LCE audit reform plans take a step forward
18 December 2020: Plans for a simplified auditing standard for less complex entities moved a step closer this week after the International Auditing and Assurance Standards Board unanimously approved the project proposal and committed to publishing an Exposure Draft of the new standard in June next year.
The project proposal for a separate auditing standard for less complex entities (LCEs) was officially ratified at standards body the International Auditing and Assurance Standards Board’s (IAASB) December 2020 meeting, more than four years after the concept was first floated. The IAASB has already published a new communique, with details of current thinking on what the standard will look like, which entities it will apply to and the development timeline.
The new standard will be based on concepts and principles similar to those used in the International Standards on Auditing (ISAs). The audit approach will be risk-based to obtain sufficient appropriate audit evidence to result in a reasonable assurance opinion, the communique says.
Katharine Bagshaw, ICAEW manager of auditing standards said the Institute was delighted that the project proposal had been approved and that the communique reflected the importance the IAASB attached to the project. “It is great news for the world's LCEs, many of which are SMEs, and the timetable demonstrates IAASB's commitment to the project,” Bagshaw said.
Bagshaw added she was pleased to see several important clarifications, including the fact that engagements will be audit-level reasonable assurance engagements, rather than lower-level limited review engagements. The IAASB also confirmed that the LCE standard would be standalone, based on ISAs but not necessarily identical. “We have been clear that we believe the wording needs to be fit for purpose and meet the needs of LCEs,” she added.
The approval and the communique come just a week after ICAEW CEO Michael Izza wrote to IAASB chair Tom Seidenstein, calling for decisive action on a new standard. In his letter, Izza warned that the new standard needed to be a priority, amid concerns that the complexity of current requirements for SMEs could hamper efforts to rebuild the global economy.
While there is still work to be done on defining the scope of the standard, Bashaw said she welcomed clarification in the communique that the responsibility for application would be at national level. “We’re delighted that the communique has clarified a number of areas and we look forward keenly to the Exposure Draft in June next year.”