negatively impact the potential for a widespread uptake of the ISA for LCE in Canada. Furthermore, concerns arise from the public interest implications of having two sets of auditing standards. Following this decision, the AASB will continue to discuss possible alternative options for addressing the unique challenges faced by small and medium-sized entities and practitioners engaged in audits of LCEs.
Other Developments
March 2024
In March 20234, the AASB decided not to adopt ISA for LCE as it believes the ISA for LCE would not adequately meet the needs of interested and affected parties in Canada nor serve the Canadian public interest. The AASB will continue to discuss possible alternative options for addressing the unique challenges faced by small and medium-sized entities and practitioners engaged in audits of LCEs.
December 2023
On December 6, 2023, the IAASB published the ISA for LCE. The standard is effective for audits beginning on or after December 15, 2025, for jurisdictions that adopt or permit its use.
May 2023
On May 1, 2023, the AASB submitted a comment letter responding to the Exposure Draft. In its letter, the AASB indicated its concerns about proposed “bright line” exclusion of the use of the proposed ISA for LCE when component auditors are involved. It was also indicated that the AASB is yet to decide whether or not having a separate standard for LCE would be appropriate for Canadian environment and decision will be made based on finalized ISA for LCE.
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.