21 February 2023

Is this project that we have all eagerly anticipated actually going to happen? It appears so. I recently attended an IFAC webinar (recording is here) that explained the latest developments.

I wrote about this back in 2021 when the draft standard was released. It seems that there has been a bit more clarity as to the application of the standard.

Originally groups were to be excluded from the scope of the standard, however, common sense has now prevailed and groups that meet LCE criteria may now be included. Using component auditors will be acceptable, as components don’t necessarily equate to complexity. An additional section has been added to the original exposure draft discussing the application to components and groups.

The webinar participants reiterated that the standard does not give a lesser level of assurance than a full ISA audit, and audit reports will be essentially unchanged. The standard focuses on core procedures and does not include much explanatory information. It is designed to follow the flow of an audit. It also uses more direct language than the ISAs.

Concerns had been expressed that there seemed to be too much judgment required in whether the standard could be applied. To clarify the scope, the IAASB has agreed to enhance the description of the qualitative characteristics of an LCE and will include an expectation for jurisdictions to determine quantitative thresholds, I assume in terms of say turnover, assets, staffing, or ownership complexity.

Since the LCE standard was proposed, we have had the new ISA 315 (revised 2019). This focus on risk identification and assessment has also flowed through to the LCE standard, with some revision of Part 6 to make it align more with the approach of ISA 315 (revised 2019).

Finally, when can we expect to enter this audit utopia? The finalisation date for the international standard is December 2023. It is then just a matter of how proactive the XRB and other key NZ stakeholders will be in adding any quantitative thresholds and releasing it into the wilds of Aotearoa.

This is going to be a game changer for auditors in NZ, as most of the work we do should fall into the scope of the LCE standard, and most charities and not-for-profits will have fit-for-purpose standards and not have to use auditing standards designed for multinational corporates. Auditors will be partying in the streets when this new standard is released.