ICAI Seeks Comments on Exposure Draft for Audits of Less Complex Entities

1. Introduction

The Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) has issued an Exposure Draft on the “Standard on Auditing for Audits of Financial Statements of Less Complex Entities (SA for LCE)”, with the objective of introducing a simplified yet robust auditing standard tailored to entities with lower levels of complexity.

2. Exposure Draft on LCE

The proposed SA for LCE is designed to enable auditors to obtain reasonable assurance that the financial statements of Less Complex Entities are free from material misstatement, whether arising from fraud or error, while ensuring that audit procedures remain proportionate to the size, nature, and risk profile of such entities. The standard is premised on firms being subject to Standard on Quality Management (SQM) 1, thereby reinforcing that audit quality remains central even in a simplified framework.

3. Optional Use of SA for LCE

Despite the entity satisfying the criteria of a Less Complex Entity (LCE) as prescribed in the standard, the application of this Standard remains optional. The auditor may, based on professional judgment, elect to conduct the audit in accordance with the full set of Standards on Auditing (SAs) instead of the SA for LCE. In such cases, the audit shall be planned, performed, and reported strictly in compliance with the applicable Standards on Auditing, and no reference to compliance with the SA for LCE shall be made in the auditor’s report.

4. Criteria for Classification as a Less Complex Entity

A key feature of the exposure draft is the clear articulation of eligibility criteria for classifying an entity as an LCE. These criteria encompass:

4.1 Specific Prohibitions

An entity may be considered for audit under the “SA for LCE” only where no law or regulation restricts its application or mandates the use of any other auditing framework.

The entity must be unlisted in nature and should not operate as a banking or insurance entity, nor should its principal activities involve providing insurance services to the public. The framework is also not applicable in circumstances involving group audits, including situations where the principal auditor relies on the work of other auditors in respect of components of the entity.

Further, the entity should not be governed by any special statute and must operate as a standalone entity, i.e., it should neither be a holding, subsidiary, nor an associate of another entity. These conditions collectively ensure that the SA for LCE is applied only to entities with limited regulatory complexity and straightforward ownership and reporting structures.

4.2 Quantitative Criteria

From a quantitative perspective, an entity qualifies as a Less Complex Entity only if it remains within prescribed size thresholds. Specifically, its paid-up share capital does not exceed ₹10 crore, and its turnover, as reported in the profit and loss account for the immediately preceding financial year, is limited to ₹50 crore.

In addition, the entity should not have borrowings, including public deposits, exceeding ₹25 crore at any point during the accounting year. Where applicable, such as in the case of Section 8 companies or similar entities, cumulative grants and donations should also not exceed ₹25 crore at any time during the year.

Further, the entity’s employee strength must remain within 100 employees throughout the accounting year, ensuring that the scale of operations remains consistent with the characteristics of a less complex entity.

4.3 Qualitative Criteria

From a qualitative standpoint, an entity may be regarded as a “Less Complex Entity” only where it is exempt from the requirements of Section 143(3)(i) of the Companies Act, 2013, which mandates reporting on the adequacy and operating effectiveness of internal financial controls with reference to financial statements.

In addition, the entity’s business activities, operations, and related transactions should be straightforward in nature, with no complex matters or circumstances that could significantly affect the preparation of the financial statements.

Further, there should be no indicators of heightened complexity arising from the entity’s ownership structure, corporate governance arrangements, or the policies, procedures, and processes established by the entity. Collectively, these conditions ensure that the entity’s financial reporting environment remains simple and transparent, consistent with the objectives of the SA for LCE framework.