Audits of Less Complex Entities Webinar (English)
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Listen to Prof. Roger Simnett, IAASB member and Audits of Less Complex Entities Working Group Chair, discuss the challenges and possible actions that the IAASB is exploring in its current Consultation Paper, which is open for public comment until September 12, 2019. Listeners and stakeholders are also encouraged to share their thinking with the IAASB on less complex entities through IFAC's survey on issues relating to audits of less complex entities.
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Audits of Less Complex Entities Webinar (English)
- 1. Page 2 Presented by: Roger Simnett, IAASB Board Member and LCE Working Chair July 22, 2019 Audits of Less Complex Entities (LCEs) (English)
- 2. Page 2 The IAASB’s Journey IAASB undertook a post- implementation review of the clarified ISAs in 2011‒2013. IAASB discussed a proposal to develop a Discussion Paper to obtain input on matters related to audits of LCEs. IAASB issued Revised IAPS 1005, The Special Considerations in the Audit of Small Entities, which was withdrawn when the clarified ISAs became effective (these became the basis of the “considerations specific to smaller entities” within the ISAs). Approval of Discussion Paper. Second Paris Conference in May 2019. Feedback from the Paris Conference and other outreach discussed by IAASB in Executive Session. IAASB agrees to formal information gathering activities on audits of LCEs. IAASB and others convened a conference in Paris focused on SME and SMP public interest issues. 2017 2004 2009 2002 –2009 March 2018 Sept. 2018 April 2019 Clarity Project. IAASB completed the Clarity Project and the clarified ISAs became effective. 2013
- 3. Page 3 The IAASB’s Discussion Paper The IAASB has not yet decided on a future course of action and remains open minded. Audits of Less Complex Entities: Exploring Possible Options to Address the Challenges in Applying the ISAs Published on April 29, 2019 Comments due by September 12, 2019
- 5. “An entity which typically possesses qualitative characteristics such as: a. Concentration of ownership and management in a small number of individuals (often a single individual – either a natural person or another enterprise that owns the entity provided the owner exhibits the relevant qualitative characteristics); and b. One or more of the following: i. Straightforward or uncomplicated transactions; ii. Simple record-keeping; iii. Few lines of business and few products within business lines; iv. Few internal controls; v. Few levels of management with responsibility for a broad range of controls; or vi. Few personnel, many having a wide range of duties. These qualitative characteristics are not exhaustive, they are not exclusive to smaller entities, and smaller entities do not necessarily display all of these characteristics.” Page 5 What is a Less Complex Entity?
- 6. • Challenges not within the IAASB’s control or within the scope of the IAASB’s work on audits of LCEs include: Page 6 Challenges Related to Applying the ISAs in Audits of LCEs Factors driving challenges that are not within the control of the IAASB such as: ‒ Legal and other requirements for an audit; ‒ Commercial considerations relating to an audit; ‒ Technology / methodology; and ‒ Education and people. Those scoped out of exploratory activities related to audits of LCEs such as ‒ Engagements other than audit; ‒ Enhanced accessibility to the ISAs; ‒ Value of an audit; and ‒ Public expectations.
- 8. Challenges Related to Applying the ISAs in Audits of LCEs (Cont.) Page 8 • Challenges within the scope of the IAASB’s work on audits of LCEs include: ‒ Language and basic approach to the standards; ‒ Length of the standards; ‒ Documentation; ‒ Lack of clarity as to what needs to be done or why; ‒ Not enough guidance within / outside of the ISAs; and ‒ ISAs noted as particularly problematic.
