Basis for Conclusions

Prepared by the Staff of the IAASB

December 2023

International Standard on Auditing

International Standard on Auditing for

Audits of Financial Statements of Less
Complex Entities (ISA for LCE)

Including Conforming Amendments to

Other International Standards
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

About the IAASB

This document has been prepared by the Staff of the International Auditing and Assurance Standards Board
(IAASB). It does not constitute an authoritative pronouncement of the IAASB, nor does it amend, extend or
override the International Standards on Auditing (ISAs) or other of the IAASB’s International Standards.

The objective of the IAASB is to serve the public interest by setting high-quality auditing, assurance, and
other related services standards and by facilitating the convergence of international and national auditing
and assurance standards, thereby enhancing the quality and consistency of practice throughout the world
and strengthening public confidence in the global auditing and assurance profession.
The IAASB develops auditing and assurance standards and guidance for use by all professional
accountants under a shared standard-setting process involving the Public Interest Oversight Board (PIOB),
which oversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides
public interest input into the development of the standards and guidance.

For copyright, trademark, and permissions information, please see page 35.

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

BASIS FOR CONCLUSIONS: INTERNATIONAL STANDARD ON AUDITING FOR

AUDITS OF FINANCIAL STATEMENTS OF LESS COMPLEX ENTITIES
CONTENTS

Page

Section A – Introduction ............................................................................................................................. 5

Background ............................................................................................................................................... 5

Exposure Draft of Proposed ISA for LCE .................................................................................................. 6

Exposure Draft of Proposed Part 10, Audits of Group Financial Statements of the Proposed ISA for
LCE ........................................................................................................................................................... 6

Public Interest Issues ................................................................................................................................ 7

Section B – Reasonable Assurance ........................................................................................................ 11

Background ............................................................................................................................................. 11

Summary of Comments Received on Exposure ..................................................................................... 12

IAASB Decisions ..................................................................................................................................... 12

Section C – Standalone Nature of the ISA for LCE ................................................................................ 12

Background ............................................................................................................................................. 12

Summary of Comments Received on Exposure ..................................................................................... 13

IAASB Decisions ..................................................................................................................................... 13

Section D – Authority................................................................................................................................ 14

Background ............................................................................................................................................. 14

Summary of Comments Received on Exposure ..................................................................................... 14

IAASB Decisions ..................................................................................................................................... 16

Section E – Proportionality of the Standard .......................................................................................... 18

Background ............................................................................................................................................. 18
Summary of Comments Received on Exposure ..................................................................................... 18

IAASB Decisions ..................................................................................................................................... 20

Section F – Group Audits ......................................................................................................................... 23

Background ............................................................................................................................................. 23

Summary of Comments Received on Exposure ..................................................................................... 23

IAASB Decisions ..................................................................................................................................... 24

Section G – Other ...................................................................................................................................... 25

800-Series ............................................................................................................................................... 25

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Relevant Ethical Requirements and Firm-level Quality Management .................................................... 25

Engagement Letter .................................................................................................................................. 26

Going Concern ........................................................................................................................................ 26

Materiality ................................................................................................................................................ 27
Responding to Assessed Risks of Material Misstatement ...................................................................... 27

Subsequent Events ................................................................................................................................. 29

Reporting ................................................................................................................................................. 30
Re-Exposure ........................................................................................................................................... 31

Section H – Conforming Amendments ................................................................................................... 32

Section I – Effective Date ......................................................................................................................... 33

Section J – Maintenance .......................................................................................................................... 34

Background and Summary of Comments Received on Exposure.......................................................... 34

IAASB Decisions ..................................................................................................................................... 34

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

The Staff of the IAASB has prepared this Basis for Conclusions. It relates to but does not form part of the
ISA for LCE, or the conforming amendments to other International Standards.

The ISA for LCE and the conforming amendments to other International Standards were approved at the
September 2023 IAASB meeting with affirmative votes of 17 out of 18 IAASB members.1

Section A – Introduction

Background

1. Between 2005–2009 the ISAs were clarified and revised with a view to being applied to audits of
entities of all sizes and complexity. As part of the post-implementation review (which was completed
in 2013), the IAASB conducted a survey that highlighted a number of concerns around the scalability
and proportionality of requirements within the ISAs, and the nature and extent of documentation
required.

2. In considering the findings from the post-implementation review, the IAASB acknowledged that the
volume and complexity of the standards may result in challenges for audits of less complex entities
(LCEs). Accordingly, the IAASB recognized in its Strategy for 2015–2019, that in order to achieve
effective implementation globally, its standards need to be, and be seen to be, proportionate and
scalable for audits of all sizes and complexity.

3. Following the initial work of Staff and an informal group of present and past Board members and
other external experts at different times during 2017–2018, an IAASB Working Group was
established at the start of 2019 to progress the development of a Discussion Paper as part of the
Board’s information gathering and research on the topic of applying the ISAs to audits of financial
statements of LCEs, including a focus on the scalability and proportionality of requirements in the
ISAs. The Discussion Paper, Audits of Less Complex Entities: Exploring Possible Options to Address
the Challenges in Applying the ISAs was published in April 2019. The matters noted in the responses
to the Discussion Paper were summarized in a Feedback Statement.

4. Based on the feedback received on the Discussion Paper and further targeted outreach, the Board
decided in June 2020 that its further work will benefit from bifurcating and focusing efforts in specific
areas and agreed to two workstreams:

(a) An ‘ISA Focused Workstream’ focusing on the complexity, understandability, scalability and
proportionality (CUSP) issues identified in the ISAs more broadly, to address challenges that
have been identified in applying the ISAs, for audits of all types of entities, including audits of
LCEs; and
(b) A ‘Separate Standard Workstream’ exploring the development of a separate standard to focus
on audits of LCEs.

5. In December 2020, the Project Proposal for the workstream to develop a separate standard was
approved by the IAASB.2 It was agreed that the project is intended to serve the public interest by:

(a) Maintaining confidence in financial reporting of LCEs.

1
For a full record of the voting on the ISA for LCE, including the rationale of the IAASB member who abstained from the vote, see
https://www.iaasb.org/meetings/iaasb-quarterly-board-meeting-september-18-21-2023.
2
At the time of approval of the Project Proposal, the Working Group for the separate standard became the LCE Task Force, which
took the project forward.

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INTERNATIONAL STANDARDS

(b) Helping auditors of LCEs undertake a consistent, effective and proportionate approach to
producing high-quality audits.

(c) Being responsive to stakeholder needs – to address a growing and consistent call for an
appropriate solution to the challenges of proportionality and scalability in the ISAs.
(d) Promoting a more consistent application of the auditing standards to audits of LCEs particularly
where alternative approaches are emerging.

Exposure Draft of Proposed ISA for LCE

6. At its June 2021 meeting, the IAASB approved the Exposure Draft of Proposed ISA for LCE (ED-ISA
for LCE). During the development of the draft standard the IAASB leveraged an international ”LCE
Reference Group,” comprised of representatives from the LCE community across a broad range of
jurisdictions, in order to receive real-time stakeholder feedback.

7. ED-ISA for LCE was issued on July 23, 2021, and closed for comment on January 31, 2022. During
the exposure period, the IAASB undertook various outreach activities and also developed a survey
in collaboration with International Federation of Accountants (IFAC) to offer an alternative way to
participate in the consultation. Together with the ED-ISA for LCE, the IAASB published non-
authoritative guides on the Authority of the Standard (the Authority Supplemental Guide) and
Reporting (the Reporting Supplemental Guide), and mapping documents.3

8. In total, 145 comment letters were received on ED-ISA for LCE, including from regulators and audit
oversight authorities, jurisdictional/ national auditing standard setters (NSS), accounting firms, public
sector organizations, professional accountancy and other professional organizations, academics,
and individuals. Responses were received from two Monitoring Group members.4

9. In May 2022, the IAASB held the third and final Paris conference to discuss and explore how to move
forward in progressing the ISA for LCE. The event produced great discussions on the feedback to
the ED-ISA for LCE and possible options for moving forward. Over 130 people from more than 30
countries joined the conference either in person in Paris or virtually and afterwards the IAASB issued
a publication highlighting the key takeaways.5

Exposure Draft of Proposed Part 10, Audits of Group Financial Statements of the Proposed ISA for LCE

10. In the ED-ISA for LCE, audits of group financial statements (group audits) were excluded from the
scope of the standard. This was done because the IAASB, on balance, had the view that group audits
inherently exhibited characteristics of complexity within an entity and, consistent with other areas of
complexity, had not been contemplated in the design of the standard. The IAASB was open to
reconsider the decision to exclude group audits based on stakeholder feedback and included a

3
The mapping documents illustrated how the requirements from the ISAs have, or have not, been incorporated within the ED-ISA
for LCE.
4
The Monitoring Group comprises the Basel Committee on Banking Supervision, the European Commission, the Financial Stability
Board, the International Association of Insurance Supervisors, the International Forum of Independent Audit Regulators (IFIAR),
the International Organization of Securities Commissions (IOSCO) and the World Bank. Responses to ED-ISA for LCE were
received from IFIAR and IOSCO.
5
Feedback from the comment letters to the ED-ISA for LCE, together with responses to the online survey and input from the third
Paris conference, were considered in the Board’s deliberations post-exposure in revising and finalizing the text of the standard.
Board materials and minutes of meetings are available on the Audits of LCEs project webpage.

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

specific question in the ED-ISA for LCE regarding whether group audits should be excluded from (or
included in) the scope of the ISA for LCE.

