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International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE)

Background

The ISA for LCE is a standalone global auditing standard issued by the International Auditing and Assurance Standards Board (IAASB). The standard has been designed and tailored specifically for smaller and less complex entities, with the goal of providing the same level of 'reasonable' assurance.

The IAASB issued an exposure draft for consultation on the ISA for LCE in July 2021, which followed a period of information gathering and engagement with stakeholders. Following this, a second exposure draft related to group audits was issued in January 2023, ahead of final approval of the ISA for LCE which occurred in September 2023. The standard is effective for audits of financial periods beginning on or after December 15, 2025 for jurisdictions that adopt or permit its use.

What is the ISA trying to achieve?

The ISA for LCE was developed in recognition of the specific needs of smaller, less complex entities, and the practitioners auditing them. Its goal is to apply the same audit principles, and substantially the same requirements, while using a simplified structure and concise language to support audit engagements for these entities. The IAASB has stated that the standard does not require less work to carry out an audit, and it does not reduce audit cost.

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Who is the Standard designed for?

The ISA for LCE may not be used in the audit of a listed entity or a public interest entity including insurers or credit institutions.

To use the ISA for LCE, the auditor must take a number of characteristics into consideration, including business activities, ownership structures, the finance functions, technology, and its accounting and financial reporting. An entity must be considered not complex in all aspects of its business to enable the use of the ISA for LCE. It is important to recognise these limitations in flexibility, which were intentionally built into the scope. The FRC cannot remove these limitations in a UK version, as this would result in a standard that was inconsistent with the international version, and would result in UK standards falling below international standards. In the UK, we have a statutory audit exemption threshold that applies to many entities that would fall in scope of the ISA for LCE. The UK Government has already taken steps to address regulatory burdens on small and less complex entities by removing auditing requirements for certain categories of businesses.

How is the FRC delivering proportionality for the SME audit market?

As the competent authority for audit in the UK, the FRC wants to ensure that all audits are carried out in a proportionate manner that is reflective of the scale and complexity of the business, and the risk of material misstatement of an entity's accounts arising from fraud, error or non-compliance with law and regulation.

Auditing standards need to work effectively, and be applied proportionately, for the audit of small and medium sized enterprises. To support this, the FRC will publish for consultation a Practice Note designed to enhance auditors' application of the existing auditing standards for the small and medium sized entities. This will explain the opportunities for scalability and proportionality in the standards and clarify what an appropriate response might be in applying certain requirements in this context.

FRC campaign to support UK SMEs to grow and scale

Market study examining issues affecting SMEs including audit and reporting requirements
Guidance to support the proportionate audit of SMEs
Support materials for SMEs

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Name International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE)

Publication date 06 June 2025

Format PDF, 378.6 KB

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