What is the new International Standard on Auditing for Audits of Financial Statements of Less Complex Entities?

 

The International auditing and assurance standards board designed “The International Standard on Auditing for Audits of Financial Statements of Less Complex Entities” which is effective for audits of financial statements of less complex entities for periods Beginning on or after December 15, 2025.

The standard is based on the International Standards on Auditing (ISA) and would follow a simplified approach based on risk assessment.

The standard will enable auditors to obtain reasonable assurance that financial statements are free from material misstatements, and in an independent audit`s report will be pointed out that the audit is conducted in accordance with the ISA for LCE.

The ISA for LCE has the following limitations for using:

1.      Specific classes of entities for which the use of the ISA for LCE is prohibited (described below).

2.      Qualitative characteristics that describe an LCE. Qualitative characteristics relate to business activities, business model & industry, organizational structure and size, ownership structure, nature of finance function, information technology and application of the financial reporting framework and accounting estimates.

3.      Quantitative thresholds to be determined by legislative or regulatory authorities or relevant local bodies with standard setting authority in each jurisdiction.

Specific classes of entities for which the use of the ISA for LCE is prohibited:

     (a)    Law or regulation prohibits the use of the ISA for LCE or specifies the use of auditing standards other than the ISA for LCE for the audit of the financial statements in that jurisdiction.

(b) The entity is a listed entity.

(c) The entity falls into one of the following classes:

·        An entity functions are to take deposits from the public,

·        An entity one of whose main functions is to provide insurance to the public.

·        A class of entities where use of the ISA for LCE is prohibited for that specific class of entity by a legislative or regulatory authority or relevant local body with standard-setting authority in the jurisdiction.

(d) The audit is an audit of group financial statements (group audit) and:

·     Any of the group’s individual entities or business units meet the criteria as described above or

·    Component auditors are involved, except when the component auditor’s involvement is limited to circumstances in which a physical presence is needed for a specific audit procedure for the group audit.

Objective of the ISA is:

To achieve reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, for audits of financial statements of less complex entities (LCEs) in the private and public sectors.

The standard is applicable to an audit of a complete set of general-purpose financial statements of an LCE as well as in the circumstances of the engagement to an audit of a complete set of special purpose financial statements, or an audit of a single financial statement or of a specific element, account or item of a financial statement, only if the entity is an LCE.

When an audit engagement is undertaken using this standard, the International Standards on Auditing do not apply to the engagement.

The ISA for LCE contains ten parts:

§  Fundamental Concepts, General Principles and Overarching Requirements.

§  Audit Evidence and Documentation.

§  Engagement Quality Management.

§  Acceptance or Continuance of an Audit Engagement and Initial Audit Engagements.

§  Planning.

§  Risk Identification and Assessment.

§  Responding to Assessed Risks of Material Misstatement.

§  Concluding.

§  Forming an Opinion and Reporting.

§  Audits of Group Financial Statements.

Also, ISA for CE includes seven appendices listed below:

1.      Glossary of Terms.

2.      Illustrative Engagement Letter.

3.      Identifying and Assessing the Risks of Material Misstatement.

4.      Fraud Risk Factors.

5.      Assertions.

6.      Examples of Factors Influencing Sample Size for Tests of Controls and Test of Details.

7.      Illustrative Representation Letter.

In conclusion, Less Complex Entities play considerable role in global economy and the majority of audits are audits of less complex entity The ISA for LCE will help auditors deliver consistent and effective high-quality audits and will help less complex entities gain more investment and finance opportunities as well as provide the management of the entity with more reliable financial information and information about significant deficiencies in the internal control system  (if any found by an auditor).