The Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) released the Exposure Draft of the Standard on Auditing for Financial Statements of Less Complex Entities (SA for LCE) on July 26, 2024, inviting public comments. This draft aims to provide a tailored auditing approach for less complex entities, ensuring high-quality audit engagements through professional judgment and skepticism. The draft outlines responsibilities of auditors, management, and those charged with governance, emphasizing compliance with legal and regulatory requirements. Stakeholders are encouraged to submit comments by September 9, 2024, either via email or postal mail, providing specific feedback on the draft’s paragraphs and suggesting alternative wording where applicable. The SA for LCE is designed to enhance confidence in financial statements by ensuring they are free from material misstatements, whether due to fraud or error. The draft includes comprehensive guidelines covering audit evidence, documentation, quality management, and special considerations for using another auditor’s work.
Auditing and Assurance Standards Board
The Institute of Chartered Accountants of India
26th July, 2024
Exposure Draft of Standard on Auditing for Audits of Financial Statements of Less Complex Entities (SA for LCE)
The Auditing and Assurance Standards Board (AASB) of ICAI has issued the Exposure Draft of SA for LCE for public comments. The Exposure Draft may be downloaded from the following link:
https://resource.cdn.icai.org/81255aasb65479.pdf
Invitation to comment AASB invites comments from various stakeholders on the Exposure Draft.
Comments are most helpful if they indicate the specific paragraph(s) to which they relate, contain a clear rationale and, where applicable, provide a suggestion for alternative wording.
How to submit Comments
Comments on the Exposure Draft may be submitted through any of the following modes.
| 1. Email | aasb[at]icai[dot]in |
| 2. Postal: | Secretary, Auditing and Assurance Standards Board The Institute of Chartered Accountants of India ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi- 110002 |
Last date for submitting comments on the Exposure Draft is 9th September 2024
Preface to the SA for LCE
P.1. This standard (i.e., the SA for LCE) has been designed to achieve reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, for audits of financial statements of less complex entities (LCEs). The standard has been developed to reflect the nature and circumstances of an audit of the financial statements of an LCE and result in the consistent performance of a quality audit engagement. This standard is premised on the basis that the firm is subject to SQM 11. A quality audit engagement is achieved by planning and performing the engagement and reporting on it in accordance with professional standards and applicable legal and regulatory requirements. Achieving the objective of this standard involves exercising professional judgment and maintaining professional skepticism.
P.2. This standard is written in the context of an audit of a complete set of general purpose financial statements of an LCE as contemplated in Part A. It may also be adapted as necessary in the circumstances of the engagement to an audit of a complete set of special purpose financial statements, or an audit of a single financial statement or of a specific element, account or item of a financial statement, only if the entity is an LCE as set out in Part A.
P.3. When an audit engagement is undertaken using this standard, the Standards on Auditing do not apply to the engagement.
P.4. Part A sets out the definition of LCE and the applicability of SA for LCE thereon.
P.5. This standard does not override local law or regulation that governs audits of financial statements. The SA for LCE does not address the responsibilities of the auditor that may exist in legislation or regulation. Such responsibilities may differ from those established in this standard and it is the responsibility of the auditor to ensure compliance with all relevant legal, regulatory, or professional obligations.
The Applicable Financial Reporting Framework
P.6. The financial statements subject to audit are those of the entity, prepared by management of the entity with oversight from those charged with governance. Law or regulation may establish the responsibilities of management, and those charged with governance, in relation to financial reporting. This standard does not impose responsibilities on management or those charged with governance and does not override law or regulation that govern their responsibilities. However, an audit in accordance with this standard is conducted on the premise that management, and where appropriate, those charged with governance have acknowledged certain responsibilities that are fundamental to the conduct of the audit. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities.
Management’s and Those Charged with Governance’s Responsibilities for Preparation of the Financial Statements
The extent of management’s responsibilities, or the way that they are described, may vary.
