The IAASB this month issued one of their very helpful and informative “Staff Questions and Answers” publications.  Cumbersomely titled “Applying ISAs Proportionately with the Size and Complexity of an Entity”, the publication cuts to the chase in respect of how ISAs should be applied in particluar to SMEs.  The staff publications are issued from time to time by the IAASB, and are normally in response to professional concerns on interpreting the ISAs.  For a copy of the publication visit the IAASB website here.  

The application of the auditing standards (ISAs/ASAs) to SMEs has been an area of difficulty for many of my customers, especially those that have been through quality control reviews, be they internal firm reviews or inspections conducted by an external regulator.

From my perspective, it was encouraging to see that the IAASB publication reinforced the fundamental concept of auditor’s professional judgement.  The auditors of SMEs, which make up the significant majority of both my clients and users of CaseWare, consistenly struggle with the fear of not adequately documenting compliance with auditing standards.

The IAASB publication points out the good news that under the Clarity Project there will be even more guidance to assist the auditor of the SME in applying the auditing standards.  To highlight this the publication points out the following: 

1. The objectives of the auditing standards do not differ depending upon the size or complexity of the entity being audited.  The audit approach for designing and performing audit procedures is not prescribed through specific procedures but “depends upon the auditor’s risk assessment”.   The IAASB points out that “the ISAs acknowledge that the appropriate exercise of professional judgement is essential to the proper conduct of an audit”.
2. Given that SMEs often operate a relatively simple business, audits conducted under the auditing standards will therefore be relatively straightforward.
3. Specific guidance exists within the auditing standards for their application to SMEs.  Numerous and varied examples exist and will often appear under the heading “Considerations Specific to Smaller Entities”.  
4. Auditor’s shall comply with all auditing standards “relevant” to the audit.  To be relevant, the circumstances behind the auditing standard must exist.  Therefore there is no need to comply with the auditing standard on internal audit functions where none exists.
5. Whilst an ISA may be relevant, certain aspects or requirements of it are conditional.  Conditional requirements will often be self evident, such as not needing a team discussion when there is only one person conducting the audit.  It is important to note here that the auditing standards do not call for compliance with requirements that are not relevant.
6. With respect to documentation the IAASB staff make a number of points.  FIRSTLY, the benchmark for sufficient and appropriate audit documentation is that an experienced auditor, having no previous connection with the audit, can understand the complying procedures conducted, the results and the significant matters.  SECONDLY, the auditing standards recognise that it is unrealistic to document every aspect of an audit such as compliance with matters (by checklist completion) when documents within the file demonstrate compliance.  An example would be a documented plan demonstrates that the auditor has planned the audit.  THIRDLY, professional judgement prevails when it comes to determining the form and extent of documentation.  For example, the extent of documentation is generally less for the smaller audit than that of the large audit.  LASTLY, the auditing standards contain guidance on the efficient forms documentation can take.  For example, documenting the auditor’s understanding of the entity, the overall audit strategy and the audit plan might be be incorporated into one document on a smaller audit.

In concluding, I would like to point out that nowhere in the auditing standards (pre or post Clarity) does it say that auditors must demonstrate through their audit documentation compliance or non-complaince with requirements that are not relevant to the audit. 

Happy auditing!

Justin Reid
Professional Standards Consultant