Auditing standards – should one size fit all?

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By Anne Adrain, ICAS

28 May 2018

The concerns over whether the current International Standards on Auditing (ISAs) remain relevant for small or non-complex entities have been around for several years.

To stimulate discussion and debate on this issue, Accountancy Europe has published a Cogito paper: Simplifying auditing standards for small or non-complex entities

The issues raised within the paper, and the proposed solutions, will be discussed at an event in Brussels later today.

The paper highlights the contribution that small entities make to the global economy and emphasises how important it is that the financial statements produced by these entities can be considered reliable.

Increasingly, the ISAs have tended to focus on the issues affecting listed and more complex entities as a means of maintaining the stability of the capital markets.

However, this presents a challenge for auditors of small and non-complex entities as the current ISAs have become very lengthy and, in some cases, less relevant to the issues that the auditors of these entities face.

The paper sets out some of the difficulties and challenges when applying the ISAs in the small/non-complex environment which include:

• The increasing length of the requirements and application material within the ISAs.
• The lack of scalability or proportionality of the ISAs.
• The ISAs appear to have become less ‘principles-based’ and more reliant on a compliance mindset leaving less room for professional judgment.

Across Europe, some countries have already started to adapt the ISAs at a national level by producing additional guidance or specific auditing standards for SMEs.

This indicates that there is a need to tackle this issue at a global level. More pressure is being placed on the International Auditing and Assurance Standards Board (IAASB) to examine how the ISAs can be applied to small and non-complex entities.

The final section of the Accountancy Europe paper proposes some possible solutions for further discussion and deliberation. These proposed solutions comprise:

• Building a solution within the ISAs: This could take the form of additional guidance on the application of the ISAs to small or non-complex entities. Alternatively, a think-small first approach could be adopted to the standard-setting process.
• Developing a standalone standard: This could be a single standard that results in the same objective as the current audit but moves away from a compliance approach to one that requires greater application of professional judgement.
• Making greater use of technology: The use of technology and data analytics could be more effectively embedded in the standard-setting process enabling greater application of technology during the audit process.