While there may be differences in the extent of those responsibilities or how they are described, an audit in accordance with this standard is conducted on the premise that management, and where appropriate, those charged with governance, have acknowledged and understood that they have responsibility:
- For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant, their fair presentation;
- For such internal control as management, and where appropriate, those charged with governance determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and
- To provide the auditor with unrestricted access to all information of which they are aware that is relevant to the preparation of the financial statements, additional information the auditor may request, and unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.
P.7. The applicable financial reporting framework often encompasses financial reporting standards established by an authorized or recognized standard setting organization, or legislative or regulatory requirements.
P.8. The requirements of the applicable financial reporting framework determine the form and content of the financial statements. Although the framework may not specify how to account for or disclose all transactions or events, the framework ordinarily embodies sufficiently broad principles that can serve as a basis for developing and applying accounting policies consistent with the framework’s concepts underlying the requirements.
P.9. Some financial reporting frameworks are fair presentation frameworks, while others are compliance frameworks. This standard covers both frameworks. The term “fair presentation framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and:
(a) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or
(b) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.
The term “compliance framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (a) or (b) above.
An Audit of Financial Statements
P.10. The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. As the basis for the auditor’s opinion, this standard requires the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
P.11. Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level. However, reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.
Inherent Limitations of an Audit
Audit risk is a function of the risks of material misstatement and detection risk. The assessment of risks of material misstatement is based on audit procedures to obtain information necessary for that purpose and evidence obtained throughout the audit. The assessment of risks of material misstatement is a matter of professional judgment, rather than a matter capable of precise measurement.
Because of the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with this standard. Accordingly, the subsequent discovery of a material misstatement resulting from fraud or error does not by itself indicate a failure to conduct an audit in accordance with this standard. However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less than persuasive audit evidence.
Format of the SA for LCE
P.12. The SA for LCE includes:
(a) Part A, which sets out the definition of LCE and the applicability of SA for LCE thereon.
(b) Part 1, which sets out the fundamental concepts, general principles and overarching requirements to be applied throughout the audit.
(c) Part 2, which sets out the general requirements for audit evidence and documentation, as well as the overall objective of the audit.
(d) Part 3, which sets out the auditor’s and engagement partner’s obligations and responsibilities for quality management in an audit of an LCE.
(e) Parts 4 to 9, which follow the flow of an audit engagement, and set out the detailed requirements for the audit. Each of these Parts also includes specific communication and documentation requirements as necessary.
(f) Part 10, which sets out the special considerations that may apply where an auditor, reporting on the financial information of an entity, uses the work of another auditor with respect to the financial information of one or more components included in the financial information of the entity.
(g) Appendices, which include the glossary of terms used in this standard, assertions, an illustrative engagement letters and an illustrative representation letter, as well as other relevant supporting materials for implementation of the requirements within this standard.
P.13. The content of Parts 1–10 includes: Parts 1–10
(a) Introductory material in a separate box setting out the content and scope of that Part (but does not create any additional obligations for the auditor).
(b) Objective(s), which link the requirements of that Part and the overall objective of the audit.
(c) Requirements to be met, except where the requirement is conditional, and the condition does not exist. Requirements are expressed using “shall.”
(d) Essential explanatory material (EEM) designed to provide further explanation relevant to a sub- section or a specific requirement. All EEM is presented in italics within separate blue boxes. There are two types of EEM: general introductory EEM that explains the context of the section that follows, and EEM specific to the requirement directly above it.
Certain requirements and EEM are only applicable when there are engagement team members other than the engagement partner. Such requirements and EEM are presented in a box with the header “Considerations When There Are Members of the Engagement Team Other Than the Engagement Partner”.
P.14. Definitions, describing the meanings attributed to certain terms for the purpose of this standard, can be found in the Glossary of Terms in Appendix 1. The definitions assist in the consistent application and interpretation of the requirements, and are not intended to override definitions that may be established for other purposes, whether in law or regulation.
Note:-
1 Standard on Quality Management (SQM) 1, Quality Management for Firms that Perform Audits or Reviews for Financial Statements, or Other Assurance or Related Services Engagements
