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Audits of Less Complex Entities – Our Progress Toward a Solution

September 13, 2022 News, Resource, Article

In September 2021, we issued the Discussion Paper, “Exploring Standard-Setting Options for Audits of Less Complex Entities.” The Discussion Paper sought to gather views on how best to address the challenges practitioners experience in applying the Canadian Auditing Standards (CASs) to audits of less complex entities (LCE audits).

Their challenges are not unique to Canada. The International Auditing and Assurance Standard Board (IAASB) has also deliberated on a solution to this issue. In July 2021, the IAASB issued the Exposure Draft, “Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities.”

Our Discussion Paper set out and asked for your views on three possible options for moving forward in Canada:

  • Option 1 – having a separate Canadian standard for LCE audits. For example, once the IAASB’s LCE standard is finalized, we could adopt it in Canada or use it as a basis for developing an equivalent Canadian standard.
  • Option 2 – making limited, targeted Canadian amendments to International Standards on Auditing (ISAs) when adopting them as CASs to support the need for more effective scalability and proportionality in the CASs.
  • Option 3 – developing, or supporting other groups in developing, targeted non-authoritative guidance, including tools, to assist practitioners in applying the CASs to LCE audits.

For an overview of our Discussion Paper, including a discussion of the possible options, see our November 2021 blog post, “Audits of less complex entities at a turning point: Input needed.”

This update includes:

  • overview of Discussion Paper respondents;
  • what you told us;
  • what we are doing now; and
  • what assistance is available now.


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Overview of Discussion Paper Respondents

The comment period for our Discussion Paper closed on December 10, 2021. We consulted widely, including a series of roundtables and a workshop to field-test certain aspects of the IAASB’s Exposure Draft. Close to 100 people attended the roundtables. Feedback was extensive, thoughtful, and informative. We heard from a broad cross section of interested parties including:

  • small and medium-sized firms, and sole practitioners (41%);
  • regulators, practice inspectors, and advisors (25%);
  • large firms and public sector auditors (14%);
  • users and preparers (12%); and
  • others, including developers of firm methodologies, tools, and audit software (8%).

In addition, we received 12 written responses to our Discussion Paper, including:

  • six letters from large firms and public sector auditors;
  • five letters from small and medium-sized firms and sole practitioners; and
  • one letter from provincial and territorial bodies.


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What You Told Us

Most of our Canadian respondents expressed broad support for our efforts to solve the challenges practitioners experience in applying the CASs to LCE audits.

Respondents generally agreed that we identified all the Canadian public interest considerations related to this initiative, including:

  • Practitioners may not consistently apply the CASs in LCE audits, 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 the requirements that the standard imposes exceeds expected benefits from compliance with those standards), it may become a barrier in engaging auditors.

They also agreed that, overall, our Discussion Paper identified the areas in the CASs that are particularly challenging to apply in LCE audits, particularly identifying and assessing the risks of material misstatement.

However, we received mixed feedback on which option we should pursue; no one option was clearly favoured. Respondents identified benefits and drawbacks for each option, similar to those included in our Discussion Paper.

We heard the following key views on each option:

Option 1 – Separate standard for LCE audits

We heard support for a separate standard for LCE audits. Respondents noted many of the same benefits we set out in our Discussion Paper. However, many of these respondents had concerns with the IAASB’s Exposure Draft, including that:

  • it does not sufficiently support the need for scalability and proportionality of the areas in the ISAs that are challenging to apply in LCE audits (i.e., the “pain points”);
  • it is not easy to understand when the standard can be used;
  • there is a lack of guidance on the required work effort and the impact on reporting when transitioning from the ED-ISA for LCE to the ISAs and vice versa; and
  • there is not enough essential explanatory material to support the application of the requirements.

Respondents expressed concerns about the notion of having two sets of auditing standards, including the risk that this may:

  • exacerbate users’ expectation gap by having audit reports that refer to different sets of standards, both of which are reasonable assurance audit opinions;
  • create the perception of a new level of assurance engagement, adding to the confusion in the marketplace between audit, review, and compilation engagements;
  • create a two-tier profession if, over time, the profession splits into auditors who perform CASs audits and those who perform LCE audits; and
  • have an unintended consequence of increasing the need for:
    • education, training and maintenance of methodologies for practitioners using both the CASs and the separate standard; and
    • education for those who receive and use auditor’s reports, to mitigate the risk of an expectation gap and marketplace confusion.

