Introduction

On September 25, 2024, the Confederation of Asian and Pacific Accountants (CAPA), in collaboration with the International Federation of Accountants (IFAC) and the International Auditing & Assurance Standards Board (IAASB) organized a virtual forum on the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (the ISA for LCE) to raise awareness of the new stand-alone standard.

The Forum featured a presentation by the IAASB on the benefits, design principles and the content of the ISA for LCE, including the authority of the standard. A panel discussion followed where representatives from various jurisdictions were each given time to share their jurisdiction’s respective journeys in either considering adopting or the adoption of the ISA for LCE. There was also discussion on how regulators and professional accountancy organizations (PAOs) can help with the transition.

During the forum, the IAASB launched their first comprehensive adoption guide to help jurisdictions adopt the ISA for LCE. This guide provides valuable insights into the adoption process, highlighting common steps and successful approaches while also addressing potential challenges. The guide also outlines steps for legislative, regulatory or relevant local bodies with standard setting authority to follow and eventually allowing practitioners to use the ISA for LCE with the necessary due process.

Panel Discussion – The ISA for LCE Journey

The panel members present at the forum comprised of practitioners and standard setters from various jurisdictions, including:

  • Ms. Hena Sadiq of Pakistan - Partner in Yousuf Adil, Chartered Accountants & member of the Auditing Standards & Ethics Committee of the Institute of Chartered Accountants of Pakistan (ICAP).
  • Ms. Kusumaningsih Angkawijaya of Indonesia - Partner with KPMG Indonesia, Council Member of Institut Akuntan Publik Indonesia (IAPI), member of the Indonesia’s Auditing & Assurance Standards Board (AASB), member of the Indonesian Central Bank’s Financial Accounting Standards Committee, and member of the IAASB’s ISA for LCE Reference Group from the Southeast Asia Region.
  • Chen Voon Hann of Malaysia - Managing partners of CAS Malaysia PLT, member of the Malaysia’s AASB, and past council member of the Malaysian Institute of Accountants.
  • Sabbir Ahmed of Bangladesh - Elected member of the Institute of Chartered Accountants of Bangladesh (ICAB), and Chair of the South Asian Federation of Accountants (SAFA) technical committee and a member of CAPA’s Accounting, Reporting & Assurance Coordinating Committee (ARACC).
  • Prabin Kumar Jha of Nepal - Current President of the Institute of Chartered Accountants of Nepal (ICAN), and former Board Member of the Securities Board of Nepal (SEBON).
  • Dr. Gary Pflugrath of Australia - Senior advisor to the Board & CEO of CPA Australia.  
  • Kai Morten Hagen of Norway - Former member of the IAASB and the Chair of the IAASB ISA for LCE Task Force.

In summary, the following points were discussed during the forum:

  • Following initial outreach in Pakistan, Bangladesh and Malaysia, there is a need to reinforce that the ISA for LCE does not reduce the quality of the audit or necessarily mean less work. It is about doing the right work, including the right amount of work in the right areas, and having proportionate requirements to drive those work. However, the profession will still need to clear the perception of a 2-tiered audit, with the LCE standard being seen as of a lower quality.  
  • It will likely take time and further education for users such as finance providers and tax authorities to accept the audit using the ISA for LCE. Initial experience in Indonesia has been cautiously positive.
  • There could be savings in terms of work effort and documentation by transitioning from the International Standards on Auditing (ISAs) to the ISA for LCE, although this could be minimal. After all, the requirements are based on the underlying concepts from the ISAs which are proportionate to the typical nature and circumstances of an LCE and support the consistent performance of a quality audit engagement.  
  • The ISA for LCE anticipates that standard setting authorities will set quantitative thresholds to assist in the consistent and appropriate use, although determining quantitative thresholds is not mandatory. There are benefits for the PAOs to work with their local authority to align thresholds with existing national laws covering definitions of SMEs, a proxy for LCE.
  • Transitioning to or out of the ISA for the LCE is not considered very likely and will be addressed in the IAASB first-time implementation guide, which is intended to be launched in Q1 2025.
  • After the ISA for LCE becomes effective on December 15, 2025, there will be an initial period of stability of at least three years which was supported by the IAASB. Practitioners, especially the SMPs are impacted by regular changes to international standards. However, a core consideration for the IAASB is that the ISA for LCE must remain up to date and, to the greatest extent possible, consistent with the ISAs.

As the panel was unable to deal with all the questions submitted, we have appended an addendum together with the answers for more clarity. You can read more of those here.

Conclusion

The ISA for LCE was issued as a response to the global community asking for a more succinct and focused approach in auditing less complex entities while preventing the fragmentation of the audit profession. This message was well re-iterated during the Forum.

Built on the foundation of the ISAs, audits performed using the ISA for LCE provide the same level of assurance for eligible audits: reasonable assurance. Adopting the ISA for LCE will help auditors of LCEs deliver consistent and effective high-quality audits. It also reduces the risk of jurisdictional divergence by driving consistency and comparability globally and will help maintain confidence in the financial reporting by smaller and less complex businesses.

In the forum’s closing address, the Chair of CAPA’s Accounting, Research, and Assurance Coordinating Committee (ARACC) Mr. Chiew Chun Wee mentioned that each jurisdiction will need to explore their own journey to consider the adoption of the standard. However, this forum together with the various implementation support materials being produced by IAASB will hopefully support jurisdictions when considering the adoption of the standard.

As expressed during the forum, early engagement with regulators and users is an important step in ensuring the success of any standard implementation, including the ISA for LCE. CAPA and its ARACC will continue to follow the developments and trends around the adoption or consideration of the adoption of the ISA for LCE.

Johnny Yong

Executive Director, Confederation of Asian and Pacific Accountants

Prior to joining CAPA in July 2023, Johnny was the Head of Capital Market & Assurance at the Malaysian Institute of Accountants (MIA) where his main role was to develop guidelines, standards, and technical guidance materials for accountants and auditors in Malaysia. Between 2016 and early 2021, Johnny was a Technical Manager in IFAC, managing the SMP Committee (now known as an Advisory Group). Previously he was a partner of a training provider in Malaysia, led MIA's public practice department, and initially qualified as an accountant following his articleship with BDO Malaysia.