IAASB sizes up small entity audits
When it comes to auditing small entities, the international audit standard setter recognises that it is complexity, not size that matters, reports LSCA Technical Committee chair Jamie Tomlin.
The International Auditing and Assurance Standards Board (IAASB) has issued a discussion paper, Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges in Applying the ISAs. The paper is a very early stage document in the process, but no destination was ever reached without taking those first steps.
So, what does the paper include?
The first stage is to set a scope: who, or what is small? The IAASB is shying away from a size approach in favour of a definition based on complexity, as it recognises, quite rightly in my view, that the challenges in applying the ISAs are greater for a less complex entity. These challenges derive from matters such as risk identification, the nature and extent of work performed, and the extent of documentation required. For less complex entities the ISAs lack clarity about what is reasonable, leading to work being excessive and documentation being extensive.
Like the IAASB, I do not dispute that some smaller entities can be very challenging to audit, but generally I would expect a correlation between size and complexity.
The next step is to recognise that some of the challenges from auditing are beyond the ability of the IAASB to impact. It is interesting to compare the UK, where, apart from certain regulated entities, the point at which an audit is required is quite “chunky”, to other jurisdictions where audit thresholds are much lower, and possibly in some moving even lower.
This creates a challenge for the standard setter when drafting any standard or guidance - should it be principles-driven or should it have a strong nod towards what is expected of a “typical” entity, for example in the application materiality?
The IAASB has given considerable consideration to where and how any guidance should be drafted. To read its comments in the paper would certainly suggest that the “clarity” project did not always achieve the clarity sought, which must be a barrier to use.
I am certainly in favour of recognising that to be effective any standard needs to be read by its users, and making whatever final product is the outcome as accessible as possible should help this.
Don’t disregard the medium, as this will also have a part to play. With the greater use technology in audit and the need to access materials away from the traditional office, there has to be a strong argument in support of the end product not simply being in the form of a book. Questions should be asked about how auditors use the standards and what are the barriers to using them better, as this could help inform decisions about the how the final product is delivered and structured. The answer may lie, partly, in IT.
The paper does point to three possible outcomes:
- Revising the ISAs;
- Developing a separate standard for less complex entities; and,
- Developing guidance for auditors of less complex entities.
The outcome may be a combination of the above, or something else if demand identifies a fourth way.
There are substantial challenges in looking at how to improve the auditing of smaller, less complex, entities. Getting engagement from auditors is one of these challenges, especially where the product of the discussion will be a number of years in the future - but without input from auditors this project runs the serious risk of missing its objective, for which all auditors of these entities would suffer the consequences.
So please, if you can engage with the paper and give your views on the matters sought, either directly, via your firm or through your district society, do so.
The consultation is open until 12 September 2019. Details can be found at www.iaasb.org/about-iaasb.
Jamie Tomlin is chair of the LSCA Technical Committee
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