- 9. • Revising the ISAs Page 9 Possible Actions to be Explored How: ‒ Revising all of the ISAs as part of one substantial project ‒ Revising the ISAs on a rolling or phased basis ‒ Making targeted changes when an ISA is being revised By: ‒ Providing greater clarity on what the auditor needs to do ‒ Setting out basic requirements and then building on these for more complex situations ‒ Enhancing scalability considerations in the application material
- 10. Possible Actions to be Explored (Cont.) • Developing a separate auditing standard for audits of LCEs Page 10 ‒ Separate auditing standard based on the existing ISAs ‒ Separate auditing standard developed based on a different framework
- 12. Possible Actions to be Explored (Cont.) • Developing guidance for auditors of LCEs or other related actions Page 12 ‒ A comprehensive guide about how to apply the ISAs in circumstances where the nature and circumstances of the entity being audited are less complex ‒ An International Auditing Practice Note (IAPN) for audits of LCEs ‒ Guidance for the application of specific areas within the ISAs, or particular ISAs specifically for challenges identified related to audits of LCEs ‒ Focused “implementation packs” for new and revised ISAs specifically for audits of LCEs
- 14. Way Forward • Deadline for comments is September 12, 2019(survey will stay open until then) • The IAASB’s Working Group set up for this purpose will analyze the responses and make recommendation for a way forward for IAASB discussion in early 2020 • A feedback statement will be published setting out a summary of the respondent’s views to the Discussion Paper and the survey Page 14
- 15. Planned Outreach Activities Article Article published about the matters covered within the Discussion Paper in IFAC’s Knowledge Gateway. Online Survey Conducting an online survey targeted at stakeholders who would not necessarily respond to the formal consultation but from whom the IAASB would like to hear from. Virtual Content Developing virtual content to introduce the Discussion Paper and promote it further through social media engagement (e.g., this webinar) Page 9
- 16. We would like to hear from you! (either responding to the broader Discussion Paper or the online survey) Page 16
- 17. www.iaasb.org For copyright, trademark, and permissions information, please go to permissions or contact permissions@ifac.org. Page 17
Hinweis der Redaktion
- Welcome to the webcast To note that there is a share function on the screen where the slides will be Purpose is to explain where the IAASB is on our journey of thinking about what more we can do relating to audits of less complex entities, so we are not taking questions. However, during the course of the webcast we will be polling on certain matters – these will pop up and we will give participants a minute or two to give us their thoughts. The focus is on AUDIT – not that other engagements are not important but they form a different workstream for the IAASB. For example we are in the process of finalizing our changes to our AUP standard and developing guidance in relation to EER engagements.
- To start, to provide some context, we will run you through the IAASB’s journey to here. There is still much work to be done, but as the roadmap shows it has been a journey for us. Starting in 2002, as the ISAs were “clarified” – there was a focus on drafting in a consistent way using principles to be followed. As part of the redraft, in the application material separate paragraphs were added for focused considerations for smaller entities, which still remain in the ISAs today. The post implementation review of the clarified ISAs included a specific focus on the impact of applying the new and revised ISAs for audits of SME’s through a survey carried out over two years. The findings from the survey found that the introduction of the clarified ISAs had a positive impact on the work , in particular in relation to audit planning and quality control. There was also more focus on risk, and it was also noted that this helped the recommendations made to management. However, it was noted that documentation was an issue. This feedback, together with other things learned during this post-implementation review have informed many of the projects we are doing today. In early 2015 an informal group was set up by the IAASB to start looking into issues related to audits of SMEs. This group eventually morphed into the current working group who are considering these matters. In 2017 the IAASB arranged a first global working conference focusing on the needs of SMP’s, including both audit and other services. This conference was attended by over 100 people from more than 23 countries. In early 2018, the IAASB discussed the work of its ‘informal’ working group, as well as the matters discussed at the Paris conference I an executive session, and agreed to more formally establish a working group to gather information about what should be done. This working group developed the Discussion Paper we will explain on this webcast, and also arranged a second working conference in Paris to also discuss the May Paris conference. The discussion and views expressed in Paris will be combined with the responses to the more formal consultation, as well as the survey, and will be used by the IAASB to help it decide on a way forward. In the background of all of this, the IAASB has continued to, and continues to, think about scalability and proportionality of its standards, as well as its standards for other types of engagement performed by SMPs. However, as noted that is of the focus of this webcast – rather we will be looking at the Discussion Paper.
- We have issues a Discussion Paper and are looking for views from our stakeholders as that will help us to decide on the best way forward WE haven’t yet decided what we will do – although we do recognize that something needs to be done. We are particularly looking for views from people using the ISAs day-to-day, as this will really help us to understand where the issues are and what the preferred course of action might be. If the DP is too much, we still want to hear from you – we have a much shorter survey (will provide details at the end) so that may be an alternative option fro us to get your views. But sometimes the explanations of why help so we do encourage to respond to the DP
- Poll Question 1 Which stakeholder group do you primarily represent? Public Practice IFAC Member Organization Preparer of Financial Statements Regulator or Audit Oversight Body Other
- Firstly – why do we refer to LCE rather than an SME? As we have had our discussions, and heard from others, the more clear it has become that it is not necessarily about size. Rather, its about complexity. For example there are many small entities that can be very complex. And at the same time, there could be many medium sized entities that are relatively simple. So we have changed our way of thinking about size, and rather refer to “less complex entities.” Next we have to describe what we mean. We are not yet sure what the outcome of this work will be so not sure yet what this description will be used for, or how. But we do need to have an idea of the types of entities we are thinking about. In our current ISAs, we describe a “smaller” entity – when looking at this we realized its not actually about size but rather describes the characteristics of a smaller entity – we agreed this was a good starting point and we would use this for now and make changes as necessary as the project advances. Therefore, as part of this consultation we are asking questions about whether this description is appropriate or not, what people’s views are, and is there something better to describe these types of entities. There is a specific question in the DP covering this.
