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Other Canadian Standards

Audits of Less Complex Entities

Summary

Practitioners have identified scalability challenges when applying the Canadian Auditing Standards (CASs) to audits of entities whose nature and circumstances are less complex – particularly, Canada’s many small and micro entities.

Based on concerns raised by some interested and affected parties, the public interest considerations include the following:

  • Practitioners may not consistently apply the CASs in audits of less complex entities (LCE), which may affect the performance of high-quality audits.
  • Practitioners may spend unnecessary time and effort performing procedures that may be ineffective or create redundant documentation, which may affect the performance of cost-effective audits. If conducting audits is not cost effective (i.e., the cost of complying with the standard’s requirements exceeds expected benefits), it may become a barrier in engaging auditors.

Similar issues in LCE audits are experienced by practitioners worldwide. Consequently, the International Auditing and Assurance Standards Board (IAASB) has issued:

Staff Contact(s)

Jacqui Kuypers, CPA, CA Principal, Auditing and Assurance Standards Board

Project Status

  • Information gathering

    Discussion Paper comment deadline was August 14, 2019

    AASB submitted its response to the IAASB’s Discussion Paper

    IAASB is deliberating feedback received on the Discussion Paper

  • Approving project
  • Consulting stakeholders

    The AASB issued its Discussion Paper, “Exploring Standard-setting Options for Audits of Less Complex Entities,” in September 2021

  • Deliberating feedback

    The AASB deliberated feedback received on its Discussion Paper

    Read the AASB progress report

  • Final pronouncement

    The AASB decided not to adopt the IAASB’s International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE)

    The AASB will continue to explore possible Canadian solutions

AASB response to the IAASB Exposure Draft, Proposed Part 10, Audits of Group Financial Statements of the Proposed ISA for Audits of Financial Statements of Less Complex Entities

Our response letter highlights our concerns with the IAASB’s proposed Part 10. 

AASB response to the IAASB Exposure Draft, Proposed International Standard on Auditing of Financial Statements of Less Complex Entities

Our response letter highlights our concerns with the proposed standard. 

News


May 27, 2024

News, Article

Canada’s Decision to Not Adopt the International Standard for Audits of Less Complex Entities

The AASB has provided information on its decision to not adopt the International Standard for Audits of Less Complex Entities. Read further to learn the reasons behind this decision and what the AASB is doing now.

May 17, 2023

News

AASB Response – Part 10, Audits of Group Financial Statements of the Proposed ISA for Audits of Financial Statements of Less Complex Entities

The Board submitted a comment letter responding to the IAASB’s Exposure Draft, Proposed Part 10, Audits of Group Financial Statements of the Proposed ISA for Audits of Financial Statements of Less Complex Entities. The IAASB plans to approve the final ISA for LCE before the end of the year. Consistent  with our report, “Audits of Less Complex Entities – Our Progress Toward a Solution”, we will continue to monitor and provide input to the IAASB’s as we work towards providing solutions in this area. Read the response letter for full details.

March 6, 2023

International Activity

IAASB Issues Exposure Draft of Proposed Part 10, Audits of Group Financial Statements of the ISA of Less Complex Entities

The International Auditing and Assurance Standards Board (IAASB) issued its Exposure Draft of Proposed Part 10, Audits of Group Financial Statements, of the Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE). The Exposure Draft aims to include certain group audits within the scope of the proposed ISA for LCE. Submit your comments on the IAASB’s Exposure Draft by May 2, 2023, and provide a copy of your response to the AASB at [email protected].

September 10, 2021

Document for Comment

AASB Discussion Paper – Exploring Standard-Setting Options for Audits of Less Complex Entities

The AASB issued a Discussion Paper to obtain stakeholder input on options that might be explored in Canada to address the challenge of applying the Canadian Auditing Standards (CASs) to audits of less complex entities. Submit your comments by December 10, 2021!

September 1, 2021

International Activity

IAASB Exposure Draft – Audits of Less Complex Entities

The IAASB issued an Exposure Draft proposing a new standard on auditing the financial statements of less complex entities (LCEs). On September 10, 2021, the AASB will release a discussion paper that explores whether to pursue a separate standard for audits of LCEs in Canada and other options to address the challenges practitioners face in LCE audits. Read the IAASB Exposure Draft and stay tuned for our Canadian discussion paper!

October 4, 2019

International Activity

AASB Response – Audits of Less Complex Entities

The Board submitted a comment letter responding to the IAASB’s Discussion Paper, Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges of Applying the ISAs. Visit the IAASB’s website to read the Board’s response.

July 11, 2019

News

Join us! AASB Discussion Group – Understanding the Challenges of Auditing Less Complex Entities

The AASB is investigating the challenges experienced by Canadian practitioners when auditing LCEs. Join the AASB Discussion Group where AASB Principal, Andrea Lee, will be sharing information, asking questions, and moderating discussion to help us understand what you, our stakeholders, need when performing audits of LCEs.

