[Global Financial Insights] IAASB Issues New Guidance on the Application of the ISA for LCE and More

Global Financial Insights is a weekly feature for the Accounts and Audit Module subscribers of Taxmann.com. It provides you with the latest updates on financial reporting and auditing practices from across the globe. Here is this week’s financial update.

1. IAASB issues new guidance on the application of the International Standard on Auditing for Audits of Less Complex Entities

Earlier on 11th July, 2024 the International Auditing and Assurance Standard Board (IAASB) has issued a guidance on International Standard on Auditing for Audits of Financial Statements of Less Complex Entities, hereinafter referred as “ISA for LCE”. Under the said guidance, the IASB has included the eight illustrative audit report explaining the different scenario of adverse opinion, disclaimer of opinions and opinions where there is a material uncertainty related to going concern. Considering the challenges faced by the user in implementing the ISA for LCE, the IASB on 27th August, 2024 has again issued a new guidance with respect to the application of the ISA for LCE. This guidance shall assist the auditor, legislative and regulatory authorities in implementing the ISA for LCE. Furthermore, the guidance shall also be helpful in determining whether the aforesaid standard is appropriate to be used for a specific engagement. The key highlights of this newly issued guidance is briefly described below:

1.1 Supplementary guidance for legislative and regulatory authorities in implementing the ISA for LCE

This supplementary guidance broadly discusses about the limitation of using the ISA for LCE, the role and responsibilities of “Legislative or Regulatory Authorities” with “Standard-Setting Authority” and the role of firms and engagement team. Thus, the guidance shall assist the legislative and regulatory authorities in implementing the ISA for LCE and also assist the firms in developing the related policies or procedures. Each of the section described under the aforesaid guidance are described below:

(a) Limitation of using the ISA for LCE

The ISA for LCE is designed after considering the nature and circumstances of an audit of financial statements of a “Less Complex Entities” in the private and public sectors. Thus, this standard does not address complex matters or circumstances and, therefore, if it is used for an audit outside the defined scope, the auditor will not be able to obtain sufficient appropriate audit evidence to support an audit opinion.

(b) Role and Responsibilities of Legislative or Regulatory Authorities with Standard-Setting Authority

The IAASB identified that, it would not be practicable for them to define size, thresholds or other criteria about what may constitute an audit of an LCE. Thus, after considering the nature and circumstances, the legislative, regulatory authorities or local bodies with standard-setting authority shall issue provisions and accompanying guidance for adoption and implementation of the ISA for LCE. These provision shall include the description of audits which are to be conducted using ISA for LCE.

(c) Role of Firms, Engagement team and Auditors

After considering the prohibitions described under ISA for LCE, the prohibitions relevant to the applicable jurisdiction and the qualitative characteristics and quantitative thresholds set for the firm’s jurisdiction, the firm shall establish the policies and procedures that is to be used by the engagement team. Furthermore, the firm may also restrict the use of the standard for audits of particular classes of entities or industries, by setting policies or procedures for the use of the ISA for LCE.

Where the firm’s policies or procedures allow the use of the standard, the engagement partner is required to evaluate whether the use of the standard is appropriate for a particular audit engagement. Also, the engagement partner is required to determine whether the audit engagement is an audit of a LCE, when accepting or continuing an engagement.

It is hereby important to note that, this new guidance does not amend or override the ISA for LCE and reading this guidance is not a substitute for reading the ISA for LCE.

Source: International Auditing and Assurance Standard Board

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