- We have learned much in our work to date, including the vast spectrum of things influencing audits of LCE’s (its not just the standards!) As context we have set out the various challenges impacting auditors today, including those things that are not in our control. So we have scoped out various things (although recognizing them in the paper it is not within the IAASB’s remit as a global standard-setter – provide the examples in the DP (listed in the blue box above) As said earlier, the focus of this work is on AUDIR, so we have also scoped out other engagements (mention thigs in green box above) Its not to say we will completely ignore these things – obviously they play an important role in the environment, and the IAASB will think more about how it can influence others to perhaps address some of these other things.
- Poll Question 2 Are there questions being asked about the value of an audit in your jurisdiction? Yes No Don’t Know
- We also set out those challenges that are within our control and within the scope of this project – i.e. those challenges we will focus on addressing Talk about each of the bullet points in the orange box above – see DP for talking points
- There are lots of things that can be done. Some are easier than others, some will take a short time while others will take a long time. The Discussion Paper sets out some initial thoughts about what each of these could involve. Its very high-level but does describe the various options available to the IAASB Its also not necessarily only one thing. It may be a combination or aspects of each. What we are looking for is the views of our stakeholders in relation to each – why would you prefer some over others, or why would some options not work? All of this will help us better understand where we are going, and make a better informed decision that will appropriate for our stakeholders globally. Talk a bit about each option on this and next slide – see DP for talking points – here a few: Greater focus on more clearly setting out what the auditor needs to do Setting out the basic requirements for all audits then expanding as needed to address more complex circumstances (building-blocks approach) Featuring more scalability and proportionality considerations in the application material Including considerations specific to audits of less complex entities in a separate section within each ISA
- Important to remind participants that we are only thinking about whether this may be an option at this stage, definitely no commitment yet but we are very aware that many different jurisidictions are thinking about this (as well as those who have already developed a new alternative standard such as France, Belgium, Sri Lanka). Describe what this could be – unlikely to have application material so may mean that still need some kind of guidance in the form of a separate guide. Would also take you back into the “big” ISAs if something no covered and the entity has
- Poll Question 3 Has there been discussions in your jurisdiction about addressing the complexity of the ISAs by introducing a regional initiative? Yes No Don’t Know
- This will likely be in addition to one of the other two This is an area the IAASB already does – but more information abut specifically what is needed will be helpful. Our new strategy will focus on this area so we will continue to develop guidance, but we are also limited about how much we can provide (limited resources and capacity). It is probably also worth mentioning the IFAC Guide to Using ISAs in Audits of SME’s – to create awareness for those that might not know it exists.
- Poll Question 4 Which potential possible IAASB action should be pursued as a priority? Revising the ISAs to make the auditor’s work effort clearer Developing a separate auditing standard for audits of less complex entities Developing guidance for auditors of less complex entities or other related actions
- To sum up – we are looking for your input – deadline (as a reminder) is 12 Sep (for the survey too) All of the input from the survey, the responses to the DP and our outreach (including the second Paris conference) will be summarized in a feedback statement expected to be published in early 2020. We received a question before the webcast asking about the timing of this project: All of this information will be used by the Working Group to develop recommendation for the IAASB which will be discussed in March 2020, and after that the IAASB will begin work on its preferred course of action. As we don’t know what we will be doing yet means we can’t be more definitive than that.
- We have some other references where we discuss this DP There is an summarized article in English, Spanish and French on IFAC’s Gateway We have a survey that asks some of the questions in a “survey format” – after this webcast the link to the survey, as well as the Discussion Paper, will be sent to all participants (but can also be found on the IAASB’s website). To date we have over 800 responses and look forward to receiving many more (the survey is also in English, Spanish and French) The DP itself is also published in English, Spanish and French The webcast is in English Monday, French on Tuesday and Spanish on Wednesday., But if you missed ay of these the webcast will be published on the IAASB’s website (IAASB.org) in the next couple days.
- Thank you for joining us today and we look forward to hearing from you