Impact of International Auditing Standards on Less Complex Entities

Overview and Adoption

The International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE) by the International Auditing and Assurance Standards Board (IAASB), introduced in December 2023, marks a significant advancement in the field of accountancy and auditing. This standard underscores the IAASB's dedication to inclusivity and its recognition of the diverse range of business sizes and complexities. The IAASB acknowledges the unique challenges and needs of small and medium-sized entities (SMEs) and their auditors by crafting a standalone standard tailored for less complex entities. This move is a pivotal moment in enhancing the accessibility and effectiveness of auditing practices for entities of varying sizes and complexities.

Building on the existing International Standards on Auditing (ISAs), the ISA for Less Complex Entities represents more than an incremental change. It maintains the core objective of providing reasonable assurance but offers a more tailored set of guidelines for less complex audits, diverging from the one-size-fits-all approach. This is crucial for SMEs, which often require fewer resources or don't need the full extent of traditional ISAs.

The new standard also respects local laws and regulations, complementing them rather than supplanting them, ensuring auditors can meet local and international expectations. Its flexibility in accommodating different legislative and regulatory environments promotes broader adoption without conflict with existing frameworks.

Furthermore, by providing a clear and focused set of standards for audits of less complex entities, the ISA for LCE helps auditors navigate the audit process more efficiently, focusing on the most pertinent aspects of the audit for SMEs. Doing so contributes to the integrity and reliability of financial information, which is vital for the economic well-being of businesses and the markets in which they operate.

In essence, the ISA for LCE is a strategic initiative that balances the need for thorough audits with the practical realities faced by smaller entities. It promotes a more equitable auditing landscape, where the size and complexity of an entity does not compromise the quality of its financial reporting. The standard is poised to foster greater consistency in the application of auditing standards globally, reducing the risk of discrepancies arising from jurisdictional differences. This global consistency is instrumental in creating a level playing field for entities across the spectrum, enhancing the comparability and credibility of financial statements worldwide.

Recognising the importance of local contexts, the ISA for LCE also allows jurisdictions to define additional criteria, demonstrating a thoughtful balance between standardisation and customisation.

The standard becomes effective for audits starting on or after December 15, 2025, in jurisdictions that adopt or permit its use. This provides a clear timeline for implementation, with early adoption encouraged. This forward-thinking approach gives practitioners sufficient time to familiarise themselves with the new standards and incorporate them into their audit practices. Encouraging early adoption also demonstrates a proactive stance towards enhancing audit quality promptly.

The Impact of the International Standard on Auditing for LCEs

The introduction of the ISA for LCEs by the IAASB marks a significant step forward for the auditing profession. It acknowledges the distinct needs of smaller businesses and tailors the auditing process accordingly. This new standard offers a welcome change for accountants and auditors serving the SME sector, providing them with a clear and practical framework.

Adopting the ISA for LCE helps make audits of less complex entities more effective and efficient while maintaining high quality. It also promotes the consistent application of auditing standards to LCEs and reduces the risk of jurisdictional divergence by driving consistency and comparability globally.

Benefits for All Stakeholders

The ISA for LCE offers several advantages, such as:

• Proportionate and Tailored Approach: The standard streamlines the auditing process for LCEs, making it more manageable for auditors and businesses. This does not compromise quality; it ensures reasonable assurance is achieved through a focused approach.
• Global Consistency and Comparability: The ISA for LCE promotes consistent financial reporting across jurisdictions. This is particularly valuable for LCEs operating internationally or with cross-border financial ties. It reduces the risk of discrepancies in auditing standards between different countries.
• Enhanced Efficiency: By focusing on the most relevant aspects of financial reporting for LCEs, the ISA for LCE streamlines the audit process, making it more efficient. This focus ensures thorough audits without unnecessary burdens.
• Increased Trust in Financial Reporting: The ISA for LCE fosters trust in LCEs' financial statements, which are crucial for stakeholders just like those of larger corporations. This standard ensures high-quality and reliable audits for LCEs, strengthening confidence in the financial markets.
• Clarity and Navigability: Explicitly designed for LCEs, the ISA for LCE prioritises clarity and ease of use. It provides a concise framework that upholds essential auditing principles while eliminating overly complex requirements that are less relevant to LCEs. This focus on clear guidance enhances the effectiveness and efficiency of audits for LCEs

In summary, the ISA for LCE represents a significant advancement in global auditing standards. It offers a more effective and streamlined approach for auditing LCEs, benefiting auditors, businesses, and stakeholders. The standard's flexibility and adaptability make it a valuable addition to the suite of tools available to the auditing profession, promoting consistent and high-quality audits for LCEs worldwide.

Next steps

The broader implications of adopting the ISA for LCE are substantial. It is expected to elevate the audit quality for smaller businesses, aligning with the International Auditing and Assurance Standards Board's (IAASB) mission of fostering trust in global financial markets. This initiative parallels the objectives of the International Financial Reporting Standards (IFRS®) for Small and Medium-sized Entities (SMEs), which aim to provide clear, enforceable, and globally accepted financial reporting standards designed for SMEs.

Conclusion

The ISA for LCE represents a forward step in the auditing profession. It offers a streamlined, focused framework for auditors of less complex entities, ensuring high-quality and relevant audits. The standard's alignment with the IAASB's goals and its synergy with IFRS for SMEs® highlight its potential to impact financial reporting and auditing positively.

The standard acknowledges smaller businesses' unique challenges and provides a tailored approach to auditing that caters to their specific needs. It simplifies the auditing process, making it more accessible and manageable for less complex entities while maintaining the rigour and quality of financial reporting. At Forvis Mazars, we champion this initiative as we play a crucial role in facilitating a smoother transition for businesses adapting to these standards.

The global accountancy profession is on the cusp of a transformative era. By harmonising auditing practices, the ISA for LCE has the potential to increase transparency, efficiency, and trust in financial statements globally.