May 30, 2019

International Activity

IAASB Discussion Paper - Audits of Less Complex Entities

The IAASB has issued a Discussion Paper Audits of Less Complex Entities. Canadian stakeholders are encouraged to submit their comments to the IAASB by September 12, 2019.

May 30, 2019

Document for Comment

AASB Discussion Paper – Audits of Less Complex Entities

The AASB has issued its Discussion Paper that corresponds to the IAASB’s discussion paper on this topic. Stakeholders are encouraged to submit their comments by August 14, 2019.

Meeting & event summaries


April 8, 2024

AASB Decision Summary – March 11-12, 2024

The AASB considered whether to adopt the ISA for Less Complex Entities (ISA for LCEs), which the IAASB approved at its September 2023 meeting.

While the AASB’s policy is to adopt the IAASB’s ISAs and its International Standards on Quality Management (ISQMs), decisions to adopt other international standards the IAASB issues, like the ISA for LCE, are made on a case-by-case basis. Such decisions are based on whether they meet the needs of interested and affected parties in Canada and serve the Canadian public interest.

After careful consideration, the AASB decided not to adopt the ISA for LCE. The Board believes the ISA for LCE would not adequately meet the needs of interested and affected parties in Canada nor serve the Canadian public interest. The Board based its decision primarily on the observation that the specific aspects of the ISAs identified by Canadian practitioners as challenging to apply in the audits of LCEs have not been sufficiently tailored. This may negatively impact the potential for a widespread uptake of the ISA for LCE in Canada. Furthermore, concerns arise from the public interest implications of having two sets of auditing standards.

Following this decision, the AASB will continue to discuss possible alternative options for addressing the unique challenges faced by small and medium-sized entities and practitioners engaged in audits of LCEs.

October 10, 2023

AASB Decision Summary – September 12-13, 2023

The AASB discussed issues related to the IAASB’s project to develop an International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE). Key issues discussed included:

  • the certain requirements and essential explanatory material in the IAASB’s draft of the ISA for LCE, including:
    • professional skepticism, including the example of conditions that could create pressures on the engagement team is hard to understand and the suggestion of alternate examples; and
    • performing procedures at the service organization and concern about how the auditor would meet the requirement considering it is unlikely that a service organization would allow another auditor to perform procedures on its controls, especially if it has a Type 1 or Type 2 report.
  • the planned approach to future updates and maintenance of the final ISA for LCE, including the proposed period of stability after the ISA for LCE becomes effective where revisions will not be made.

The AASB also discussed the significant concerns it has raised on the content of ISA for LCE through its response letters to the IAASB Exposure Drafts (ISA for LCE Exposure Draft and Part 10 (Group Audits) Exposure Draft), as well as in review and discussion of post-exposure issues and revisions.

The IAASB is expected to approve the ISA for LCE at its September 2023 meeting. The AASB will be considering the way forward in Canada at a future meeting.

June 29, 2023

AASB Decision Summary – June 12-13, 2023

The AASB discussed issues related to the IAASB’s project to develop an ISA for Audits of Financial Statements of Less Complex Entities (ISA for LCE). Key issues discussed included:

  • the proposed approach to developing non-authoritative guidance to support the proposed ISA for LCE, including the nature and content of such guidance and whether the proposed ISA for LCE should reference such guidance;
  • the proposed approach to addressing the ISA 800 series of standards;
  • how common it is for LCEs to use a service organization and whether the proposed ISA for LCE should address the auditor’s use of a report on the description, design, or operating effectiveness of controls at a service organization;
  • the content of Part 6, including where changes to requirements or additional essential explanatory material (EEM) may be needed to address:
    • the use of analytical procedures as risk assessment procedures;
    • the description of components of the entity’s system of internal control;
    • the use of commercial accounting packages; and
    • the requirement related to the presumption of fraud risk in revenue recognition;
  • the content of Part 7, including where changes to requirements or additional EEM may be needed to address:
    • incorporating an element of unpredictability in audit procedures;
    • audit sampling; and
    • journal entry testing.


April 26, 2023

AASB Decision Summary – April 5, 2023

The AASB reviewed a draft of its response letter to the IAASB’s Exposure Draft, Proposed Part 10, Audits of Group Financial Statements of the Proposed ISA for Audits of Financial Statements of Less Complex Entities. Key issues discussed included:

  • the IAASB’s proposal to allow the use of the LCE standard for group audits unless component auditors are involved, except in limited circumstances, and how in practice there are scenarios where judgment is required to determine whether an auditor performing work on a component is a component auditor or a group auditor; 
  • the meaning in the proposed Authority of the phrase “physical presence is needed for specific audit procedures”, including whether there are circumstances, in addition to those set out in the Authority, where a physical presence is needed; and
  • the level of engagement achieved with interested and affected parties, as outlined in the outreach plan for the project.

