IAASB's New Standard for Audits of Less Complex Entities: A Game-Changer for the Accounting World

The ISA for LCE: An Overview

The ISA for LCE is not just an amendment or an addendum; it is a new standalone global auditing standard. Built on the foundation of the globally well-respected and widely adopted International Standards on Auditing (ISAs), it aims to provide the same level of assurance: reasonable assurance, for eligible audits. The significance lies in its proportionate and tailored approach to the unique audit needs of less complex entities.

This new standard addresses the challenges faced by auditors that audit less complex entities, recognizing the focused expectations stakeholders have for an audit of a less complex entity. By doing so, the ISA for LCE aims to enhance confidence in financial reporting and promote global consistency in applying auditing standards to these entities, thereby reducing the risk of jurisdictional divergence.

Using the Standard

The ISA for LCE emphasizes that the nature of the business determines its applicability. If the business activities, organizational structures, finance functions, technology, and accounting/reporting framework are less complex, the standard can be used. The standard can also be used to perform audits of group financial statements when component auditors are not involved or are involved in limited circumstances. However, listed entities or those with a public interest characteristic are excluded from using this standard.

Beyond the characteristics outlined in the ISA for LCE, jurisdictions may also establish additional thresholds and characteristics to guide the standard's usage, including quantitative thresholds. This flexibility acknowledges the need for local adaptation while maintaining the global framework.

Design Principles

In developing the ISA for LCE, the IAASB adhered to key design principles, ensuring a robust and adaptable standard. The ISA for LCE has a risk-based approach, is principles-based, and has an intuitive structure. In developing the standard clarity, and conciseness were at the forefront. Core ISA concepts were also integrated, making the standard applicable to less complex entities across diverse sectors and industries.

Practitioner’s Perspective

Practitioners in jurisdictions allowing the use of the ISA for LCEs will experience a notable shift in their approach to audits. The proportional nature of the standard eliminates the need to assess which ISAs apply to each engagement, streamlining the process for auditors auditing less complex entities.

The ISA for LCE recognizes the distinct needs of auditors who audit smaller businesses, offering guidance in the form of essential explanatory material tailored to their needs. It stands out for its readability, navigability, and providing a concise and focused framework.

Next Steps: Adoption

“We now turn to each jurisdiction and their oversight authorities and regulators to decide whether to adopt the standard. We encourage practitioners and others to reach out to the authorities in their jurisdictions to advocate for the ISA for LCE’s adoption.”
—IAASB Chair Tom Seidenstein
The ISA for LCE is set to be effective for audits of financial statements of less complex entities starting from December 15, 2025, with early adoption permitted. However, before the standard can be used in jurisdictions, each jurisdiction must decide whether to adopt it.

Adopting the ISA for LCE is expected to elevate the quality of audits for less complex entities. This aligns with the IAASB’s broader goal of instilling trust and confidence in financial markets and among investors, mirroring the impact of the International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs).

Conclusion

The introduction of the ISA for LCE marks a pivotal moment in the evolution of auditing standards, catering specifically to the needs of less complex entities. As jurisdictions consider its adoption, the global accountancy profession eagerly anticipates the positive impact this standard will have on audits of smaller and less complex businesses worldwide.

This article originally appeared on the IFAC Knowledge Gateway. Copyright © 2024 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact permissions@ifac.org for permission to reproduce, store or transmit this document.