The New International Standard on Auditing for Auditing of Financial Statements of Less Complex Entities

On December 6, 2023, the International Auditing and Assurance Standards Board (IAASB) published the International Standard on Auditing for Auditing of Financial Statements of Less Complex Entities, which is set to become effective for audits beginning on or after 15th December 2025.

This is a stand-alone auditing standard designed specifically to manage and address audits of smaller and less complex entities. One would therefore need to consider the nature of the business that is being audited prior to determining whether this standard can be applied. For instance, an entity with a complex organisational structure or reporting function would not be in a position to apply such standard.

The focus of the new ISA for LCE’s will therefore be to address the complexity of audits, rather than focus on their size, with the ‘less complex’ entities falling within the scope of application of this ISA. This standard will play a crucial role in lessening inconsistencies in audit quality, whilst also reducing potential confusion for users of the financial statements.

Audits performed using this standard will provide a reasonable level of assurance of an audit of financial statements of a less complex entity (“LCE”), this being the same level of assurance that is provided on larger and more complex entities. However, under this ISA, auditors are still required to obtain sufficient appropriate audit evidence to support their basis for the audit opinion provided.

While the ISA addresses smaller and less complex entities, the application of this standard will not apply to audits that fall outside its scope, namely:

1. Where law or regulation prohibits the use of this standard or specifies the use of other auditing standards;
2.  The entity is a listed entity;
3. An entity where:
   • One of the main functions of the Company is that of taking deposits from the public; or
   • One of the main functions of the Company is that of providing insurance to the public; or
   • Entities in a jurisdiction which prohibit the use of this standard
4.  The audit is a group audit and
   • Any of the group’s individual entities or business units meet the criteria as described in points 2 or 3 above; or
   • Component auditors are involved, except when the component auditor’s involvement is limited to situations where a physical presence is required for a specific audit procedure for the group audit.

The requirements and associated content of this standard are organized into a number of sections, which mirror the sequence of an audit engagement. These include:

Part A: Authority for determining the appropriate use of the ISA for LCE

Part 1: Fundamental concepts, general principles and overarching requirements to be applied throughout the audit

Part 2: General requirements for audit evidence and documentation and the overall objective of the audit

Part 3: The auditor’s and engagement partner’s obligations and responsibilities for quality management of an LCE audit

Part 4: Acceptance or continuance procedures of an audit engagement and initial audit engagements

Part 5: Planning activities and requirements

Part 6: Risk identification and assessment procedures and requirements

Part 7: Procedures to respond to the assessed risks of material misstatements

Part 8: Requirements for concluding on the audit

Part 9: Requirements for forming an audit opinion, including the content of the auditor’s report

Part 10: Special considerations that apply to an audit of group financial statements

Part 1 to the standard outlining the fundamental concepts, principles and overarching requirements also includes requirements in relation to fraud, laws and regulations, and related parties which replicate those already applied in an ISA audit. Furthermore, the risk identification and assessment procedures highlighted in Section 6 to this standard also make reference to the new concepts introduced through the Revised ISA 315 standard, including the spectrum of inherent risk and the five inherent risk factors. The ISA for LCEs also highlights the requirement for auditors to evaluate whether implemented controls have been designed effectively to address the risks of material misstatement at the assertion level, or whether these controls have been effectively designed to support the operation of other controls in place and whether such controls have been implemented.

Within the release of the new ISA for LCE’s, one can also find the basis for the conclusions reached, a high-level fact sheet and a frequently asked questions document.

The adoption of the new ISA for LCE’s aims to enhance the effectiveness and efficiency of audits for smaller and less complex entities, whilst maintaining a high level of quality. This adoption also ensures the uniform application of auditing standards to LCE’s, minimizing the risk of different practices being applied across different jurisdictions. The standard also aims to foster global consistency and comparability. Through this new standard, auditors will receive appropriately tailored and targeted requirements and guidance that can be easily applied to audits of less complex entities.

Should you require further information in relation to this new standard, please get in touch.

Please note that this article is being published for information purposes only. As such, it does not constitute or should not be interpreted or construed as legal advice or guidance. ZD does not accept responsibility or liability for any damages arising as a result of using this information as legal advice or guidance.