The AASB will submit its response in advance of the IAASB’s deadline on May 2, 2023.

April 4, 2023

AASB Decision Summary – March 13-14, 2023

The AASB discussed issues related to the IAASB’s project to develop an International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE). Key issues discussed included:

  • Part 6, including where changes to requirements or additional essential explanatory material (EEM) may be needed, including:
    • the use of analytical procedures as risk assessment procedures;
    • describing the components of the entity’s system of internal control;
    • obtaining audit evidence when the entity uses service organizations;
    • addressing the risks arising from the use of IT; and
    • the requirement related to the presumption of fraud risk in revenue recognition;
  • Part 2, including the proposed approach to documentation requirements and EEM;
  • Part 4, including the content of the engagement letter and whether it should reference the auditor’s use of the ISA for LCE; and
  • issues related to the IAASB’s Exposure Draft, Proposed Part 10, Audits of Group Financial Statements of the Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (IAASB Part 10 ED) to inform the drafting of the AASB’s response letter to the IAASB.

The AASB will review and discuss a draft of its response letter to the IAASB Part 10 ED at its April 2023 meeting.

December 13, 2022

AASB Decision Summary – November 28-29, 2022

The AASB discussed issues related to the IAASB’s project to develop a separate standard for audits of less complex entities (LCEs). Key issues included:

  • the proposed revisions to Part 6 of the draft International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE) dealing with risk identification and assessment;
  • the proposed Part 10 of ISA for LCE and proposed revisions to the Authority of ISA for LCE dealing with group audits;
  • how the AASB will respond to the IAASB’s exposure draft of Part 10; and
  • the possible activities the Board may undertake in its 2023-2024 Annual Plan as it works towards a solution for LCEs.

The AASB will continue to discuss future activities as it develops its 2023-2024 Annual Plan.

October 3, 2022

AASB Decision Summary – September 8-9 2022

The AASB discussed issues related to the IAASB’s project to develop a separate standard for audits of less complex entities (LCEs). Key issues included:

  • the Authority of proposed ISA for LCE, including the content and presentation of the qualitative characteristics of a typical LCE;
  • whether to incorporate accounting estimates that are more complex in the ISA for LCE, and if so, how;
  • proposed changes to the Authority to allow less complex group audits to be performed using ISA for LCE, including how to address the use of component auditors; and
  • how to revise requirements to be more proportionate to audits of LCEs.

June 27, 2022

AASB Decision Summary – June 6-7 2022

The AASB discussed issues related to the IAASB’s project to develop a standard for audits of less complex entities (LCE). Key issues discussed included:

  • the Authority of the standard, including:
    • whether the IAASB should describe what an LCE is, rather than setting out characteristics of entities that would not use the standard;
    • whether the IAASB should require or encourage jurisdictions to establish quantitative thresholds (i.e., size tests to determine if an entity is an LCE);
  • how requirements in the draft LCE standard could be rewritten to be more principles-based, and whether such changes would result in increased efficiencies in an LCE audit;
  • the IAASB’s approach to including essential explanatory material in the LCE standard; and
  • whether the IAASB has addressed the significant concerns and barriers to having a separate standard that provides reasonable assurance that several respondents to the IAASB’s Exposure Draft raised.

The AASB also discussed next steps in Canada, including additional research on Canadian issues that staff proposes to undertake.

February 8, 2022

AASB Decision Summary – November 29-30, 2021

The AASB received a presentation of feedback received to date in consultations with stakeholders on its Discussion Paper, “Exploring Standard-Setting Options for Audits of Less Complex Entities.” The Board also discussed its approach to preparing its response to the IAASB Exposure Draft, “Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities.”

January 20, 2022

AASB Decision Summary – January 20-21, 2022

The AASB reviewed a draft response letter to the International Auditing and Assurance Standards Board’s Exposure Draft, “Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE).”

The response letter will be submitted by the comment deadline of January 31, 2022.

July 15, 2021

AASB Decision Summary – July 15, 2021

The AASB discussed a draft Canadian discussion paper,” Exploring Standard-setting Options for Audits of Less Complex Entities.” This discussion paper will seek input from stakeholders on possible options to explore in Canada to address the challenge of applying the CASs to audits of less complex entities. This discussion paper also seeks views on:

  • the concept of a separate standard for the audit of less complex entities; and
  • the IAASB’s Exposure Draft, “Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities.”

The AASB expects to approve the Canadian discussion paper in August 2021, for issuance in September 2021.

