Back in the 1980s when many of today’s senior partners started their training, there were just a handful of auditing standards and guidelines. Back then, nearly 99% of UK companies required audits – but now a similar percentage is audit-exempt, including most smaller entities.
Of course, many exempt companies still have an audit anyway, and auditing standards still matter to smaller entities in practice as well as in theory.
Standard-setters assert that their standards are intended to scale in both directions – but there are concerns about both whether they can really cope with the world’s largest financial institutions, and whether they work for smaller audits.
It’s not really clear where standard-setters start from when revising standards, but one thing is: they’ve long resisted calls to ‘think small first’.
Assuming that most smaller entities are audit-exempt and writing standards based on larger entity audits has other implications: it risks creating a two-tier profession, more limited choice in the audit market, and difficulties for accountants moving between larger and smaller firms.
In a recent ACCA paper, Thinking Small First, the Head of Audit and Assurance Andrew Gambier argues that auditing standard-setters should think small first when developing standards, but on a prospective basis, to future-proof them while avoiding the need to dismantle existing standards.
What’s being done
While the IAASB has made efforts to tackle the issue of scalability for smaller audits, some concerns remain. Now, it is to develop a Discussion Paper ‘setting out the perceived challenges and difficulties when undertaking an audit of less complex entities’.
This is an important development. IAASB has struggled for years to get details of which specific requirements cause trouble for auditors of smaller and less complex entities. The problem is partly because it is the overall scale of the issue, rather than particulars, causing trouble – a much harder issue to address.
The consultation will address ‘less complex entities’, the reason being that IAASB says less complex entities ‘may be broader’ than just small entities, and include some medium-sized entities.
- a risk that ‘jurisdictional developments’ may lack consistency, and undermine confidence in audit, and particularly ISAs in the SME and less complex audit environment
- increasing levels of audit exemption and a corresponding reduction in the number of smaller firms performing audits
- that the recent exposure draft ISA 315 on risk assessment referred to ‘smaller and less complex entities’
Among other things, the consultation will explore why some believe that ISAs can “inhibit or not promote audit quality in the context of the audits of SMEs and less complex audits.”
In particular, it will explore whether there are ‘alternative ways of obtaining a reasonable assurance audit opinion’ without the ISAs as currently written. Which might mean a separate standard for less complex entity audits.
The paper will be issued in April 2019 for public consultation, with a feedback statement in October 2019. Watch this space.
For even more detailed audit guidance, including updates and commentary on developments as they happen, see Croner-i’s range of tax, accounting, and audit products.