In a May 2018 publication, CPA Canada noted that the International Auditing and Assurance Standards Board (“IAASB”) announced that it was initiating a project to explore challenges in auditing small and medium-sized entities (“SME”). A discussion paper on the topic was expected in late 2018; however, it only just arrived in early March.
The discussion paper, in essence, does not appear to do much more than to redefine SME into LCE (less complex entity) and expand somewhat on the difficulties that are often experienced in applying the current standards to LCEs and list some possible solutions. The following is a summary of these key points for those that just want the highlights, but if this subject is of interest you may want to read the full discussion paper (linked here).
In the IAASB discussion paper a LCE has been defined as an entity which typically possesses qualitative characteristics such as:
- Concentration of ownership and management in a small number of individuals; and
- One or more of the following:
- Straightforward or uncomplicated transactions;
- Simple record-keeping;
- Few lines of business and few products within business lines;
- Few internal controls;
- Few levels of management with responsibility for a broad range of controls; or
- Few personnel, many having a wide range of duties.
The document notes the following difficulties of applying the current standards in LCE audits:
- The complexity of the language used in the audit standards and what appears to be a move away from principles-based requirements into more detailed and specific requirements;
- The sheer volume of requirements is prohibitive, particularly when fees are an issue (i.e. an audit of a small NFPO) and the audit standards continue to grow in size but are rarely reduced over time;
- Documentation requirements throughout the standards are extensive, and are becoming more onerous;
- Paragraphs detailing considerations for audits of smaller entities, where they are presented within the current standards, are not always helpful in understanding scalability and proportionality of the requirements; and
- Some specific requirements are particularly problematic, such as:
- The work on understanding the entity’s system of internal controls, in particular where controls will not be relied on, this work is often considered unnecessary;
- Risk identification and assessment can lead to an “over-engineered” risk assessment for entities in a non-complex environment;
- The auditor’s considerations in relation to fraud when auditing a LCE may be more onerous than what would be appropriate in the circumstances; and
- Auditing accounting estimates is often not applicable when applying accounting standards that do not require many items be measured at fair value or when impairment is not a significant issue.
So far, the IAASB have raised the following as possible solutions:
- Develop guidance to apply the current standards to LCE audits and keep this separate from the current standards to allow navigation that is more efficient.
- Redraft the current standards to apply a ‘think small first’ approach by taking the core of each standard to follow the ‘think small first’ approach, and building the rest of the standard around it allowing for scalability.
- Revise the current standards to remove the over engineered or elaborate language and replace it with language that is more understandable.
- Develop a new standard for LCE audits whether separate or within the current standards. One alternative contemplates a standard that is somewhere between the current audit standards and the review engagement standards.
Similar considerations to the IAASB’s discussion paper were published in an Accountancy Europe, formerly the Federation of European Accountants, publication on April 2018 which is also worthy of a read (linked here).
As a result of the above, it appears prudent for the Canadian AASB to monitor developments at the international stage. We are looking out for the consultation paper and will provide our insights once published. Subscribe to our newsletter to ensure you do not miss our views on the topic.