11. Respondents to the ED-ISA for LCE along with participants of outreach activities expressed strong
support for the inclusion of group audits. Therefore, the IAASB reconsidered its decision to exclude
group audits from the scope of the ED-ISA for LCE, and in its June 2022 meeting the IAASB decided
to include group audits in the scope of the ISA for LCE. As the ED-ISA for LCE included a specific
prohibition that excluded all group audits, it did not include any requirements or Essential Explanatory
Material (EEM) related to group audits. Therefore, the IAASB subsequently developed requirements
in this area which had not previously been exposed for public comment.

12. At its December 2022 meeting, the IAASB approved the Exposure Draft, Proposed Part 10, Audits
of Group Financial Statements of the Proposed International Standard on Auditing for Audits of
Financial Statements of Less Complex Entities and Proposed Conforming Amendments (ED-ISA for
LCE-Group Audits). ED-ISA for LCE-Group Audits was issued on January 24, 2023, and closed for
comment on May 2, 2023.

13. In total, 60 comment letters were received on ED-ISA for LCE-Group Audits, including from regulators
and audit oversight authorities, NSS, accounting firms, public sector organizations, member bodies
and other professional organizations, and individuals.

Public Interest Issues

14. The table below sets out the key public interest issues identified by the IAASB in the Project Proposal
and describes how they have been addressed in the ISA for LCE.

Key Public Description of Key Principles to Address Identified Key Relevant Part in
Interest Matter Public Interest Matters the ISA for LCE

Maintaining Reasonable Assurance

Confidence in
The ISA for LCE is designed to support the auditor in obtaining a Throughout the
Financial
reasonable assurance opinion in an audit. The concepts and standard
Reporting of
principles used in an ISA audit were used for developing the ISA
LCEs
for LCE.

Authority of the Standard

The scope of the ISA for LCE is clearly set out in the Authority Part A
(Part A) to avoid the unintended use of the standard. The Authority
designates limitations for using the ISA for LCE into three
categories:

• Specific classes of entities for which the use of the ISA for
LCE is prohibited;
• Qualitative characteristics that describe an LCE, and if not
exhibited by an entity would ordinarily preclude the use of
the ISA for LCE for the audit of the financial statements of
that entity; and

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Key Public Description of Key Principles to Address Identified Key Relevant Part in
Interest Matter Public Interest Matters the ISA for LCE

• Quantitative thresholds to be determined by legislative or

regulatory authorities or relevant local bodies with standard-
setting authority in each jurisdiction.
In determining the appropriate use of the ISA for LCE, all three
categories are to be considered.

Qualitative standard-setting characteristics: 6 The overall outcome of reasonable

assurance and the Authority of the standard encapsulate completeness in reflecting
the results of the broad information-gathering, outreach and consultations that
informed the project and consistency with the priorities established to undertake the
project based on the assessment of public interest and stakeholder needs. In addition,
the scope of the standard is designed to support the scalability and proportionality of
the ISA for LCE by clearly describing the typical nature and circumstances of an LCE.

Helping Risk-Based Approach

Auditors of
A risk-based approach is taken by incorporating basic concepts Part 1 to Part 10
LCEs
used in the ISAs, including:
Undertake
Consistent, • The use of objectives;
Effective, and • Using the core ISA requirements and concepts as a base
High-Quality for establishing the work effort of the auditor;
Audits
• The need to obtain sufficient appropriate audit evidence to
support the audit opinion;

• The use of materiality to focus the auditor’s efforts and to

evaluate misstatements; and

• Using the audit risk model (i.e., applying the concepts of

inherent risk, control risk and detection risk).

Professional Judgment and Professional Skepticism

The underlying concept of professional judgment and professional Throughout the

skepticism applies in the same way as it would in an ISA audit. standard
Some of the changes made to the ISAs to enhance the auditor’s
exercise of professional skepticism, for example around

6
The Project Proposal for the development of the ISA for LCE was approved in December 2020 and preceded action by the IAASB
to commence implementing the Public Interest Framework that was published as part of the Monitoring Group recommendations
(July 2020), Strengthening the International Audit and Ethics Standard-Setting System. Nevertheless, the IAASB has provided
an indication in this table of the qualitative standard-setting characteristics of the Public Interest Framework that are of most
relevance to the standard-setting actions in relation to each of the key public interest matters. This does not follow to same format
or level of detail than in projects that were approved in 2021 or thereafter for the reason stated.

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Key Public Description of Key Principles to Address Identified Key Relevant Part in
Interest Matter Public Interest Matters the ISA for LCE

corroborative or contradictory audit evidence, have also been

incorporated within the ISA for LCE.

Relevant Ethical Requirements and Quality Management

The ISA for LCE has been developed: Part 1 and Part 3

• Requiring that the auditor comply with relevant ethical

requirements, including those pertaining to independence,
for financial statement audit engagements.

• On the basis that the auditor performing the engagement is

a member of a firm that is subject to the IAASB’s ISQMs, 7
or national requirements that are at least as demanding.

Qualitative standard-setting characteristics: The above approach applied, and the

matters addressed provide an appropriate foundation to ensure relevance through the
development of principles-based requirements to enable the overall objectives of the
auditor to be achieved, and in maintaining coherence with the overall body of the
IAASB standards, in particular with ISAs.

Being Separate Standalone Standard

Responsive to
The ISA for LCE is developed as a separate standalone standard Throughout the
Stakeholder
focusing on addressing the challenges in applying the ISAs in an standard
Needs
audit of an LCE. The separate standard includes the requirements
for an audit of an LCE based on the core requirements of the ISAs
and presented in a more understandable and straightforward way.

Proportionate Requirements

The requirements in the ISA for LCE have been designed to be Part 1 to Part 10
proportionate to the typical nature and circumstances of an audit
of an LCE and requirements that address complex matters or
circumstances are not included in the ISA for LCE.

Essential Explanatory Material

The ISA for LCE includes guidance as EEM where it has been Throughout the
considered that explanatory material is crucial to support the standard
requirements or concepts used.

7
International Standard on Quality Managements (ISQMs) include: ISQM 1, Quality Management for Firms that Perform Audits or
Reviews of Financial Statements, or Other Assurance or Related Services Engagements and ISQM 2, Engagement Quality
Reviews. In addition, ISA 220 (Revised), Quality Management for an Audit of Financial Statements, has been used in developing
Part 3 of the ISA for LCE.

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Key Public Description of Key Principles to Address Identified Key Relevant Part in
Interest Matter Public Interest Matters the ISA for LCE

Qualitative standard-setting characteristics: The standalone nature of the standard

supports the clarity of its scope in terms of what should be complied with when the ISA
for LCE is appropriate for use. The scalability and proportionality of the requirements
reflect consistency with identified needs for developing a solution to address the
challenges and issues related to audits of LCEs, while being comprehensive to enable
the achievement of the auditor’s objectives and limiting the extent to which there are
exceptions to principles.

Promoting a Structure of the ISA for LCE

More
The structure of the standard follows the flow of an audit Throughout the
Consistent
engagement by grouping the requirements and related EEM into standard
Application of
“Parts” and placing the “Parts” in order of the flow of an audit
The Auditing
engagement.
Standards to
Audits of The same structure has been used within each Part and each Part
LCEs includes an introductory box, objective(s), requirements, EEM,
specific communication requirements (where applicable) and
specific documentation requirements (where applicable).

Drafting Principles

The ISA for LCE is drafted to present required actions as clear, Throughout the
understandable and stated as simply and concisely as practical. standard
The use of long or multiple layers of bullet lists is avoided as this
may be perceived as a checklist rather than a principles-based
approach. Material that is lengthy, educational or background in
nature has not been included. In addition, the IAASB has focused
on:

• Simpler numbering.

• Limiting the number of “sub-bullets” where appropriate.

• One thought per paragraph.

• Combining requirements from the ISAs where appropriate,

and avoiding repetition.

• Articulating the requirements in a clearer and simpler way

where feasible.

• The CUSP drafting principles and guidelines8 were applied.

8
CUSP drafting principles and Guidelines was developed as another workstream (i.e., ISA Focused Workstream) which addresses
the CUSP issues in relation to the ISAs more broadly in order to address challenges that have been identified in applying the
ISAs, for audits of all types of entities, including audits of LCEs.

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Key Public Description of Key Principles to Address Identified Key Relevant Part in
Interest Matter Public Interest Matters the ISA for LCE

Qualitative standard-setting characteristics: The structure of the ISA for LCE and the
drafting principles applied contribute to clarity and conciseness that enhance
understandability and limit the likelihood of differing interpretations. This, together with
the other actions described in this table, support the implementability of the ISA for
LCE as a global standard for audits of financial statements of LCEs.

Supplementary Guidance

The ISA for LCE will be supported by two supplemental guides: The Authority
Supplemental
• The Authority Supplemental Guide assists with the
Guide
application of the Authority by legislative or regulatory
authorities or relevant local bodies with standard setting The Reporting
authority, firms and auditors. Supplemental
Guide
• The Reporting Supplemental Guide provides further
guidance and examples on modifications to the auditor’s
report, including a number of full illustrative reports. This
guide also addresses changes to the auditor’s report for
emphasis of matter paragraphs, other matter paragraphs,
as well as further guidance as to which reports may be
appropriate in various circumstances.

Section B – Reasonable Assurance

Background

15. The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements of an entity. The auditor achieves this by obtaining sufficient appropriate audit evidence
to reduce audit risk to an acceptably low level in the circumstances of the engagement, and
expressing an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework. Reasonable assurance, in the context
of an audit, provides a high, but not absolute, level of assurance.

