IAASB launches project to explore SME audit issues

The IAASB is initiating a project to explore challenges in auditing small and medium-sized entities (SMEs). Canadian auditors are encouraged to contribute to the consultation paper, expected later this year.

At its meeting in March 2018, the International Auditing and Assurance Standards Board (IAASB) agreed to begin a project to explore the challenges in auditing small and medium-sized entities (SME). It’s looking to issue a consultation paper later this year.

Canadian auditors will be interested in contributing to the paper because we face many of the same challenges identified in other countries.

IAASB DEVELOPMENTS

The IAASB project builds on its January 2017 working conference, which brought practitioners together from across the globe to discuss this topic. Since the conference, the IAASB has been working to improve the way it describes requirements in standards that have a degree of conditionality that reflects the circumstances of the engagement, and when the practitioner must escalate the magnitude of response to a requirement to address size and complexity. The intent of these improvements is to make the standards more workable in a broader range of audit circumstances.

The jury is still out on whether these improvements are working, because the standards projects employing these new approaches – dealing with quality control, audit of accounting estimates and audit risk – are still in progress. And questions are still being raised about whether the improvements will be enough. Different jurisdictions are exploring different solutions to the issue. Some commentators say there needs to be a separate standard for “small entity” audits. Others call for different services that are not full audits (and are not reviews). An impact assessment following the abolition of the audit requirement for small limited liability companies in Sweden concluded that the requirement should be reintroduced because companies’ competitiveness and growth were not enhanced, as expected.

The public interest concern is that if the IAASB does not play a leadership role, there may be a proliferation of different approaches that undermine the global profession’s ability to consistently serve the audit quality needs of the SME marketplace.

THE CANADIAN PERSPECTIVE

The Auditing and Assurance Standards Board (AASB) is focusing on this issue as part of its strategic plan. It has enhanced its outreach to practitioners in firms of all sizes during its standard-setting process to make sure small and medium-sized practice (SMP) views are heard more clearly as standards are developed.

In Vancouver in 2017, the board learned that the primary reasons practitioners are facing challenges in applying the Canadian Auditing Standards (CAS) to SME audits are insufficient guidance and education, and too few training tools to help practitioners bridge the gap between the increased complexity of the CAS and the ability to implement these standards efficiently and effectively.

SO, WHAT IS ON THE TABLE?

The IAASB seems to be keeping an open mind. It is looking at:

  • a separate standard based on principles in the existing audit framework so that standard can focus on enhancing audit quality in SME audits without having to tackle issues that are only relevant to listed and large/complex entities
  • a separate standalone standard based on a different framework that could reflect a fully substantive audit, for example, or have other material differences from concepts used in the current standards
  • leveraging new audit technologies to help practitioners navigate audit standards
  • the need for non-audit standards to meet stakeholder needs where an audit does not match up well

The challenge, as I see it, is that this project has the potential to have a very broad scope. This may inhibit the finding of a solution in time to unwind actions taken in individual jurisdictions. I believe that the initial focus should be on continuing the good work being done in the current standards projects; it needs to be expanded to other standards where difficulties exist for audits of SME.

CONCLUDING REMARKS

I applaud the IAASB for taking a step forward on this project. It will be of ongoing interest to the AASB and Canadian auditors.

KEEP THE CONVERSATION GOING

Do you support the IAASB commencing its SME audit project? Which areas do you think could bear fruit in the short term? Post a comment below or email me directly.

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues, and their impact in Canada.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada