Share your views on the ISA for LCEs
The International Auditing and Assurance Standards Board (IAASB) published the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities in December 2023. We are keen to hear the views of audit practitioners as to whether the adoption of this standard in the UK would be beneficial.
Commonly known as the ISA for LCE, this global auditing standard recognises the importance of smaller businesses and their specific audit needs and is known as the ISA for LCE.
This is a standalone global auditing standard tailored to the specific needs of smaller and less complex businesses and organisations, making it easier for practitioners to navigate these types of engagements. Built on the foundation of the International Standards on Auditing (ISAs), audits performed using this standard provide the same level of assurance for eligible audits: reasonable assurance.
The standard is effective for audits beginning on or after 15 December 2025 for jurisdictions that adopt or permit its use. At present, the Financial Reporting Council is not minded to approve the standard for use in the UK. However, given the challenges that certain smaller entities are currently experiencing in finding an auditor, this may need to be revisited.
Released alongside the ISA for LCE are a Basis for Conclusions, which details feedback from the public consultation period, a high-level fact sheet, and a frequently asked questions document.
Additional materials to help jurisdictions navigate adoption will be issued in 2024, including supplementary guidance, a fact sheet on adoption, and a first-time implementation guide. All materials can be accessed on the IAASB website.
Entities excluded from scope
The ISA for LCEs cannot be used where:
- (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:
- (i) An entity one of whose main functions is to take deposits from the public (for example, banks).
- (ii) An entity one of whose main functions is to provide insurance to the public.
- (iii) 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:
- (i) Any of the group’s individual entities or business units meet the criteria as described in paragraph A.1.(b) or A.1 (c) above; or
- (ii) 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 (for example, attending a physical inventory count or physically inspecting assets or documents).
The requirements in the ISA for LCE have been designed to reflect the typical nature and circumstances of an audit of an LCE and it has therefore not been designed to address:
- Complex matters or circumstances relating to the nature and extent of the entity’s business activities, operations and related transactions and events relevant to the preparation of the financial statements.
- Topics, themes and matters that increase, or indicate the presence of, complexity, such as those relating to ownership of the entity, corporate governance arrangements of the entity.
The standard contains an illustrative but not exhaustive list of characteristics of an LCE for the purpose of determining its appropriate use. Each of the qualitative characteristics may not, on its own, be sufficient to determine whether the ISA for LCE is appropriate or not in the circumstances. Therefore, the matters described in the list are intended to be considered both individually and in combination. For the purpose of group audits, these considerations shall apply to both the group and each of its individual entities and business units.
Examples from the list are as follows:
Business activities, business model and industry - The entity’s business activities, business model, or the industry in which the entity operates, do not give rise to significant pervasive business risks. There are no specific laws or regulations that govern the business activities that add complexity (for example, prudential requirements). The entity’s transactions result from lines of business or revenue streams.
Organisational structure and size - The organisational structure is relatively straightforward, with few reporting lines or levels and a small key management team (for example, five individuals or less).
Ownership structure - The entity’s ownership structure is straightforward and there is clear transparency of ownership and control, such that all individual owners and beneficial owners are known.
Structure of ISA for LCEs
The standard is split into the following sections:
- Preface
- Authority
- 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
We want your views
We are keen to hear the view of practitioners on this new standard. Would its use in the UK be beneficial to your firm in terms of proportionality, effectiveness and efficiency?
Email your views to James Barbour CA, Director, Policy Leadership, jbarbour@icas.com
We look forward to hearing from you.