16. When developing the separate standard for auditing LCE’s, the IAASB consulted on and discussed
the appropriate level of assurance that would be appropriate for the intended users of the financial
statements of an LCE, including whether another kind of engagement, or a different level of
assurance, should be considered.

17. The IAASB’s stakeholders were of the view that a separate standard should contain requirements
that will result in a reasonable assurance opinion, and that this opinion should be in the form of an
audit opinion. Accordingly, the IAASB’s intentions have been to develop a separate auditing standard
that will enable the auditor to obtain reasonable assurance as a basis to express an audit opinion on
the financial statements, using the concepts and principles used in an audit conducted in accordance
with the ISAs.

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Summary of Comments Received on Exposure

18. There were respondents to the ED-ISA for LCE who were not supporting the development of a
separate standard. It was noted that the existence of a separate standard that provides the same
level of (reasonable) assurance as the ISAs would be confusing for both auditors and users of
financial statements, and in some cases that users may view an audit under the separate standard
as “lower quality” or less robust. Concerns were raised regarding the potential fragmentation of the
audit market (offering “two-tiers” of audits). Both Monitoring Group members that responded to the
ED-ISA for LCE were of the view that the draft standard could cause confusion for stakeholders
(including over what level of assurance is provided) and widen the expectation gap that is perceived
to exist between auditors’ responsibilities and stakeholders’ expectations.
19. Certain respondents who did not support the development of a separate standard also suggested
that the creation of guidance could be an alternative option and that such guidance could utilize the
work already performed on the ED-ISA for LCE as the basis.

20. Respondents were of the view that the ED-ISA for LCE achieved reasonable assurance, but certain
respondents questioned if all the requirements that were included in the ED-ISA for LCE were needed
in an audit of an LCE. In contrast, a regulator and other NSS expressed concern that ED-ISA for LCE
may not achieve reasonable assurance due to certain requirements from the ISAs being omitted, and
due to the lack of comprehensive application material to support implementation of requirements.

IAASB Decisions

21. In its deliberations about whether or not to continue with the project, the IAASB noted that the public
interest issues that were identified through the Discussion Paper and which supported the need for
the project, as described in the Project Proposal (see paragraph 5), would not be addressed if the
project is not completed. When agreeing to the workstream to develop a separate standard, the
IAASB identified an urgent need to have an international solution to address issues related to audits
of LCEs, particularly as jurisdictions increasingly develop their own standards and commence other
initiatives in this area (this ‘fragmentation’ would not be in the public interest).

22. As part of the adoption and implementation support activities for the ISA for LCE, the IAASB is
planning to liaise with IFAC, NSS and professional accountancy organizations, reach out to key
stakeholders, and develop materials which explain the benefit of using the ISA for LCE. This will
include key messages on what the standard aims to achieve, including facilitating the performance
of a high-quality audit that is appropriate in the circumstances of a LCE and enabling the auditor to
issue a reasonable assurance opinion.

23. Regarding the comments on the work performed to reach reasonable assurance as mentioned in
paragraph 20, the IAASB addressed the issues by making changes to the standard based on the
specific comments received (see sections below). For example, being more specific about the scope
of entities for which the standard can be used helped the IAASB to determine the appropriate
requirements for the standard.

Section C – Standalone Nature of the ISA for LCE

Background

24. The IAASB developed the ED-ISA for LCE as a standalone “self-contained” standard. The standard
is separate from the ISAs with no intended need to directly reference back to the requirements or

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INTERNATIONAL STANDARDS

application material in the ISAs in its application. This means that if there is a circumstance that has
not been contemplated in the design of the ED-ISA for LCE as addressed in the Authority of the
standard (Part A), relevant ISA requirements cannot be applied in order to address the circumstance.

25. Also, if matters of complexity not contemplated by the standard have been identified at either the
acceptance and continuance phase or during the audit and the ISA for LCE is no longer appropriate
to use, the audit will need to be transitioned to use the ISAs or other applicable auditing standards.

Summary of Comments Received on Exposure

General

26. There was broad support for the standalone nature of the standard with respondents agreeing with
the approach, or agreeing but noting some concerns that would need to be addressed (this also is in
the context of the matters raised in Section B, above).

Transitioning to the ISAs

27. A Monitoring Group member expressed concern that switching to the ISAs part-way through an audit
might be difficult and may lead to additional time when compared to applying ISAs at the outset of
the audit. The Monitoring Group member also noted concern that auditors would not be able to
identify complex situations without an understanding of the ISAs.

28. Other respondents noted that even where the initial evaluation to use the standard was performed
appropriately, areas of complexity may still be discovered, or occur unexpectedly during the audit,
(e.g., the discovery of an isolated complex accounting estimate) that may not be deemed pervasive
to the complexity of the entity as a whole in that scenario. In that scenario, the auditor would need to
transition to the ISAs, which was viewed as burdensome by respondents.

29. To address the challenges for transitioning to the ISAs respondents suggested:

(a) To allow the use of ISAs or additional “modules.” These modules may contain specific
procedures for a more complex topic or area that could be “added on” where needed. The use
of “modules” will prevent transitioning to the ISAs when subsequent to engagement acceptance
or continuance, one complex item occurs.

(b) To change the Authority with a more clearly defined scope so it will be less likely that the ISA
for LCE is subsequently judged as inappropriate. Also, there were suggestions to make
changes to the Authority so that a single complex issue will not lead to the need to transition
to ISAs.

(c) Additional guidance and clarifications to assist with the transition from the ISA for LCE to the
ISAs. Such guidance and clarifications included differences between the ISA for LCE and ISAs
and the work required in the transition process.

IAASB Decisions
General

30. Consistent with the overall support for the approach expressed by respondents, the IAASB decided
that it is appropriate to develop the ISA for LCE to be a standalone “self-contained” standard (i.e.,
with all the requirements relevant to the typical nature and circumstances of an audit of an LCE
included, and with no intended need to reference back to the ISAs). The IAASB noted this approach

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INTERNATIONAL STANDARDS

would aid understandability of the standard and transparency about its use, and avoid unintended
practical issues as described in the Explanatory Memorandum to the ED-ISA for LCE.

31. The IAASB discussed whether a statement in the ISA for LCE is needed to make clear that referring
to the ISAs for additional guidance to help perform procedures would not be precluded. However, the
IAASB noted that auditors could potentially refer to various sources of guidance in undertaking an
audit engagement. The IAASB is of the view that a statement referring to the ISAs may be perceived
to contradict the objective of creating a standalone standard and could lead to the perception that the
ISAs are a superior source of guidance and therefore decided not to include such statement.

Transitioning to the ISAs

32. The IAASB noted respondents’ comments on allowing reference to the ISAs or additional “modules”
may help the burden to transition to ISAs. As the IAASB decided that it is appropriate for the ISA for
LCE to be a standalone standard, it therefore does not allow the use of the ISAs for matters or
transactions that are not addressed by the ISA for LCE. In addition, to support consistent application
of the standard the IAASB decided not to add “modules.”

33. The IAASB considered circumstances where a single area of complexity may occur that may not be
deemed pervasive to the complexity of the entity as a whole and where, other than for the one area
of complexity, it may still be appropriate to use the ISA for LCE. The IAASB had the view that
accounting estimates are the most common area where this could occur. The IAASB noted that one
or a few complex accounting estimates are not necessarily an indicator of complexity for the entity
more broadly. Therefore, the IAASB updated the Authority regarding accounting estimates in the
entity's financial statements (see Section D – Authority, paragraphs 43, 44 and 51 to 54) and added
requirements related to more complex accounting estimates in the ISA for LCE (see Section G –
Other, paragraphs 117 and 123).

34. Acknowledging respondents’ comments, the IAASB was of the view that guidance is needed to
support the transition from the ISA for LCE to the ISAs. The IAASB noted that this guidance is best
placed in an implementation guide (which is planned to be released in 2024) to keep the ISA for LCE
standalone and succinct.

Section D – Authority

Background

35. The Authority sets out the scope of the standard. To assist in the application of the Authority, the
IAASB has developed the Authority Supplemental Guide.

36. To obtain a balance between being too prescriptive and allowing too much judgment in determining
whether the ISA for LCE is appropriate to use, the IAASB has explained the scope in the Authority of
the ED-ISA for LCE through prohibiting the use of the standard for certain classes of entities (i.e.,
specific prohibitions), and further describing those qualitative characteristics of an entity that would
make the standard inappropriate to use (i.e., qualitative characteristics).

Summary of Comments Received on Exposure

37. Although there was support by respondents that the Authority as set out in Part A of the ED-ISA for
LCE is implementable, many respondents expressed concerns that the Authority as described is
unclear. The most significant concerns expressed, including by two Monitoring Group members, were

14
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

that the Authority is too open (i.e., needs to be more precise) and involves too much judgment and
will therefore lead to inconsistent use of the standard.

Specific Prohibitions

38. Respondents supported the alignment with the final revised International Ethics Standards Board for
Accountants (IESBA), Definitions of Listed Entity and Public Interest Entity in the International Code
of Ethics for Professional Accountants (including International Independence Standards) (the IESBA
Code) for consistency between the standards.
39. Respondents noted some concerns about the way that entities with public interest characteristics are
described within the draft standard. Especially related to what “public interest characteristics” may
mean in different jurisdictions, as well as whether it broadly applied to the public sector (i.e., is the
whole public sector scoped out of the standard).

40. Regarding the exclusion of group audits from the scope of the ED-ISA for LCE, respondents were of
the view that group audits should be included in the scope of the standard. Comments on group
audits are explained in detail in Section F – Group Audits.