Option 2 – Limited targeted revisions to the CASs

Respondents were least supportive of broadening our amendment criteria when adopting the ISAs as CASs, for the following key reasons:

  • it adds content to standards that are already lengthy, overly detailed, and challenging to navigate;
  • it takes time and effort to revisit our amendment criteria to determine what changes are needed to permit Canadian amendments to the ISAs to support more effective scalability and proportionality of the CASs;
  • it takes significant time to revise existing CASs following our due process; and
  • it diverges too much from international auditing standards, making tracking differences between the ISAs and CASs overly cumbersome.

Option 3 – Targeted non-authoritative guidance

We heard support for developing targeted non-authoritative guidance, including tools, to assist practitioners in applying the CASs to LCE audits. Respondents note that such guidance can be:

  • developed, issued, and modified on a timelier basis than revisions to standards; and
  • more flexible in content and use of plain language and, therefore, may better support practitioners in implementing the CASs to LCE audits.

However, other respondents cited the need for an authoritative response, preferably a separate standard, and did not support this option.

Our response to the IAASB Exposure Draft

With support from our Audits of Less Complex Entities Advisory Group, we carefully considered the feedback from Canadians on the IAASB’s Exposure Draft and the option of pursuing a separate standard for audits of LCEs in Canada. This feedback informed our response letter to the IAASB’s Exposure Draft. In our response, we said that we are pleased with the IAASB’s continuing efforts to develop a global solution that addresses the challenges in performing audits of LCEs. However, we have concerns with:

  • whether the IAASB’s Exposure Draft, in its current form, is a suitable solution; and
  • the public interest implications of having two sets of standards.


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What We Are Doing Now

We are monitoring and providing input on the IAASB’s project and assessing whether the IAASB’s revisions will sufficiently address the significant concerns we set out in our response letter. We believe we need to see where the IAASB lands on direction and content before we decide the way forward in Canada.

The IAASB received diverse feedback on its Exposure Draft and has significant decisions to make in addressing that feedback. It is unclear what the final IAASB standard will look like. The IAASB will continue to consider feedback and develop the final ISA for LCE throughout 2022 and into 2023. Its goal is to approve a final standard in the second half of 2023.

As the IAASB debates issues and finalizes its standard, we are:

  • engaging in further research to consider the experiences of other jurisdictions, including those that:
    • have or plan to have two separate auditing standards, which will inform our deliberations of the public interest implications of having two sets of auditing standards in Canada; and
    • do not plan to have two separate auditing standards to see what they are doing to support practitioners in LCE audits;
  • providing input to the IAASB as it revises its ISAs to ensure they are scalable, with a focus on those standards and requirements that have been identified as challenging to apply in LCE audits (see our Active Projects page). To do this, we continue to:
    • ensure members from small and medium-sized practices (SMPs) are on our Board and committees;
    • give high priority to engaging with SMPs; and
    • attend international meetings to provide Canadian views and hear the views of other standard setters and interested parties on issues related to LCE audits, such as the IAASB’s Paris Conference (read the IAASB’s key takeaways from this conference);
  • supporting the development of implementation tools and other resources to help practitioners implement CASs for LCE audits (see “What Assistance Is Available Now”).


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What Assistance Is Available Now

CPA Canada, with the support of our staff, developed non-authoritative guidance to help practitioners in applying the CASs to LCE audits. CPA Canada’s Audit and Assurance Resource Guide summarizes the resources to help you understand the implementation and application guidance available. You might be particularly interested in the following guidance focused on issues specific to LCE audits:

  • Revised CAS 315 resources – Includes an audit and assurance alert, an implementation tool for auditors focused on issues specific to LCE audits, a webinar, and other resources.
  • CAS 240 – This implementation tool for auditors is based on the existing CAS. The IAASB has started a project to revise ISA 240. We are following this project closely and providing input to the IAASB to ensure that challenges respondents identified in LCE audits are addressed.
  • CAS 540 – An implementation tool for auditors.

In addition, the CPA Canada Practitioner’s Portal was recently developed with SMPs in mind. This centralized location houses resources and information to support a wide range of practice matters. You may find the recently added alert to assist SMPs with implementing Canadian Standard on Quality Management (CSQM) 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements, of particular interest.

Last, you may also find interesting the IAASB Technology Working Group guidance on using automated tools and techniques in the audit related to:

  • identifying and assessing risks of material misstatement;
  • addressing the risk of overreliance on technology;
  • performing audit procedures; and
  • preparing audit documentation.

Our work is not done. In our 2022-2025 Strategic Plan, we committed to “Provide solutions that respond to the environment for small and medium-sized entities and allow practitioners to apply standards in a scalable and proportional way on the less complex elements of an entity.”

You can follow our progress on this work and the IAASB’s progress on its audits of LCEs project.

We are interested in hearing your questions and comments. Email us directly.


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Staff Contact(s)

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