Audits of less complex entities: Are we at a crossroads?

Learn about a potential shift in direction for auditing standards for audits of less complex entities.

In a world where there are pressures on auditors to meet a broad range of demands, whether it be increasing regulatory expectations or providing value at a reasonable cost, auditors of small and medium-sized entities are not exempt. We seem to be approaching a crossroads as international standard setters grapple with a potentially significant change in direction on how they set auditing standards.

Small and medium practice audits are a key AASB focus

When the Canadian Auditing and Assurance Standards Board (AASB) set its 2016-2021 strategic plan, it recognized that it needed to focus on the challenges small and medium practices (SMPs) face when conducting audits of smaller, less complex entities. The AASB does so within the constraint that its standard-setting approach is to adopt International Standards on Auditing (ISAs) set by the International Auditing and Assurance Standards Board (IAASB) with minimal amendments. The AASB is taking actions such as the following to better understand the SMP perspective and to provide input to the IAASB about the challenges SMPs face:

  • holding outreach sessions with different provinces to discuss SMP challenges
  • more actively engaging with SMPs to pilot test IAASB proposals before an ISA is finalized
  • asking in documents for comment for specific feedback on scalability and implementation issues relating to IAASB proposals
  • conducting an implementation risk analysis on each new ISA to identify potential challenges in applying the new standard, and working with educators, trainers and developers of guidance and tools for auditors to address these challenges
  • strengthening relationships with provincial accounting bodies to better understand what they are learning through inspections and practice advisory discussions, and to obtain the input of their members on standards matters
  • working more closely with other national standard setters and IAASB working groups to collaborate on implementation matters

Canadian SMPs have lauded the AASB’s progress. But the bottom line is that the auditing standards Canada adopts are set by the IAASB – the AASB does not hold the pen. This means that progress on addressing challenges in applying auditing standards is largely dependent on actions taken by the IAASB. The AASB provides input to the IAASB primarily through national standard setter discussions and responses to documents for comment.

What is the IAASB doing about it?

The IAASB is hearing the call for action, not only from Canada but from many of the 100 jurisdictions that also adopt ISAs. And to date, its response has been to build scalability considerations into its current projects. However, many think that the IAASB is not doing enough. The IAASB’s challenge is to identify what actions to take. So, it issued an easy-to-read discussion paper in April to gather input on the root causes of SMP concerns and views on possible future directions.

I believe that this is a pivotal moment, not only for the IAASB but for the direction of audits in the SMP space going forward. This is because one of the key decisions the IAASB may need to make is whether to undertake a massive revision of ISAs or develop a separate standard for audits of less complex entities. A discussion of these options by 50 international participants in May showed that initial views are evenly divided.

Such a directional change could have significant implications and cannot be taken lightly. The IAASB needs to be fully informed if it is to reach appropriate conclusions on what actions it, and possibly others, need to take. Which is where you come in.

We need to hear what Canadians think as decision time nears

Because of the importance of this topic to Canada, the AASB is actively working to respond to the discussion paper. But, it needs the input of stakeholders, including practitioners, practice advisors, audit inspectors, and those who develop and use firm methodologies, to help it develop a strong response to the IAASB. Thus, we are building a web page devoted to this topic to provide different means for stakeholders to engage with us.

Keep the conversation going

We need to hear from you by August 14, 2019, so please read the discussion paper and get back to us, by posting a comment below or on our web page, or emailing me directly. The IAASB response deadline is September 12, 2019.

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