Qualitative Characteristics

41. In addition to the comments about too much judgment more generally, respondents also noted strong
reservations about the subjectivity related to the qualitative characteristics described, and therefore
the resulting inconsistency in application. In addition, it was noted that auditors would need an in-
depth knowledge of the entity to be able to make some of these judgments.

42. It was noted that the Authority should be clearer about the criteria to be met to be considered a less
complex entity and that the Authority should describe what is “in” the standard rather than what is
“out” of the standard. By focusing on what is “less complex” this would drive a conscious
determination about whether the entity is truly “less complex’' for the purpose of using the standard.

Accounting Estimates

43. Regarding the qualitative characteristics related to accounting estimates, concerns were expressed
about accounting estimates with high estimation uncertainty being excluded from the scope. It was
noted that a less complex entity may have one or a few accounting estimates with high estimation
uncertainty that would not necessarily affect the complexity of the entity as a whole and that these
entities should be able to use the standard.

44. Respondents to the ED-ISA for LCE also noted that even where the initial evaluation to use the
standard was performed appropriately, areas of complexity (commonly relating to accounting
estimates) may still be discovered or occur unexpectedly during the audit. However, these areas of
complexity may not be deemed pervasive to the complexity of the entity as a whole (see paragraph
28).

Quantitative Thresholds

45. The IAASB was encouraged to include quantitative thresholds to help users of the standard and
others to understand the scope of the standard. Responses received also suggested that such
boundaries would help clarify the scope of the standard and narrow it appropriately. However, there

15
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

were respondents that did not support establishing quantitative thresholds at a global level but rather
leaving this to individual jurisdictions.

IAASB Decisions

Specific Prohibitions
46. The IAASB aligned the classes of entities with the classes in the IESBA’s revisions to the Definitions
of Listed Entity and Public Interest Entity in the IESBA Code. The IAASB noted that the IESBA’s
public interest entity definition for the purposes of the IESBA Code serves a different purpose than
the description of classes of entities that may exhibit public interest characteristics in the ISA for LCE.
The former imposes differential independence requirements that apply to the audit firm or auditor for
audits of financial statements of public interest entities, and the latter describes classes of entities for
which the use of ISA for LCE may not be appropriate. Notwithstanding that they serve a different
purpose, the IAASB acknowledged respondents’ comments that regardless of the purpose, having
differing descriptions may cause confusion, and therefore noted the importance of alignment to the
greatest extent possible between the Authority and the IESBA Code.

47. The IAASB recognized the issues raised by respondents, in particular the concerns that it was
perceived that all public sector entities may be excluded from the scope of the standard. The IAASB
agreed that specific guidance for public sector entities is needed in the standard and the IAASB re-
ordered and updated relevant paragraphs to clarify which entities are prohibited from using the
standard. This also better supports the statement in the Preface to the ISA for LCE that the standard
is relevant to engagements in the public sector, when the considerations set out in the Authority in
Part A apply (see also paragraphs P.18 to P.21 of the Preface).

Qualitative Characteristics

48. The IAASB considered the comments on qualitative characteristics together with the overarching
comment that the standard is not clear about the types of entities which the standard has been
designed for. The IAASB recognizes that there is a range of entities that could use the ISA for LCE
but agreed that this “range of entities” should be described so that there is a common understanding
by all stakeholders about the types of entities for which the standard is designed (at least in terms of
establishing a global baseline). Therefore, the IAASB updated the qualitative characteristics by
incorporating the description of a “typical LCE” that describes the “range of entities” the standard is
designed for.

49. The IAASB also updated the qualitative characteristics to describe what is “less complex” rather than
what is “more complex”. For example, the qualitative characteristics for organizational structure and
size is described “The organizational structure is relatively straightforward, with few reporting lines or
levels and a small key management team (e.g., 5 individuals or less).”
50. For qualitative characteristics to provide more clarity and specificity, the IAASB included numerical
indicators as examples (e.g., number of members in management team, number of employees
involved in financial reporting roles etc.,) in the revised qualitative characteristics where relevant.

Accounting Estimates

51. The IAASB acknowledged that accounting estimates vary widely in nature, and the complexity of
accounting estimates are subject to, or affected by inherent risk factors such as estimation

16
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

uncertainty,9 complexity10 or subjectivity.11 The IAASB’s view is that, in general, it is not expected that
the typical nature and circumstances of an LCE would have accounting estimates with high estimation
uncertainty, complexity and subjectivity.

52. The IAASB considered using inherent risk factors as qualitative characteristics. However, the IAASB
recognized that it may be difficult to assess the complexity (such as evaluating the degree of the
inherent risk factors taking into account the facts and circumstances of an individual accounting
estimate) at the acceptance or continuance phase. Respondents to ED-ISA for LCE noted that the
Authority should be easy to understand and implement. Therefore, the IAASB changed the qualitative
characteristics related to accounting estimates using more direct language, focusing on the methods,
models, assumptions and data used for making accounting estimates. The IAASB believes that using
terminology that is widely used and understood would be easier for auditors to understand.

53. The IAASB used the word “ordinarily” in the qualitative characteristic to indicate that the focus is not
on the isolated or “one-off” accounting estimates or transactions that do not otherwise increase the
complexity of the entity as a whole. The IAASB believes this would also help address respondents’
concerns regarding the need to transition from the ISA for LCE to the ISAs when additional matters
and circumstances are discovered after the initial evaluation to use the ISA for LCE (e.g., for a one-
off transaction that the entity has entered in to). In such a scenario, the auditor would need to consider
if the entity is still an LCE. However, there would be no need to “automatically” transition out of the
ISA for LCE during the engagement because of the complexity specific to the accounting estimate.

54. Requirements and EEM related to accounting estimates in Part 7 were revised to reflect the above
changes to the qualitative characteristics of the Authority (see Section G – Other, paragraphs 117
and 123).

Quantitative Thresholds

55. The IAASB considered respondents’ suggestions to include quantitative thresholds in the Authority.
While the IAASB noted that complexity is not directly linked to size, it was acknowledged that the use
of quantitative thresholds may serve as an additional “safeguard” to limit the range of entities
perceived to be within the scope of the standard. Also, the IAASB deliberated whether the quantitative
thresholds should be set at an international level or at a jurisdictional level. The IAASB is of the view
that quantitative thresholds cannot be set at a global level because of the differing nature and
circumstances of each jurisdiction that may use the standard.

56. The IAASB added in the Authority the expectation for legislative or regulatory authorities or relevant
local bodies with standard-setting authority to determine quantitative thresholds for their jurisdiction.
In addition, EEM was added to describe how quantitative measures are relevant to the use of the
standard and how existing thresholds may be used as a point of reference. The EEM refers to the
definitions of “small enterprise” of the European Commission and the South African Department of

9
Estimation uncertainty is the susceptibility to an inherent lack of precision in measurement. It arises when the required monetary
amount for a financial statement item that is recognized or disclosed in the financial statements cannot be measured with
precision through direct observation of the cost or price.
10
Complexity is the inherent complexity in the process of making an accounting estimate, before consideration of controls, which
gives rise to inherent risk.
11
Subjectivity (i.e., the subjectivity inherent in the process of making an accounting estimate, before consideration of controls)
reflects inherent limitations in the knowledge or data reasonably available about valuation attributes.

17
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Small Business Development as examples of benchmarks that may be appropriate. The EEM
indicates that these definitions may be adjusted as appropriate for the circumstances of the individual
jurisdiction when determining quantitative thresholds for their jurisdiction. The IAASB decided it would
be appropriate to include multiple examples to better support the legislative or regulatory authorities
or relevant local bodies with standard-setting authority when determining their quantitative
thresholds.

Other
57. The IAASB removed the roles and responsibilities of firms and auditors (i.e., paragraphs A.12. to
A.14. in the ED-ISA for LCE) to make the Authority more succinct and understandable. The IAASB
is of view that such roles and responsibilities would be better placed in the Authority Supplemental
Guide, noting that this would help focus Part A on the role of the jurisdiction or those with standard-
setting authority only.

Section E – Proportionality of the Standard

Background

58. Similar to the ISAs, the ED-ISA for LCE sets out requirements that, taken together, would fulfill the
overall objective of the auditor (i.e., to express an opinion based on the audit evidence obtained).
Compliance with these requirements is intended to support how the auditor obtains sufficient
appropriate audit evidence as the basis for the auditor’s reasonable assurance opinion. Therefore,
to develop a standard that will achieve reasonable assurance, the IAASB has used the requirements
in the ISAs as the basis for the requirements within ED-ISA for LCE.

59. The IAASB agreed that some guidance was needed for implementation of the requirements.
However, a key objective of the design of the ED-ISA for LCE was to keep the standard concise and
succinct, mindful of the typical nature and circumstances of an LCE and that the standard does not
address complex matters or circumstances. Therefore, the IAASB also agreed to limit this material
to where it is essential to understanding or applying a requirement(s). Accordingly, ED-ISA for LCE
included EEM where it has been considered that explanatory material is crucial to support the
requirements or concepts used.

Summary of Comments Received on Exposure

General

60. On balance, respondents agreed with the approach to using the core ISA requirements and concepts
as the basis for establishing the work effort of the auditor when performing an audit of an LCE. Across
stakeholders who both agreed or disagreed with the approach of using the ISAs as a base, the most
frequent theme identified as a concern was that the standard needed to be further differentiated from
the ISAs to provide value. A concern expressed by respondents was that the content of the ED-ISA
for LCE was so closely aligned with the requirements of the ISAs that there was little difference, and
therefore benefit, to using the standard.

