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On July 23, the IAASB issued an exposure draft for public comment on its Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities. This landmark, proposed separate standard, marks a significant juncture for the global accountancy profession.


In Exploring the Future Options for Audits of Less Complex Entities, we covered the IAASB’s 2019 Discussion Paper, Audits of Less Complex Entities: Exploring Options to Address the Challenges in Applying the ISAs, which sought input on the challenges of auditing less complex entities (LCEs) and explored potential possible actions. The IAASB received ninety-three written responses to the Paper and published a Feedback Statement. The more substantial overarching themes included:

  • There is an urgent need to have an international solution to address issues related to audits of LCEs, as jurisdictions increasingly develop their own standards and commence other initiatives in this area, which may have long-term implications on the adoption and use of the IAASB’s international standards.
  • The IAASB should prioritize its efforts on developing a solution to address the challenges and issues related to these audits.
  • The solution is not only one action, and likely involved a combination of the actions.

The responses to the Paper also highlighted that many of the issues and challenges being experienced are not unique to LCEs and can also apply more broadly to other audits. In particular, issues related to complexity, understandability, scalability and proportionality for all audits was highlighted.

Therefore, in balancing the needs of all its stakeholders, as well as the time needed to develop changes to address the issues and challenges within the broader suite of International Standards on Auditing (ISAs), in June 2020 the IAASB agreed to two workstreams:

(a) An ISA-focused workstream to address complexity, understandability, scalability and proportionality (CUSP) issues in relation to the ISAs more broadly in order to address challenges that have been identified in applying the ISAs, for audits of all types of entities, including audits of LCEs; and

(b) A separate standard workstream exploring developing a separate standard to address the challenges in applying the ISAs in an audit of an LCE.

Developing a Separate Standard

From July 2020, the IAASB focused efforts on developing a separate standard on an accelerated timeline. In December 2020, the Project Proposal for the workstream was approved and in June 2021 the Exposure Draft (ED) of a Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities was approved and published for public comment on July 23.

The intended outcome from using the separate standard is a high-quality audit that would enhance the credibility of the financial statements for the users thereof. The separate standard is designed for an audit of the financial statements of an LCE that:

  • Is proportionate to the nature and circumstances that would be typical of an audit of an LCE.
  • Can be used effectively and efficiently to obtain sufficient appropriate audit evidence to support a reasonable assurance audit opinion.
  • Utilizes a risk-based approach to an audit, with requirements that are principles based, so that the proposed standard can be applied to less complex entities with a wide range of circumstances and across sectors or industries.

Accordingly, many of the basic concepts used in the ISAs to support a risk-based approach have also been incorporated in the separate standard, including:

  • Using objectives;
  • Using the core ISA procedures and concepts (such as professional skepticism and professional judgment) as a base for establishing the work effort of the auditor when performing an audit of an LCE;
  • Needing to obtain sufficient appropriate audit evidence to support the audit opinion;
  • Using materiality to focus the auditor’s efforts and to evaluate misstatements; and
  • Using the audit risk model, i.e., applying the concepts of inherent risk, control risk and detection risk. 

As such, the separate standard would have the same overall objectives of the auditor and inherent limitations as an ISA audit, which are explained within the Preface to the proposed standard. The content (i.e., the requirements and related Essential Explanatory Material) have been grouped into nine “Parts” that follow the flow of an audit engagement (rather than by subject matter or topic like the ISAs).

The table below sets out a broad description of the content of each Part.

Part 1: Fundamental Concepts, General Principles and Overarching Requirements

Sets out the fundamental concepts, general principles and overarching principles to be applied throughout the audit, including:

  • Relevant ethical requirements and firm-level quality management.
  • The overall objectives of the auditor.
  • Use of professional judgment and the exercise of professional skepticism.
  • Overarching requirements to be applied throughout the audit with regard to fraud, law or regulation and related parties.
  • General requirements for communications with those charged with governance and management. Specific communication requirements, where applicable, have been set out in each relevant Part.

Part 2: Audit Evidence and Documentation

Sets out the general requirements for obtaining sufficient appropriate audit evidence and general documentation requirements.

Part 3: Engagement Quality Management

Sets out the auditor’s and engagement partner’s obligations and responsibilities for quality management in an audit of an LCE. The requirements in this Part are based on ISA 220 (Revised).

Part 4: Acceptance or Continuance of an Audit Engagement and Initial Audit Engagements

Sets out the auditor’s obligations for agreeing the terms of engagement, including establishing that the preconditions for an audit are present, and determining that the use of the proposed standard is appropriate. This Part also addresses procedures for opening balances in initial audit engagements.

Part 5: Planning

Sets out responsibilities for planning the audit, including the engagement team discussion, and the concept of materiality when planning and performing the audit.

Part 6: Risk Identification and Assessment

Sets out requirements for understanding the entity and its environment, the applicable financial reporting framework and the entity’s internal control system, identifying risks of material misstatement and assessing inherent risk and control risk. The requirements in this Part are based on ISA 315 (Revised 2019).

Part 7: Responding to Assessed Risks of Material Misstatement

Sets out requirements for the design and implementation of responses to assessed risks of material misstatement at the financial statement and assertion levels, including substantive procedures and tests of controls. This Part also sets out requirements for specific procedures on various topics within an audit.

