IAASB’s Plan for Audits of Less Complex Entities

IAASB’s Plan for Audits of Less Complex Entities

by Richard F. Fischer, CPA, CGMA | Sep 21, 2022

pa-cpa-journal-iaasb-s-plan-for-audits-of-less-complex-entitiesThe International Auditing and Assurance Board (IAASB) issued the exposure draft Proposed International Standard on Auditing of Financial Statements of Less Complex Entities to address the challenges related to less complex entities (LCEs) and develop a separate standard for audits of LCE financial statements. 

International Standards on Auditing (ISAs) apply to a wide range of entities, regardless of the nature and circumstances of the entity. The business environment, however, is increasing the complexity of ISAs, creating challenges and issues in applying ISAs when structures and transactions are straight-forward.  

When developing the auditing standard, IAASB considered the qualitative characteristics of being less complex rather than the size of an entity.  

The Auditing Standards Board (ASB) did issue a comment letter on IAASB’s proposed standard. The ASB believes the IAASB should use the ISA for LCEs to develop an audit guide on the application of ISAs for the audits of LCEs. It is significant that the ASB commented on this proposal. When governing bodies such as the IAASB have made changes in the past, other regulators sometimes issue similar changes to align their standards. So, it is possible that the ASB may draft a similar auditing standard for LCEs.  

What Is an LCE?  

In considering how to describe an LCE, the IAASB looked to its current definition of a smaller entity, which sets out qualitative characteristics that could be attributable to an LCE. For example, one could be concentration of ownership and management in a small number of individuals (often a single individual, either a natural person or an enterprise that owns the entity – provided the owner exhibits the relevant qualitative characteristics). An LCE also would display one or more of the following characteristics:  

  • Straightforward or uncomplicated transactions 
  • Simple record-keeping 
  • Few lines of business and few products within business lines 
  • Few internal controls
  • Few levels of management with responsibility for a broad range of controls or few personnel, with many having a wide range of duties
  • The entity’s IT environment and IT systems ...
    • Use commercial software with no or limited modifications, including when the entity does not have access to the source code to make any program changes
    • Have a structure that is straightforward or uncomplicated
    • Have applications that perform automated information processing controls, but the underlying transactions by nature are straightforward or uncomplicated 


Draft Standard 

The proposed standard has been designed to achieve reasonable assurance about whether the financial statements as a whole are free from material misstatement – whether due to fraud or error – for the audits of financial statements of LCEs in the private and public sectors. The draft standard reflects the nature and circumstances of an audit of the financial statements of an LCE and results in consistent performance of quality audit engagements.  

The draft standard is a standalone audit guide for LCEs. There is no cross-referencing to other ISAs. The draft standard consists of nine parts and various appendices consisting of the following: 

  • Chapter 1 – Fundamental Concepts, General Principles and Overarching Requirements 
  • Chapter 2 – Audit Evidence and Documentation
  • Chapter 3 – Engagement Quality Management
  • Chapter 4 – Acceptance and Continuance of an Audit Engagement and Initial Engagement
  • Chapter 5 – Planning
  • Chapter 6 – Risk Identification and Assessment
  • Chapter 7 – Responding to Assessed Risks of Material Misstatements
  • Chapter 8 – Concluding 
  • Chapter 9 – Forming an Opinion and Reporting 

The nature and circumstances of an audit of an LCE, as contemplated by the draft standard, is less complicated. This more straightforward nature was considered when developing the requirements that would be core to an LCE audit. 

Noted Differences

The approach to documentation in Audit Evidence and Documentation (Chapter 2) is the same as the approach to documentation in existing ISAs. The auditor is required to plan the audit in the same manner that other ISAs require audits to be planned. However, one area where the IAASB modulated the proposed standard is to not distinguish between the “overall audit strategy” and the “audit plan.”  

Risk Identification and Assessment addresses the auditor’s understanding of the entity and its environment, the applicable financial reporting framework, and the entity’s system of internal control. This understanding broadly covers the requirements within ISA 315 (Revised 2019), and a flowchart to support the auditor’s understanding is included as an appendix to the draft standard. Consequently, there are several differences with other ISAs, primarily because LCEs do not have the complexities of non-LCEs. 

The Proposed International Standard on Auditing of Financial Statements of Less Complex Entities will not necessarily reduce the core procedures required to support the overall quality of the audit. The intent is to make the standard more straightforward. 

IAASB is evaluating the feedback it received. Final approval of the proposed standard is expected in March 2023. Will the ASB follow suit and also develop standalone standards for LCEs?     


Richard F. Fischer, CPA, CGMA, is a partner with O’Connor, Pagano and Associates LLC in Pittsburgh. He can be reached at rfischer@oconnor-pagano.com.

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