June 29, 2021

AASB Decision Summary – June 7-8, 2021

The AASB provided input to the International Auditing and Assurance Standards Board (IAASB) members from Canada on the IAASB’s project to develop a separate standard for audits of the financial statements of less complex entities (LCEs). Key issues discussed included:

  • the extent of judgment inherent in the characteristics of complexity and how many of these characteristics an entity needs to exhibit before it is no longer appropriate to use the separate standard for audits of LCEs;
  • understanding the related implications, including the work effort and reporting, of transitioning between International Standards on Auditing (ISAs) and the separate standard for audits of LCEs; and
  • the proposed approach to maintain the separate standard for audits of LCEs, including the potential for narrow-scope amendments, when necessary.

The AASB expects to approve a Canadian discussion paper for audits of the financial statements of LCEs at its July 2021 meeting.

May 27, 2021

AASB Decision Summary – May 5, 2021

The AASB discussed the way forward in Canada related to the anticipated IAASB exposure draft of a proposed standard for audits of less complex entities. The AASB decided it would issue a Canadian discussion paper to obtain stakeholder feedback on the proposals in the IAASB’s exposure draft and other possible options the AASB could explore to address the public interest issues.

The IAASB is expected to issue its exposure draft in July 2021. The AASB will issue its discussion paper soon thereafter.

March 15, 2021

AASB Decision Summary – February 16, 2021

The AASB discussed the Audits of LCEs Advisory Group’s (Advisory Group) recent work. During the Board’s previous activities, stakeholders identified several matters in archived CAS 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment, that were challenging to apply in audits of LCEs. The Advisory Group examined whether these matters would be addressed in extant CAS 315, Identifying and Assessing Risks of Material Misstatement, and the related implementation guidance CPA Canada is developing. The Board concluded that the matters will be addressed appropriately.

The AASB discussed the next steps it should take in Canada to address areas of the other CASs that are difficult to apply in audits of LCEs.

December 15, 2020

AASB Decision Summary – November 30 – December 1, 2020

The AASB provided input to the IAASB members from Canada on the IAASB Working Group’s:

  • project proposal to develop a separate standard for audits of less complex entities; and
  • specific considerations related to developing a separate standard.

Key issues discussed included:

  • the public interest issues and project objectives related to developing a separate standard;
  • how to apply a separate standard; and
  • the circumstances that the separate standard should (and should not) cover.

June 8, 2020

AASB Decision Summary – June 8-9, 2020

The AASB provided input to the IAASB members from Canada on the IAASB Audits of Less Complex Entities (LCE) Working Group’s proposal to start developing a separate standard on this topic. Matters discussed included the overarching principles proposed for the IAASB to use when developing a separate set of standards.

March 9, 2020

AASB Decision Summary — March 9-10, 2020

The AASB provided input to the IAASB members from Canada on possible responses to feedback on the IAASB’s Discussion Paper, “Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges in Applying the ISAs.Matters discussed included:

  • two proposed IAASB workstreams to address audits of less complex entities (LCEs);
  • the IAASB’s proposed approach to dealing with specific areas within International Standards on Auditing (ISA) that are challenging to implement; and
  • whether there are other matters deserving further consideration by the IAASB.

The IAASB plans to discuss the way forward in relation to audits of LCEs at its June 2020 meeting.

December 23, 2019

AASB Decision Summary — December 2-3, 2019

The AASB provided input to the International Auditing and Assurance Standards Board (IAASB) members from Canada on issues related to feedback on the IAASB’s Discussion Paper, “Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges in Applying the ISAs.” This input included possible actions the IAASB may take and a draft feedback statement.

The AASB will continue to discuss this project at future meetings.

September 10, 2019

AASB Decision Summary – September 9-10, 2019 Meeting

The AASB discussed its draft response to the International Auditing and Assurance Standards Board’s (IAASB) Discussion Paper, “Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges in Applying the ISAs.”

The Chair and Director will review the final letter prior to submission.

The AASB decided to form an Advisory Group to support staff and the Board on the Audits of Less Complex Entities project. The Advisory Group will help identify key issues related to audits of less complex entities in the Canadian environment and provide input to the AASB on proposals developed by the IAASB as this project evolves.

June 10, 2019

AASB Decision Summary — June 10-11, 2019

The AASB discussed the proposed plan to collect stakeholders’ feedback to inform its response to the IAASB’S Discussion Paper, “Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges in Applying the ISAs.”

The Board will continue to discuss this project at future meetings.

March 4, 2019

AASB Decision Summary – March 4-5, 2019

The AASB provided input to the IAASB members from Canada on the proposed Discussion Paper, “Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges.” A member of the IAASB’s Less Complex Entities Working Group participated in the AASB’s discussion of this topic.

The IAASB is expected to approve the Discussion Paper at its March 2019 meeting, and issue it for public comment in April 2019. The AASB will then consider what activities to undertake to obtain Canadian stakeholders’ views on the Discussion Paper.

Disclaimer

This project summary has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussions on this project, which may change after further Board deliberations. Decisions to publish Handbook material are final only after a formal voting process.