61. Regarding the content of the EEM included in the ED-ISA for LCE, there was, on balance, support
for the approach but respondents noted that content could be more proportionate or specific to an
LCE or further simplified. Also, there were mixed views regarding the sufficiency of the EEM. On one
hand, respondents noted that there was very little application material from the ISAs included which

18
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

may lead to inconsistent application of requirements. On the other hand, respondents supported the
overall sufficiency of guidance that was included in the body of the draft standard, noting additional
guidance may also be provided outside of the standard (e.g., through implementation or non-
authoritative guidance).
62. There were a few areas identified by respondents where the requirements and EEM could be further
differentiated from the ISAs and be proportionate to the typical nature and circumstances of an audit
of an LCE:
• Audit Evidence and Documentation (Part 2);

• Engagement Quality Management (Part 3);

• Risk Identification and Assessment (Part 6); and

• Accounting Estimates (Part 7).

Audit Evidence and Documentation (Part 2)

63. Respondents noted that the documentation requirements were too extensive and that there was no
real differentiation between what would be documented using the ISAs and the ED-ISA for LCE.
Respondents made suggestions such as adding guidance to help auditors better understand how to
apply documentation requirements in an appropriately proportional manner. Also, it was suggested
that the ISA for LCE should be explicit that only relevant matters should be documented and when a
requirement has been considered not applicable, the auditor is not required to explain and document
why the requirement was not applicable.

64. Respondents also questioned if all of the specific documentation requirements included in each Part
were needed or if the general documentation requirements contained in Part 2 were sufficient given
they encompass all significant matters and judgments in the audit. They noted that specific
documentation requirements were often procedural in nature.

Engagement Quality Management (Part 3)

65. Respondents noted that the requirements and EEM in Part 3 could be more proportionate as many
LCE audits are carried out entirely by the engagement partner (who may be a sole practitioner). To
reflect this practice, respondents suggested to restructure Part 3 or some of its requirements.
However, few specific suggestions were received on how to do so.

Risk Identification and Assessment (Part 6)

66. Respondents noted that Part 6 could be more streamlined and “scalable” (proportionate) to audits of
LCEs while not compromising audit quality. In particular, respondents noted that the entity’s system
of internal control is generally straightforward and less formalized in an LCE and that some
requirements in Part 6 would not be relevant for the typical nature and circumstances of an LCE.

67. The most prominent areas where the respondents questioned whether the requirements were
appropriately proportionate to the typical nature and circumstances of an audit of an LCE included:

(a) Obtaining an understanding of the entity’s system of internal control;

(b) The identification and assessment of risks of material misstatement;

(c) Services provided by a service organization; and

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

(d) Fraud, including the presumption that there are risks of fraud in revenue recognition.

Accounting Estimates (Part 7)

68. Respondents noted that the complexity of requirements related to accounting estimates could be
reduced given that LCEs often don’t have complex accounting estimates.

IAASB Decisions

General

69. The IAASB acknowledged the general support for using the ISAs as a basis, while also recognizing
the strong view that the ED-ISA for LCE needed to be further differentiated from the ISAs in order to
meet stakeholder expectations. In considering the responses to ED-ISA for LCE and the views of
participants at the Third Paris Conference, the IAASB was of the view that there was a greater call
for further consideration of specific areas, and not to rewrite the standard more holistically.
Accordingly, the IAASB focused on revisions in those areas identified as most prominently affected
by respondents’ concerns, including Parts 2, 3 and 6.

70. With respect to the EEM, considering that the ISA for LCE is designed to be proportionate to the
typical nature and circumstances of an audit of an LCE and that the standard will be accompanied
by implementation and supplemental guides, the IAASB decided that the overall approach to EEM
within the standard does not need to change. The IAASB acknowledged that there were areas
identified where further EEM (or revisions to existing EEM) may be appropriate to enhance the
application of a requirement. Those identified were addressed when revising each of the Parts.

Audit Evidence and Documentation (Part 2)

71. The IAASB noted that the most significant areas of concern for respondents (i.e., areas where the
level of documentation was not proportional) related to Parts or matters that the IAASB had already
identified as priority areas for revisions (e.g., Part 6). In revising these areas, the IAASB made
requirements more proportional and specifically reduced the granularity of many of these
requirements. The IAASB was of the view that more proportional requirements would result in the
corresponding documentation being more proportional, which would help address respondents’
concerns regarding documentation.

72. The IAASB also considered the suggestions from respondents for additional guidance to help clarify
how to apply the general documentation requirements and added further EEM in Part 2 based on
application material from ISA 230.12 On the other hand, the IAASB noted that the documentation of
non-relevant requirements discussed in paragraph 63 is not an LCE specific issue and did not believe
that it was appropriate to include an explicit statement in the ISA for LCE regarding this matter.

73. In discussing the respondents’ comments on whether specific documentation requirements are
needed, the IAASB considered Chapter 13 of the CUSP Drafting Principles and Guidelines and how
it might apply to an audit of an LCE. Based on this, the IAASB did not change its decision to include
specific documentation requirements in individual Parts, when relevant. These specific
documentation requirements are to be applied in addition to the general documentation requirements
as set out in Part 2.

12
ISA 230, Audit Documentation

20
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Engagement Quality Management (Part 3)

74. The IAASB made Part 3 more proportionate to the typical nature and circumstances of an audit of an
LCE by:

(a) Introducing separate sections for when there is more than one member in the engagement
team. To differentiate these requirements (and related EEM), they are placed in a text box with
the header “Considerations When There Are Members of the Engagement Team Other Than
the Engagement Partner.” The IAASB initially introduced the separate sections only in Part 3
and later decided to include them throughout the standard. The purpose of the text boxes is
explained in paragraph P.14. of the Preface.

(b) Deleting requirements and EEM that were deemed repetitive and re-ordering the paragraphs
to have a more logical flow.

Risk Identification and Assessment (Part 6)

75. To address respondents’ comments to make Part 6 more proportionate, the IAASB had the following
questions in mind:

(a) Has the requirement been identified as a specific “pain-point” requiring revision by respondents
and if so, why did respondents not think it would be appropriate for the typical nature and
circumstances of an LCE?

(b) Are all the matters addressed in the requirement relevant to the typical nature and
circumstances of an LCE?

(c) Would every matter in a requirement always need to be understood and documented to
achieve the desired outcome or could some matters be areas that could be considered
depending on its relevance to the entity and the audit?

76. The IAASB revised Part 6 which included repositioning requirements, deleting requirements and
repurposing requirements as EEM. The key questions in paragraph 75 helped the IAASB to consider
revisions to requirements depending on the nature and content of each requirement. For example,
focusing on the outcome to be achieved, the detailed list of matters to be understood in the
requirement in paragraph 6.3.6.(a)–(d) of the ED-ISA for LCE was repurposed as EEM (see
paragraph 6.3.7. in the final text of the ISA for LCE) as the IAASB was of the view that not all these
matters would always be relevant for the typical nature and circumstances of an LCE.

77. The IAASB also made changes to address the specific comments provided by respondents,
including:

(a) Obtaining an Understanding of the Entity’s System of Internal Control – The evaluation of the
entity’s risk assessment process and entity’s process for monitoring the internal control system
are changed to an inquiry as the IAASB was of the view that, for an LCE, the relevant outcomes
could be achieved through inquiry (see paragraph 6.3.1. (a) and (c) of the ISA for LCE). The
requirement related to information system and communication are updated to be more direct
and focus on preparation of financial statements (see paragraphs 6.3.8. and 6.3.10. of the ISA
for LCE).

(b) The identification and assessment of risks of material misstatement – The ED-ISA for LCE
included separate requirements for the identification and assessment of the risks of material

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

misstatements. To address respondents’ concerns on proportionality, the IAASB has combined

the identification and assessment of risks of material misstatement into a single requirement
(see paragraph 6.4.1. of the ISA for LCE). In addition, the IAASB combined this requirement
with the requirement to determine the relevant assertions and the related significant classes of
transactions, account balances and disclosures given that the process is iterative and typically
performed together in an audit of an LCE. Requirements to understand inherent risk factors
have been removed and instead the concepts are included in EEM.
(c) Services provided by a service organization – The requirements and EEM related to service
organizations were enhanced by clarifying:

(i) In the Authority and Part 6 how a report on the description and design of controls at the
service organization (a type 1 report), or on the description, design and operating
effectiveness of controls at the service organization (a type 2 report) may be used when
applying the ISA for LCE. The Authority explains that the ISA for LCE does not include
any requirements addressing the auditor’s use of a type 1 or type 2 report as audit
evidence about the design and implementation of controls at the service organization, or
a type 2 report as audit evidence that controls at the service organization are operating
effectively. The IAASB is of the view that this would ordinarily not be applicable to an
audit of an LCE. However, the IAASB was of the view that the auditor may use a type 1
or type 2 report in obtaining an understanding of the entity’s system of internal control
and clarified that in the EEM under paragraph 6.3.11.

(ii) What the auditor is required to obtain an understanding of when the entity uses the
services of a service organization and those services are relevant to the entity’s process
to prepare its financial statements. To do so, the IAASB added content from ISA 40213 in
paragraph 6.3.11.

(iii) In Part 7 (EEM related to paragraph 7.4.28), which further audit procedures the auditor
may consider when the auditor cannot obtain sufficient appropriate audit evidence
concerning the relevant financial statement assertions at the entity. These examples are
based on examples in ISA 402.

(d) Fraud – The IAASB considered making changes to the presumption that there are risks of fraud
in revenue recognition and revise the requirement to instead require an active determination
of potential fraud risks resulting from types of revenue, revenue transactions or assertions.
However, the IAASB noted that the change would be inconsistent with ISA 240 14 and the
direction of the IAASB in its project to revise ISA 240. Therefore, it was decided not to depart
from the base requirement in ISA 240 and to retain the presumption.

