Audits of Less Complex Entities – Discussion and Challenges

By Andrew Ross / Bridget Noonan

One of the biggest challenges we know of for smaller firms, who are not specialized in assurance, is the ability to audit small not-for-profit organizations (NPOs) in a cost effective manner, while still meeting all the requirements as set out by the Canadian Auditing Standards (CASs) which are based on international standards (ISAs).

The requirements for an audit are generally dictated by the funding received (some level of government or other funding). In many cases, while this funding plays a significant role in the operations of the organization, it can mean that audit fees might range anywhere from 2% to 10% of total revenues.  For smaller NPOs, this can make a huge impact on the programs they offer and how effectively they can offer those programs, especially with a lack of appropriate funding for administrative costs.

These challenges, however, have been noted by the profession and actionable changes may be forthcoming.  The Canadian Audit and Assurance Standard Board (AASB), and their US and European counterparts, have been in discussions since early 2018 about ways to address this. The International Auditing and Assurance Standards Board (IAASB) released a discussion paper to consider issues encountered in the Audits of Less-Complex-Entities (LCEs).

Although we do not disagree that there are a few problematic areas of the CASs when auditing smaller entities, which we have noted below, we do not believe that stripping back the audit requirements will make a significant difference in this market.

We consider the following to be a few of the major concerns when trying to balance client expectations with standards compliance:

  • The complexity of the accounting standards, and keeping up-to-date on those standards;
  • The availability of talent and resources in administrative and clerical roles within small entities to produce reliable accounting data and be adequately prepared for an audit;
  • The understanding of the scalability of the standards (i.e. which requirements are relevant in various situations, and understanding how to document them efficiently); and
  • The application of specific audit requirements in the context of a small entity such as journal entry testing, management override testing, risk assessments at the financial statement and assertion levels, the requirement to highlight significant risks, and fraud risk assessment and response.

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As there is broad range of influences on the audit environment, there isn’t necessarily a one-size-fits-all solution. As CASs are adopted from ISAs, the outcome of the IAASBs discussion will have an impact on Canada and how the AASB addresses any changes.

Until such time that new standards, or better resources are made available, what can your firm do?

  • Tailor your templates for your audit clients taking into consideration the size and type of entities. There are commonalities in the audit risk assessment and the procedures to be performed in various NPOs such as a charity, association, church or social housing organizations.   It will be difficult to find efficiencies if all audits are processed through one template designed to meet the needs of any audit.
  • Additional training on accounting standards relevant to small entities such as Accounting Standards for Private Enterprises and Accounting Standards for Not-for-Profit Organizations.
  • Focus internal training on scalability of requirements for small entities, particularly in understanding the control environment, documenting the risk assessment, and other mandatory CAS requirements.
  • Recommendations that client accounting procedures are modified to better align with the organizations accounting policies, such as recognition of deferred revenue.
  • Consider a joint arrangement with another firm to outsource either the audit or the audit preparation.

If you would like assistance in any of these areas or would like us to tailor assistance to address your particular issues, Clearline Consulting can help.

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