Canada’s Decision to Not Adopt the International Standard for Audits of Less Complex Entities

From FRAS Canada

In September 2023, the International Auditing and Assurance Standards Board (IAASB) approved a new stand-alone standard for audits of less complex entities (LCE): the International Standard on Auditing (ISA) for Audits of Financial Statements of LCE (known as the ISA for LCE).

Over the course of the IAASB’s project we:

  • established our Audits of LCE Advisory Group to support us in reviewing and responding to materials issued by the IAASB;
  • monitored the IAASB’s progress and provided input on meeting agenda papers to the IAASB members from Canada;
  • consulted extensively with interested and affected parties in Canada, through a Discussion Paper on the IAASB’s Exposure Draft of the ISA for LCE (for details on who we talked to and what we heard, read our progress report); and
  • submitted response letters to the IAASB.

We considered adopting the ISA for LCE in Canada.

While our policy is to adopt the IAASB’s International Standards on Auditing and International Standards on Quality Management, our decisions whether to adopt other international standards the IAASB issues, like the ISA for LCE, are made on a case-by-case basis. Such decisions are based on whether we believe the international standard would meet the needs of interested and affected parties in Canada and serve the Canadian public interest.

To inform our decision, in addition to considering the feedback and activities undertaken throughout the IAASB’s project, after the IAASB approved the ISA for LCE, we:

  • assessed whether the ISA for LCE would address auditors’ concerns with applying the Canadian Auditing Standards (CASs) to audits of LCEs; and
  • met with representatives from other national auditing standard setters to hear their views on the ISA for LCE, including whether they plan to adopt it in their jurisdictions.

After careful consideration, we decided not to adopt the ISA for LCE in Canada.

In our view, the ISA for LCE would not adequately meet the needs of interested and affected parties in Canada and serve the Canadian public interest. We believe this to be the case for the following reasons:

  • The specific aspects of the ISAs, identified by auditors as challenging to apply in audits of LCEs in Canada, have not been sufficiently tailored for such audits to facilitate the potential of a widespread application of the ISA for LCE in Canada.
  • We continue to have concerns around the public interest implications of having two sets of auditing standards considering the limited benefits expected.

What We Are Doing Now

Our decision not to adopt the ISA for LCE does not mean that our work is done.

In our 2024-2025 Annual Plan, we have committed to:

  • explore a Canadian solution to address the challenges that auditors face in applying the CASs to audits of LCEs, seeking views from interested and affected parties; and
  • continue to provide input to the IAASB on all current ISA projects on whether proposed revisions effectively deal with scalability and proportionality for an entity’s less complex elements.

We currently have a project to revise CAS 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. As part of this project, we are considering whether the revisions effectively address scalability and proportionality for audits of LCEs. The IAASB recently issued an Exposure Draft proposing revisions to ISA 240. In our corresponding Exposure Draft, we identified the requirements in CAS 240 that we heard pose challenges in audits of LCEs. We asked questions on whether the IAASB’s proposals will effectively address these challenges. Also, we are conducting field testing with auditors in Canada who perform audits of LCEs to delve deeper into these challenges and explore how they could be addressed.

Another standard that poses challenges in audits of LCEs is CAS 315, Identifying and Assessing the Risks of Material Misstatement. CAS 315 was recently revised and became effective for audits of financial statements for periods beginning on or after December 15, 2021. CPA Canada, with the support of our staff, developed a comprehensive Implementation Tool for Auditors with tips for implementing revised CAS 315. The focus of this Tool is to emphasize the scalability of the standard with a focus on audits of LCEs. We will consider the effectiveness of this tool in helping auditors apply CAS 315.

Assistance that Is Available Now

CPA Canada develops non-authoritative guidance to help practitioners in applying the CASs to audits of LCEs. CPA Canada’s Audit and Assurance Summary Resource Guide summarizes the resources to help you understand the implementation and application guidance available. In addition to the Implementation Tool document referred to above, in November 2023, CPA Canada issued Frequently Asked Questions on CAS 315 and the auditor’s responsibilities for general information technology controls.

Auditors may also wish to refer to:

Keep Up to Date

You can follow our progress on this work by referring to our project page.

We are interested in hearing your questions and comments. Email us directly.