78. In addition, to address comments from respondents to the ED-ISA for LCE, the IAASB added EEM,
or clarified existing EEM, in several areas, in particular to describe how requirements may be applied
in circumstances typical of an LCE. The IAASB was of the view that, although the volume of EEM
may be greater than in other parts of the ISA for LCE, it is appropriate as risk identification and
assessment was identified as a challenging area by respondents and is fundamental to an audit.

13
ISA 402, Audit Considerations Relating to an Entity Using a Service Organization
14
ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

22
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Accounting Estimates (Part 7)

79. Accounting estimates were highlighted as an area where considerations were needed in relation to
the qualitative characteristics in the Authority (see Section D – Authority). Therefore, the changes
made to the requirements and EEM related to accounting estimates were more focused to reflect the
changes made to the Authority.

Section F – Group Audits

Background
80. In the ED-ISA for LCE, group audits were excluded from the scope of the standard. This was done
because the IAASB, on balance, was of the view that group audits inherently exhibited characteristics
of complexity within an entity and had not been contemplated in the design of the standard. However,
respondents to the ED-ISA for LCE along with participants of outreach activities expressed strong
support for the inclusion of group audits. Therefore, the IAASB decided to include certain group audits
in the scope of the ISA for LCE and exposed ED-ISA for LCE-Group Audits for public comment.

81. ED-ISA for LCE-Group Audits included as a specific prohibition to the use of the ISA for LCE, group
audits where components auditors are involved. This was reflecting the overall pervasive theme
heard from respondents to the ED-ISA for LCE that the scope of the standard should better reflect
the typical nature and circumstances of an LCE for which the standard is intended to be designed
for. On the other hand, the IAASB did acknowledge that the use of component auditors may
sometimes be due to a practical consideration rather than due to the complexity of the group itself.
The IAASB added an exemption to allow the component auditor’s involvement in limited
circumstances in which a physical presence is needed for a specific audit procedure for the group
audit (e.g., attending a physical inventory count or inspecting physical assets).

82. The IAASB was of the view that the qualitative characteristics of a less complex group and an LCE
that is not a group are broadly the same. At the same time the IAASB noted that there are additional
complexities for a group reflecting the group specific circumstances and added qualitative
characteristics related to group audits (i.e., additional group-specific characteristics of a less complex
group).

83. The group audit requirements were included in a separate Part (i.e., Part 10) rather than within each
of the relevant Parts of the ISA for LCE. Similar to the other Parts, Part 10 was based on the core
requirements of the relevant ISA – for Part 10 this is ISA 600 (Revised). 15 The IAASB did not include
requirements in ISA 600 (Revised) that relate to the involvement of component auditors and
requirements which are deemed to indicate complexity that would not be typical for an LCE. In
addition, requirements which were deemed to be sufficiently addressed by requirements in other
parts of the ISA for LCE were not included in Part 10.

Summary of Comments Received on Exposure

84. Generally, respondents supported the requirements and EEM included in Part 10 noting that the
related requirements in ISA 600 (Revised) have been appropriately integrated into the ISA for LCE.

15
ISA 600 (Revised), Special Considerations-Audits of Group Financial Statements (Including the Work of Component Auditors)

23
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Component Auditors
85. Respondents had mixed views whether a prohibition relating to the use of component auditors should
be included in the Authority of the ISA for LCE.

86. Respondents supporting the prohibition relating to component auditors were of the view that the
exemption on the prohibition (i.e., the use of component auditors is not allowed other than in limited
circumstances where a physical presence is needed) should remain as per the ED-ISA for LCE-
Group Audits. They noted that the exemption addresses the most common situations where a
component auditor is needed for specific audit procedures due to practical reasons.

87. There were also respondents that suggested expanding the exemption as there may be other
situations when the use of component auditors for practical reasons is useful.

Qualitative Characteristics

88. Respondents had various comments on the group-specific qualitative characteristics. These
comments included comments not supporting the inclusion of numerical indicators and suggestions
to change the descriptions in “Group Structure and Activities,” “Access to Information or People” and
“Consolidation Process”.

IAASB Decisions

Component Auditors

89. The IAASB believed that generally component auditors are more often used in more complex groups
and that prohibiting the use of component auditors is consistent with the typical nature and
circumstances of an audit of an LCE that the standard is intended to be designed for. Also, the IAASB
considered the pervasive feedback on the ED-ISA for LCE that the Authority should be clearer about
what the IAASB believes a “typical LCE” is, in order to be operable and accepted by regulators and
other stakeholders.

90. The IAASB discussed respondents’ different viewpoints and examples to expand the exemption on
the prohibition. The IAASB was of view that most of the examples would not be common for the
typical nature and circumstances of an LCE or would open the exemption too much. However, the
IAASB noted that some clarity was needed and changed the example to clarify that the circumstances
in which a physical presence may be needed include physically inspecting assets or documents. In
addition, the IAASB was of view that the Authority Supplemental Guide may provide further clarity on
when the exemption may be applied.

Qualitative Characteristics
91. The IAASB noted that the inclusion of numerical indicators is in response to feedback on the ED-ISA
for LCE that the Authority needed to be more specific and clearer about what the IAASB believes a
“typical LCE” is. Regarding other comments on the description of the group-specific qualitative
characteristics, the IAASB made changes to the descriptions of the characteristics to better reflect
the typical nature and circumstances of an LCE.

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 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Section G – Other
800-Series

Background and Summary of Comments Received on Exposure

92. Requirements relating to the ISA 800-series16 were not included in the ED-ISA for LCE as the IAASB
agreed to focus on developing an auditing standard for audits of complete sets of general-purpose
financial statements of LCEs first. The IAASB was of the view that the inclusion of the 800-series at
a later stage would be useful.
93. Respondents generally supported the inclusion of a separate part on the ISA 800-series. However,
regarding a timeline for potential inclusion of a Part on the ISA 800-series, respondents expressed
mixed views. On one hand, respondents noted that such Part should be included in the ISA for LCE
prior to finalization. Other respondents noted that it should only be considered at a later stage as they
recognized that the IAASB should first focus on the development of the ISA for LCE for audits of
general purpose financial statements.

IAASB Decisions

94. The IAASB decided not to develop requirements to address the ISA 800-series within the ISA for LCE
at this time. However, the IAASB explored the possibility of an interim solution to allow use of the
standard for such engagements and added wording in the Preface (paragraph P.2.) to allow use of
the standard, to be adapted as necessary, to an audit of:

(a) A complete set of special purpose financial statements; or

(b) An audit of a single financial statement or of a specific element, account or item of a financial
statement.

95. The IAASB concluded that an engagement to report on summary financial statements would not be
common for the typical nature and circumstances of an LCE, other than in a limited number of
jurisdictions which could develop jurisdictional specific requirements. Therefore, the IAASB decided
not to include a reference to engagements to report on summary financial statements.

Relevant Ethical Requirements and Firm-level Quality Management

Background and Summary of Comments Received on Exposure

96. Using the same approach as the ISAs, the ED-ISA for LCE had been developed requiring that the
auditor comply with relevant ethical requirements, including those pertaining to independence. In
addition, the ED-ISA for LCE had been developed on the basis that the auditor performing the
engagement is a member of a firm that is subject to the IAASB’s ISQMs, or national requirements
that are at least as demanding.

97. Respondents suggested to include an explicit reference of what relevant ethical requirements
paragraph 1.2.1. of the ED-ISA for LCE are referring to. It was understood that this is also in the
Glossary, but respondents preferred to include it in Part 1 for ease of reference and clarity. Given the

16
The ISA 800-series includes: ISA 800 (Revised), Special Considerations – Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks; ISA 805 (Revised), Special Considerations – Audits of Single Financial
Statements and Specific Elements, Accounts or Items of a Financial Statement and ISA 810 (Revised), Engagements to Report
on Summary Financial Statements.

25
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

importance of ethical and independence requirements in an audit, it was suggested that EEM should
be included to address the fundamental concepts and principles addressed in IESBA Code.

98. Respondents noted that only having EEM for firm-level quality management is not in line with the ISA
for LCE’s drafting principles.

IAASB Decisions

99. The IAASB agreed with respondents’ comments that additional EEM that explains what relevant
ethical requirements may be and the fundamental principles the IESBA Code establishes, is useful.
Therefore, the IAASB added EEM under paragraph 1.2.1.

100. The IAASB also agreed with respondents’ comments that only having EEM for firm-level quality
management is not in line with the ISA for LCE’s drafting principles and therefore added a requirement
in paragraph 1.2.2. The requirement requires the engagement partner to be a member of a firm that
applies the ISQMs, or national requirements that are at least as demanding as the ISQMs.

Engagement Letter

Background and Summary of Comments Received on Exposure

101. The ED-ISA for LCE required the auditor to record in an audit engagement letter or other suitable
form of written agreement that the audit will be undertaken using the ISA for LCE. Respondents noted
that there is no need to include such a requirement since it should be sufficient to document that an
audit will be undertaken.

102. Respondents also noted that the audit engagement letter or other suitable form of written agreement
should include the eventuality that, as the audit progresses, the auditor determines that the ISA for
LCE is no longer applicable and therefore a transition to the use of the full ISAs may be necessary.

IAASB Decisions

103. The IAASB decided to keep the requirement to record in an engagement letter, or other suitable form
of written agreement, that the audit will be undertaken using the ISA for LCE. The IAASB was of the
view that it is important to be transparent to management which auditing standards are used and that
this is aligned with what is disclosed in the auditor’s report.

