Less Complex Entities, a New Approach to Auditing: How the Audit of Financial Statements of LCEs Is Changing

In recent years, it has become increasingly evident that the audit of financial statements should take into account the scale and complexity of an entity’s operations. In practice, for many years less complex organizations were often audited using similarly extensive frameworks as large entities. For many businesses, this meant a significant commitment of time and resources that was not always proportionate to the nature of their operations.

A response to these challenges appears to be the International Standard on Auditing for Less Complex Entities (ISA for LCEs), developed by the International Auditing and Assurance Standards Board. This standard represents an effort to organize the approach to auditing entities with simpler operational structures by introducing a more proportional and scalable audit model.

Although decisions regarding the formal adoption of the Standard—within the remit of national regulators—have not yet been made, and its practical application may not always be straightforward, the direction of change is clear: greater focus on actual risks and better alignment of audit procedures with the specifics of the audited entity. Importantly, the existing International Standards on Auditing already allow for adjusting the nature, timing, and extent of audit procedures to the size, complexity, and risks specific to an entity through the principle of scalability, which is expressly emphasized in a number of ISAs, particularly those concerning planning and risk assessment.

Practical challenge: the same requirements, different business realities

For many business owners and management board members, a financial statement audit involves certain organizational challenges. The audit process often requires the involvement of key employees, preparation of numerous materials, and adjustment of the organization’s work schedule to the course of the audit.

In the case of less complex entities, a particular paradox has been visible: financial statement audits were often conducted according to frameworks designed primarily for large and complex organizations. This did not stem from the standards themselves—which have long permitted a proportional approach—but rather from how they were applied in practice.

The new approach to auditing less complex entities helps to organize this area by emphasizing scalability and focusing on areas that are genuinely significant from a risk perspective.

What changes with a scalability-based approach under ISAs

In practice, this primarily means better alignment of the audit process with the nature of the entity’s operations.

An audit based on the principle of scalability assumes that the scope of audit procedures should correspond to the actual level of operational complexity and identified risks. As a result, the audit process can be more focused on areas that are key to the reliability of the financial statements.

Such an approach allows, among other things, to:

• reduce excessive procedural and documentation burdens,
• better align the audit schedule with the organization’s operations,
• increase transparency of the audit process for management and owners.

At the same time, it is important to emphasize that scalability does not mean a reduction in audit quality. The audit is still conducted in accordance with ISAs and aims to obtain reasonable assurance regarding the reliability of the financial statements.

Greater predictability of the audit process

One of the key benefits of a more structured approach to auditing less complex entities under ISAs is increased predictability of the audit process.

Better alignment of procedures with the nature of operations allows for more precise planning of the audit schedule and reduces the risk of scope expansion during the engagement. As a result, cooperation between the audit team and the client organization can proceed in a more structured and predictable manner.

For management and owners, this primarily means:

• greater transparency of the audit process,
• better planning of the organization’s resource involvement,
• stability of the audit timeline and costs.

Approach applied in practice

In practice, effective auditing of less complex entities requires not only knowledge of the standards but also experience in working with organizations of varying sizes.

The ability to properly identify risk areas and design audit procedures appropriate to the entity’s specific characteristics is crucial. This ensures that the audit remains a reliable tool for enhancing the credibility of financial information while avoiding excessive organizational burden.

Direction of change in auditing

The development of standards such as the ISA for LCEs demonstrates that auditing is increasingly moving toward an approach better tailored to the realities of business operations.

For less complex entities, this means the possibility of conducting financial statement audits in a more proportional manner—focused on real risks and better aligned with the scale of the business.

As a result, auditing can more effectively fulfill its primary function: strengthening the credibility of financial information and supporting owners and management in making business decisions.