Part 8: Concluding

Sets out requirements for the evaluation of misstatements, concluding activities and evaluations (including going concern, subsequent events and analytical procedures), and obtaining written representations. This Part also covers the engagement partner’s conclusions relating to quality management.

Part 9: Forming an Opinion and Reporting

Sets out the requirements for forming an opinion (including the types of audit opinions), the content of the auditor’s report, other information and comparative information. In addition to the content in this Part, the IAASB has developed Supplementary Guidance – Reporting to provide further guidance and examples on modifications to the auditor’s report.

Appendix 1: Glossary of Terms

Describes the meanings attributed to certain terms for the purpose of the proposed standard.

Appendix 2: Flowchart for Identifying and Assessing the Risk of Material Misstatement

Graphical representation of the process to identify and assess the risks of material misstatement, described in Part 6 of the proposed standard. This flowchart illustrates the iterative nature of the process.

Appendix 3: Fraud Risk Factors

Examples of fraud risk factors that may be relevant in an audit of an LCE.

Appendix 4: Assertions

Describes the categories of assertions to be considered in an audit of an LCE. The assertions are the same as presented in the ISAs.

Appendix 5: Illustrative Engagement Letter

An illustrative engagement letter that may be used to document the terms of engagement when using the proposed standard.

Appendix 6: Illustrative Representation Letter

An illustrative representation letter that may be used when obtaining written representations from management when using the proposed standard.

The IAASB’s Explanatory Memorandum explains further the significant decisions made by the IAASB in developing the proposed standard.


The IAASB extensively deliberated the approach to the scope and applicability of the separate standard, including for which types of audits the proposed standard is intended to be used for, and how this would be best described and presented.

Part A sets out the authority (or scope) of the separate standard by describing the specific prohibitions and qualitative characteristics (together making up the limitations of use of the proposed standard) that will make the standard inappropriate for use in an audit of the financial statements of an LCE. Limitations are designated into two categories:

  • Specific classes of entities for which the use of the proposed standard is prohibited; and
  • Qualitative characteristics that if exhibited by an entity would preclude the use of the proposed standard for the audit of the financial statements of that entity.

The following diagram explains the limitations (paragraphs A.5. – A.9):

To further support the application of the Authority by legislative or regulatory authorities or relevant local bodies with standard-setting authority (such as regulators or oversight bodies, national standard setters, professional accountancy organizations or others as appropriate), firms and auditors, the IAASB has developed Supplementary Guidance for the Authority of the [Draft] Standard (the Authority Supplemental Guide). This supporting material sets out further considerations when determining or evaluating use of the proposed standard. 

Feedback on the Separate Standard

The IAASB welcomes input on all matters addressed in the ED. In particular, it would like to hear from stakeholder that would be directly affected by the standard—e.g., users of financial statements of LCEs, owners and management of LCEs, legislative or regulatory authorities or relevant local bodies with standard-setting authority, and auditors that serve LCEs—in relation to the direction of the project and the structure and content of the proposed standard, as well as specific key issues.

Respondents are asked to comment on the clarity, understandability and practicality of application of the separate standard and invited to address only questions relevant to them, or all questions. The questions cover:

  • Overarching Positioning—including views on the standalone nature of the standard, proposed title and overarching positioning of the separate standard.
  • Authority of the Standard—including views on Authority (or scope), whether it is implementable, if the proposed role of legislative or regulatory authorities or relevant local bodies with standard setting authority is clear and appropriate and if any changes need to be made to the proposed limitations relating to its use.
  • Key Principles Used in Developing the Separate Standard and Overall Design and Structure—including views on the key development principles and the approach to the requirements, objectives and Essential Explanatory Material.
  • Content—including views on the content of each Part and where the standard could be improved.
  • Group Audits—including views about the impact of currently excluding group audits from the scope and whether group audits should be included.
  • Other Matters—including views on the proposed approach to the future updates and maintenance and what support and guidance would be useful when implementing the proposed standard.

Your feedback in response to the questions will be greatly appreciated. The ED is open for comments until January 31, 2022. Please note that an optional response template is available to facilitate your input, should you wish to use it.

We look forward to hearing from you!

Beverley Bahlmann

Beverley Bahlmann is a former director at the International Auditing and Assurance Standards Board (2011-2022) working on a variety of projects, including the fraud, going concern, and audits of less complex entities. Previously, Ms. Bahlmann worked for 15 years in a technical and training role in audit firms in Australia, the UK and South Africa. She is a member of the Australian and South African Institutes of Chartered Accountants. 

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Christopher Arnold


Christopher Arnold is a Director at the International Federation of Accountants (IFAC). He leads activities on contributing to and promoting the development, adoption and implementation of high-quality international standards, including the Member Compliance Program, Intellectual Property and Translations. Christopher is also responsible for IFAC’s SME (small- and medium-sized entities), SMP (small- and medium-sized practices) and research initiatives, which include developing thought leadership, public policy and advocacy. He was previously an Audit Manager for Deloitte and qualified as a professional accountant in a mid-tier accountancy practice in London (now called PKF-Littlejohn LLP). Christopher started his career as a Small Business Policy Adviser at the Association of Chartered Certified Accountants (ACCA).