104. The IAASB decided not to add a requirement to include in the audit engagement letter or other
suitable form of written agreement that there is a possibility of transitioning from the ISA for LCE to
the ISAs. The IAASB noted that this may not be appropriate as it may conflict with local regulations.
For example, some jurisdictions do not allow changes to the engagement terms after agreement.

Going Concern
Background and Summary of Comments Received on Exposure

105. The ED-ISA for LCE included requirements and EEM related to going concern in Parts 5, 6, 7, 8 and
9.
106. Respondents noted that management of an LCE is more likely to only perform an informal
assessment of the entity’s ability to continue as a going concern at the planning stage. Therefore, it
was suggested that the ISA for LCE should clarify that the going concern assessment does not have
to be written or provide guidance around its informal nature. Respondents also noted that the

26
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

requirements in Part 5 may be relocated as going concern related content is included in each part
from Part 5 through Part 9 in the ED-ISA for LCE and that this may cause confusion.

IAASB Decisions

107. The IAASB agreed with respondents that the going concern requirement that is performed during the
risk identification and assessment stage could be more proportional. To make the requirement
proportional, the IAASB removed the reference to an explicit preliminary going concern assessment
and instead added an inquiry with management focusing on the outcome of the procedure.
108. Regarding the relocation of the going concern related requirements, the IAASB noted that the related
requirements in Part 5 are in essence risk assessment procedures. It was also noted that similar
requirements in ISA 570 (Revised)17 are included in the “Risk Assessment Procedures and Related
Activities” section. Therefore, the IAASB moved the requirements to Part 6.

Materiality

Background and Summary of Comments Received on Exposure

109. The ED-ISA for LCE included requirements and EEM to set materiality and performance materiality
in Part 5.

110. Respondents noted that more guidance is needed to determine materiality and performance
materiality, such as considerations related to identifying an appropriate benchmark and determining
a percentage to be applied to a chosen benchmark. Also, respondents noted this guidance should
include considerations for non-profit and profit-oriented organizations.

111. In addition, respondents suggested to add the concept of “clearly trivial misstatement” in Part 5
instead of in Parts 7 and 8 since it is more consistent with the flow of an audit (i.e., auditors would
calculate a clearly trivial threshold at the planning stage before designing and performing further audit
procedures).

IAASB Decisions

112. Based on respondents’ requests for more guidance, the IAASB added EEM related to identifying an
appropriate benchmark and determining a percentage to be applied to a chosen benchmark.
Additional guidance will be considered when developing the Implementation Guide.

113. The IAASB moved the requirement which requires documentation of the amount below which
misstatements would be considered clearly trivial from Parts 7 and 8 to Part 5 to address respondents’
comments that such a calculation would normally be performed at an earlier stage of the audit. In
addition, EEM under paragraph 5.3.3. was added which includes context as to why the auditor may
designate such an amount during the planning stage.

Responding to Assessed Risks of Material Misstatement

Background and Summary of Comments Received on Exposure

114. Part 7 in the ED-ISA for LCE sets out the auditor’s procedures to respond to the assessed risks of
material misstatements.

17
ISA 570 (Revised), Going Concern

27
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

115. Generally, respondents supported the requirements and EEM included in Part 7. However,
respondents also noted several areas where further requirements or EEM were needed for the
standard to be able to be applied as a standalone standard. In addition, respondents noted that the
ordering of paragraphs in section 7.3. on audit procedures responsive to the assessed risks of
material misstatement at the assertion level is not mirroring the ordering in the ISAs and the flow of
an audit.

Audit sampling
116. Respondents noted that the concept of sampling is integral to an audit and that it is especially
important for fully substantive audits. Therefore, respondents were of the view that more guidance is
needed, particularly as it relates to designing audit sampling, determining sample sizes, selection of
items for testing, and evaluating the results of audit sampling.

Accounting estimates

117. As highlighted in Section D – Authority, respondents expressed concerns about the qualitative
characteristics related to accounting estimates, which may inadvertently exclude the use of the
standard where an entity is an LCE but may have one or a few accounting estimates that are not
deemed pervasive to the complexity of the entity as a whole. Providing for such scenarios would
necessarily also affect the requirements needed in Part 7 of the ISA for LCE.

IAASB Decisions

118. The IAASB considered respondents’ comments for further requirements and EEM. In addressing
respondents’ comments, the IAASB balanced the request for more guidance with the principles used
in developing the ISA for LCE.

119. Regarding requirements, the IAASB mostly revised the structure (e.g., merged or separated
paragraphs) and eliminated duplication. The IAASB also added new requirements related to litigation
and claims and documentation requirements when relying on controls that were tested in a previous
audit.

120. Regarding EEM, the IAASB added guidance where it was deemed appropriate. For example, EEM
was added related to:

(a) Incorporating an element of unpredictability (EEM under paragraph 7.2.2.)

(b) Substantive procedures (EEM under paragraph 7.3.14.)

(c) Substantive analytical procedures (EEM under paragraph 7.3.16.)

(d) Accumulation of misstatements (EEM under paragraph 7.5.4.)

(e) Specific communication requirement related to significant deficiencies (EEM under paragraph
7.6.2.)

121. Regarding section 7.3., the IAASB agreed with respondents and improved the ordering of the
paragraphs in section 7.3. to mirror the ISAs and the flow of an audit.

28
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Audit sampling
122. The IAASB acknowledged respondents’ comments and developed additional guidance. In doing so,
the IAASB went back to ISA 53018 but also other guidance such as IFAC’s Guide to Using ISAs in the
Audits of Small- and Medium-Sized Entities. The IAASB added guidance related to designing audit
sampling, determining sample sizes, selecting of items for testing, and evaluating the results of audit
sampling. Examples of factors influencing sample sizes for tests of controls and test of details were
placed in an Appendix (Appendix 6) due to their length and specificity.

Accounting estimates

123. As described in Section D – Authority, the qualitative characteristics related to accounting estimates
were revised to better describe the nature of accounting estimates that are typical for an LCE. Given
these revisions, the IAASB was of the view that the requirements and EEM related to accounting
estimates should be strengthened. The key changes to requirements and EEM in Part 7 are:

(a) Alignment with ISA 540 (Revised).19 The IAASB changed the structure of paragraph 7.4.18. of
the ED-ISA for LCE. With the revision, there is one overarching requirement that sets out the
three testing approaches for accounting estimates (paragraph 7.4.15 of the ISA for LCE). The
related procedures to obtain sufficient appropriate audit evidence are in separate requirements
for each of the testing approaches (i.e., in paragraphs 7.4.16. through 7.4.19. of the ISA for
LCE). The IAASB believed this made the requirements clearer and facilitated the inclusion of
EEM for each testing approach, as appropriate.

(b) Enhanced EEM. The IAASB strengthened the EEM in several areas based on the application
material of ISA 540 (Revised). For example, when the auditor tests how management made
the accounting estimate, the IAASB added EEM that includes relevant considerations for the
auditor regarding the appropriateness of the method, significant assumptions and data used.
Also, EEM was added that provides guidance for the auditor’s procedures that address whether
management has taken appropriate steps to understand and address estimation uncertainty
by selecting appropriate point estimates and developing related disclosures. In addition, the
IAASB added EEM under paragraph 7.4.15. that steers the auditor to use audit evidence
obtained from events occurring up to the date of the auditor’s report, as the IAASB is of the
view that this will often provide sufficient appropriate audit evidence to address the assessed
risks of material misstatement.

Subsequent Events
Background and Summary of Comments Received on Exposure

124. Part 8 of the ED-ISA for LCE included requirements to address subsequent events. Some of the
requirements in ISA 56020 were not included as they were deemed uncommon in an audit of an LCE.
125. However, respondents noted that this may not be uncommon and when it does occur, the lack of
these requirements may necessitate the engagement to transition to ISAs. Respondents suggested
to add requirements that apply when:

18
ISA 530, Audit Sampling
19
ISA 540 (Revised), Audit Accounting Estimates and Related Disclosures
20
ISA 560, Subsequent Events

29
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

(a) Facts become known to the auditor after the date of the auditor’s report but before the date the
financial statements are issued; and

(b) Facts become known to the auditor after the financial statements have been issued.

IAASB Decisions
126. The IAASB discussed respondents’ comments regarding subsequent events and was of the view that
it is still presumed to be uncommon for the typical nature and circumstances of an LCE to have
subsequent events for situations noted by respondents. However, the IAASB agreed that it is not
practical to transition to ISAs at the point when subsequent events occur. Therefore, the IAASB
reviewed ISA 560 requirements not included in the ED-ISA for LCE and added requirements which
were deemed appropriate in Part 8 (see paragraphs 8.4.6., 8.4.8., 8.4.9.) and made consequential
changes to Part 9 (see paragraphs 9.5.21., and 9.6.7.).

Reporting

Background and Summary of Comments Received on Exposure

127. Part 9 in the ED-ISA for LCE sets out the requirements for forming an opinion and reporting.

128. Respondents, on balance, expressed support for the approach taken in Part 9, in particular praising
the clarity and understandability and the innovative use of tables for presenting requirements. The
more significant themes of comments included:

(a) Need to Reference the ISA for LCE in the Auditor’s Report. There were mixed views regarding
whether the auditor’s report needed to refer to the ISA for LCE. Respondents that did not
support the reference questioned why a distinction was made when reasonable assurance is
achieved. On the other hand, respondents that supported the reference noted that the
transparency about which standard was used is important, and vital for regulator acceptance.

