The challenges in the audit of less complex entities

There is an enormous opportunity in solving the challenge of how to design simpler standards for the audit of less complex entities.

Globally accepted standards on auditing are without doubt a great positive for accountants, organisations, industries and national economies. Indeed, as businesses continue to globalise, consistency of auditing and assurance standards delivers benefits to all involved.

It also means global feedback can be gathered from practitioners on standards that are ripe for change. For example, the International Auditing and Assurance Standards Board (IAASB) has received feedback that increasingly complex audit standards are overkill for less complex entities (LCEs).

The complexity of auditing standards has led to some jurisdictions developing their own initiatives. Experts believe what is required instead is an international response.

“The current standards are being very much driven from a regulatory perspective,” says Professor Roger Simnett FCPA, Chair and CEO of the Australian Auditing and Assurance Standards Board (AUASB), IAASB member and Chair of the IAASB working group on audits of LCEs.

Simnett says the standards have probably increased by about 50 per cent in terms of page count since the last version, “and we’re getting to the stage where people struggle to pick them up and read them” [because] there is a much greater level of detail and responsibility.

“If other jurisdictions deal with this issue around LCEs in their own way, it’s not a good global solution,” he adds. 

Fragmentation of the international approach is not in the public interest as comparability will be lost, Simnett maintains. “Plus, that’s a lot of effort across multiple jurisdictions that could be saved if we do it centrally.”

Current thinking from the IAASB, AUASB and other bodies is around one of two solutions.

The first is to revise current auditing standards to remove some of their complexity and create a more user-friendly outcome while retaining the same levels of assurance. The second is to develop a new standard or guidance for auditing LCEs, with wider support for a standard rather than guidance.

Simnett says going through the process of considering both solutions could be extremely valuable.

“I think we can learn a lot by exploring that,” he says. “Can we very clearly communicate that same level of assurance on something that is shorter? To me, that seems to be a good challenge.”

What is a less complex entity?

One of the most interesting parts of the process so far has been defining an LCE. Many assume it would be the same as for an SME; a relatively small business in terms of staff numbers and market reach. However, the LCE definition has little to do with size.

“The difficulty with trying to pin it down to size is that with emerging technology, you have less and less staff for the level of output,” says CPA Australia audit and assurance policy adviser Claire Grayston FCPA.

“You might have very few staff, but very complex transactions. You might have just a few very complex products, or you might have numerous, simple products.”

An article from July 1 2019, co-authored by IAASB deputy director Beverley Bahlmann, reflects Grayston’s opinion.

“…the IAASB is of the view that it is appropriate to focus on the complexity of the entity rather than its size. In today’s environment, it is not only about size – there may be entities that are smaller but may be considered complex, and there may be other entities that would not be considered smaller but would be considered less complex.”

Bahlmann points to the many aspects of a business that could contribute to it being considered an LCE, including “concentration of ownership and management in a small number of individuals, straightforward or uncomplicated transactions, simple record keeping, few internal controls, and few personnel, many having a wide range of duties.”

She says further consideration will be given to the definition of an LCE as discussion takes place around a revised or new auditing standard.

What lies ahead?

Grayston notes that there is a myriad of community and sporting associations, charities and businesses holding money in trust and micro-entities that are required to obtain an audit. They do not carry out complex transactions or have money to spend on multifaceted audit processes.

At the same time, practitioners are obliged to follow auditing standards and meet their requirements. However, they often find themselves bogged down in attempting to figure out exactly which parts of the standards are important.

Grayston believes the layout and professional writing process applied to the standards have caused issues.

“Back in 2006, there was a project to clarify the auditing standards,” she says. “It used to be that the requirements were written in bold text, then you’d have the guidance following on from that in normal text. In 2006, they put all the requirements upfront, which seemed a fairly sensible thing to do. But when you write something, you naturally want it to flow and make immediate sense. So, the requirements, which were previously short, have become much longer, which was the opposite intention of that project.

“We’re in a modern age where we are accustomed to hyperlinks, diagrams, flowcharts [and other] mechanisms that are easy ways of expressing the message in a way that’s more easily digestible. We are not taking advantage of those communication methods in the standards.”

Simnett agrees, saying that drafting conventions need to be challenged. That, he insists, is part of the value of the current discussion.

“We have to look to a technological solution to realise how we can best communicate this type of information in a searchable and interactive format to help people get through what is becoming a voluminous body of standards,” he says.

“We have to help people access, relatively easily, the information they require. We need to challenge ourselves around whether we can do this. Until we try, we’ll never know.”

Five top challenges with auditing standards for LCEs 

The Auditing and Assurance Standards Board polled the industry to reveal what practitioners identify as the top challenges around LCE audits. Here is what it discovered.

  • Requirements that result in procedures being performed solely to comply with auditing standard requirements with no additional assurance or measurable increase in audit quality (90 per cent).
  • Lack of clarity and different interpretations as to what and how certain matters are documented (84 per cent). 
  • Insufficient or inadequate application material in the auditing standards addressing scalability and proportionality considerations (84 per cent).
  • Extensive and onerous documentation requirements (83 per cent). 
  • Lack of separate implementation support/ guidance with respect to the application of auditing to the audit of LCEs (83 per cent). 

SOURCE: AUASB Survey: Audits of Less Complex Entities

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