(b) Specified Format and Content of Auditor's Report. There was overall support for the approach
to use the format and content of an unmodified audit report as a requirement. However,
respondents noted that:

(i) The departure from the prescribed format or content of a report in paragraph 9.4.1.(a) of
the ED-ISA for LCE should be wider than “law or regulation”.

(ii) The ED-ISA for LCE is missing requirements for the auditor’s report when the audit is
conducted in accordance with both auditing standards of a specific jurisdiction and the
ISA for LCE (i.e., the situation addressed in ISA 700 (Revised), 21 paragraph 51).

(iii) The standard should allow referring to auditors’ responsibilities outside of the report (e.g.,
in an appendix).

21
ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements

30
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

IAASB Decisions
129. The IAASB discussed respondents’ feedback regarding the auditor’s report and responded as
follows:

(a) Need to Reference the ISA for LCE in the Auditor’s Report. The IAASB considered
respondents’ suggestion that a reference to the ISA for LCE in the auditor’s report is not needed
and was of the view that the auditor’s report should continue to refer to the ISA for LCE for
transparency. This is consistent with the decision on including a reference to the ISA for LCE
in the engagement letter or other suitable form of written agreement (see paragraph 103).

(b) Specified Format and Content of Auditor’s Report. The IAASB discussed the three prominent
comments from the respondents related to the auditor’s report:

(i) Departure from the prescribed format or content. The IAASB concluded not to address
this comment as that would make the ISA for LCE not aligned with the ISAs. However,
to avoid confusion, paragraph 9.4.1.(a) was aligned more closely with ISA 700 (Revised),
paragraph 50.

(ii) Audit conducted in accordance with both auditing standards of a specific jurisdiction and
the ISA for LCE. The IAASB agreed with respondents’ comments and therefore added
paragraph 9.4.1(b) which clarifies that, if an auditor is required to follow a national
standard, including the layout and wording of the report, the auditor can claim
compliance with the ISA for LCE only if the requirements of both standards have been
complied with and the report includes the elements required by ISA for LCE.

(iii) Auditors’ responsibilities. The IAASB made a revision to allow for the description of the
auditors’ responsibilities to be presented in an appendix or, where expressly permitted
by a jurisdiction, on a website of an appropriate authority (see footnote to the auditor’s
report included under paragraph 9.4.1).

Re-Exposure

130. Some respondents to the ED-ISA for LCE-Group Audits noted difficulties to respond without an
updated draft of the ISA for LCE (in particular the Authority), and therefore noted the need for re-
exposure of the standard. The IAASB considered the issue and concluded that the issue is not
pervasive as:

(a) The ED-ISA for LCE-Group Audits provided additional information regarding the changes up
to date made to the Authority (Part A) based on feedback received on the ED-ISA for LCE and
the Board’s further deliberations on how to accommodate group audits in the context of the
Authority more broadly;

(b) The ED-ISA for LCE-Group Audits included links to IAASB agenda papers in which the
changes to the standard were discussed; and

(c) The IAASB received rich comments on the ED-ISA for LCE-Group Audits, which shows that
overall, respondents were able to provide input based on applicable information available at
the time.

31
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

131. In addition to the matter highlighted in paragraph 130, above, the IAASB also considered the major
changes from the ED-ISA for LCE and ED-ISA for LCE-Group Audits and noted that:

(a) There are no substantial changes to the key concepts of the project. All the key elements
presented in ED-ISA for LCE and ED-ISA for LCE-Group Audits have been retained. Changes
made in response to comments received on exposure have not altered the key elements of the
proposed standard, nor have they resulted in a departure from the project objectives.

(b) No new key concepts have been introduced that have not been exposed.
(c) The changes to the text post-exposure are in response to feedback from respondents to the
ED-ISA for LCE and ED-ISA for LCE-Group Audits and do not fundamentally or substantively
change the proposals in the Exposure Drafts.

132. Further, the IAASB is of the view that re-exposing the ISA for LCE will not result in new information
or concerns that have not been aired already through the comment letters on ED-ISA for LCE and
ED-ISA for LCE-Group Audits or the subsequent outreach and consultation activities. Given the
above, the IAASB voted unanimously against re-exposure of the ISA for LCE.

Section H – Conforming Amendments

133. Based on a review of the IAASB’s International Standards, the IAASB proposed conforming
amendments arising from the ISA for LCE which impact the:

• Preface;22

• ISQM 1;

• ISQM 2;

• ISAE 3000 (Revised);23

• ISRE 2400 (Revised);24

• The International Framework for Assurance Engagements; and

• IAPN 1000.25

134. The main conforming amendments include:

(a) Conforming amendments to ISQM 1 and ISQM 2. The application material in ISQM 1 and ISQM
2 includes several references to requirements in the ISAs for guidance when conducting an
audit of financial statements. The IAASB was of the view that only having references to the
ISAs may confuse auditors who conduct an audit using the ISA for LCE as there are no
references to the ISA for LCE. Therefore, the IAASB added an overarching principle that
indicates that the ISA for LCE also includes requirements regarding quality management.

22
Preface to The International Quality Management, Auditing, Review, Other Assurance, and Related Services Pronouncements
23
International Standard on Assurance Engagement (ISAE) 3000 (Revised), Assurance Engagements Other than Audits or
Reviews of Historical Financial Information
24
International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements
25
International Auditing Practice Notes (IAPN) 1000, Special Considerations in Auditing Financial Instruments

32
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

(b) Conforming amendment to ISRE 2400 (Revised). ISRE 2400 (Revised), paragraph 86(g)(iii)
requires practitioners to include in their report for a review engagement the limitations of such
a report, including the fact that procedures performed in a review are substantially less than
those performed in an audit conducted in accordance with the ISAs, and, accordingly, the
practitioner does not express an audit opinion on the financial statements. As the ISA for LCE
will be an alternative to the ISAs to conduct audits of financial statements, the IAASB made
conforming amendments to this paragraph and removed the reference to the ISAs and added
a general reference to auditing standards issued by the IAASB.

Section I – Effective Date

135. In the Explanatory Memorandum to the ED-ISA for LCE, the IAASB proposed that the effective date
for the standard would be for financial reporting periods beginning at least 18 months after the
approval of a final standard, and early application would be permitted and encouraged. The IAASB
had the view this would be appropriate recognizing that the ISA for LCE is a new standard and given
the need for national due process and translation, as applicable.

136. Generally, respondents supported the effective date and early adoption for the ISA for LCE to be for
financial reporting periods beginning at least 18 months after the approval of a final standard. There
were respondents that had other views and noted that 18 months is too short considering the effort
needed to implement, especially because the ISA for LCE is a new standard that affects the entire
audit. On the other hand, there were respondents who supported shorter periods than 18 months.
They noted that the use of the ISA for LCE will be voluntary and were therefore of the view that the
effective date is less important than with other International Standards and should be effective as
soon as possible.

137. The IAASB was of the view that an effective date is needed for the ISA for LCE to align with the
structure of the ISAs (i.e., ISAs have effective dates) and to make it easier for jurisdictions to plan for
and facilitate adoption and implementation of the standard. Also, in the future when the standard is
updated, an effective date will signal when the previous version of the standard becomes out of date.

138. Taking into account that the IAASB approved the ISA for LCE in September 2023, the expected timing
of the PIOB's consideration of certification in accordance with the Public Interest Framework
(December 2023), and respondent’s comments, the IAASB decided that the ISA for LCE will be
effective for audits of financial statements of LCEs for periods beginning on or after December 15,
2025 (i.e., 2026 calendar year audits). Early adoption is permitted and encouraged.
139. In the IAASB’s view, the effective date is in the public interest because it would provide for an
implementation period of approximately 24 months after PIOB certification. This implementation
period would:
(a) Provide stakeholders with sufficient implementation time, including time for translation,
changes to firm methodologies and training, and planning and communications by other
stakeholders (e.g., audit regulators and NSS).
(b) Reflect the views of stakeholders as discussed at paragraph 136.

33
 BASIS FOR CONCLUSIONS: ISA FOR LCE, INCLUDING RELATED CONFORMING AMENDMENTS TO OTHER
INTERNATIONAL STANDARDS

Section J – Maintenance
Background and Summary of Comments Received on Exposure

140. In the Explanatory Memorandum to the ED-ISA for LCE, the IAASB proposed that revisions to the
ISA for LCE will be made periodically when projects to revisit ISAs are undertaken. As part of each
ISA project, it was intended that there will be explicit consideration of which and when changes to the
ISA for LCE will be made.

141. There were mixed views about the maintenance of the standard. Certain respondents were of the
view that the timing of revisions to the ISAs and the ISA for LCE should be aligned. Other respondents
were of the view that providing a stable platform is important for stakeholders given the efforts needed
to update methodologies and educate auditors and therefore suggested revising the ISA for LCE
periodically. There were also respondents that were of the view that the IAASB should only revise
the ISA for LCE when urgent matters related to LCEs are being raised by stakeholders.

IAASB Decisions

142. After considering a draft proposal for an initial period of stability of five years once the ISA for LCE
becomes effective (December 15, 2025), the IAASB agreed that a shorter period would be more
appropriate in terms of balancing different demands and expectations. The IAASB decided to have
an initial period of stability of at least three years once the standard becomes effective (i.e., the first
revision to the ISA for LCE would not become effective before December 15, 2028). The IAASB
agreed that it is important to provide stakeholders an initial period of stability as that will give them
time to adopt and implement the standard before introducing revisions to the standard.

143. The IAASB will consider the best way to maintain the ISA for LCE after the initial period. A core
consideration in deciding the way forward is that the ISA for LCE must remain up to date and, to the
greatest extent possible, consistent with the ISAs.

34
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