• Print
  • Share
Comment Letter to Nordic Standard for Audits of Small Entities
Oct 18, 2015

Comment Letter to Nordic Standard for Audits of Small Entities

Dear Mr Hagen


Comment Letter Nordic standard for audits of small entities

Crowe Horwath International is delighted to present a comment letter on the Consultation Paper Nordic standard for audits of small entities. Crowe Horwath International is a leading global network of audit and advisory firms, with members in some 125 countries.

We have followed the preparation of the consultation paper of the "Nordic standard" with interest.


We welcome the efforts made by the Nordic Federation to encourage a debate about the approach to the audit of small entities, and in particular the application of International Standards on Audit ("ISAs") on these audits. We recognise that in the Nordic countries a significant number of small entities, including micro entities, continue to receive an audit of their financial statements. However, the issue of consultation also presents an opportunity for a wider debate about assurance for the smaller entity, including micro-entities.


In this letter, we have not responded to the specific questions in the consultation paper. Instead, we express our view that the Nordic Federation should enter into a dialogue with the International Audit & Assurance Standards Board ("IAASB") about guidance that assists the auditor of smaller and micro-entities, and we call for a wider debate about assurance for smaller entities.


In principle, there is no reason why the Nordic Federation cannot prepare an assurance standard for reporting on micro-entities that are exempt from statutory audit. The merits of such a proposed assurance standard are best discussed by stakeholders in the Nordic countries, including the owner managers of micro-entities, providers of finance, taxation authorities, business support agencies and the assurance profession. However, as we state below, we believe that it would be better to describe this assurance using a name other than "audit". This gives the proposed form of assurance a distinct identity and avoids confusion with "audit" as recognised by ISAs and European Regulations and Directives. We also believe that it would be better for the Nordic Federation to collaborate with the IAASB to develop a new global form of assurance for micro-entities.


Working with the IAASB


The IAASB is the global body permitted to develop, through due process, and issue, subject to oversight procedures, Auditing Standards. The IAASB's standards have been recognised in European Regulations and Directives. We are concerned that an attempt by another body to issue an "auditing standard" could create confusion and undermine the public interest. There could be conflicting interpretations as to the definition of "audit" and the nature of the procedures that have been applied to deliver an "audit". Therefore, we would encourage that another term is devised to distinguish the proposed form of assurance.


This project is well intentioned and seeks to address a concern that has been identified by the members of the Nordic Federation. Rather than continue with a separate project, we would encourage the Nordic Federation to engage with the IAASB about both guidance for the auditors of smaller entities and the wider subject of assurance for smaller entities. The Nordic Federation has the opportunity to lead a global debate and influence the IAASB's guidance materials and future standards.


The IAASB should take note of the concerns raised by the Nordic Federation and the proposals set out in the consultation paper. The IAASB should add audit and assurance of smaller entities to its current programme of activities.


Guidance for the audit of small entities


The Nordic Federation has been willing to open a discussion about the audit of small entities. Some smaller entities will continue, for good and positive reasons, to seek an audit of their financial statements. There are concerns about the application of ISAs to these audits, and the Nordic Federation should present their concerns to the IAASB.


The integrity of the ISAs has to be maintained, but there we believe that the following may assist the application of ISAs to smaller audits:


  • The Application Guidance in ISAs applying to smaller audits can be reviewed, and where appropriate, revised and extended.
  • The IAASB's Staff Q&A Applying ISAs Proportionately with the Size and Complexity of an Entity was issued in 2009 and therefore needs to be updated.
  • UK Practice Note 26 has been a well-regarded source of guidance about small entity audit documentation. The IAASB could prepare an international version of this that applies ISAs.
  • The IFAC SMP Committee's Guide to Using ISAs in the Audit of SMEs is too long and too theoretical to be of practical assistance in the audit of smaller entities. The IAASB should take the lead in preparing an updated version of the guide that is more succinct and practical, perhaps following the approach of UK Practice Note 26.

The Nordic Federation could be invited by the IAASB to take the lead, supported by other interested parties, in considering the above sources of guidance, as well as developing new resources to assist the auditors of smaller entities.


Other forms of assurance for smaller entities


The Nordic Federation has developed the proposed standard because of concerns about the application of ISAs to smaller audits. As well as discussing the resources that assist the auditors of smaller entities, there should be a debate about assurance and the smaller entity.


"Traditional" audit using ISAs is not necessarily the right form of assurance for a smaller entity. Traditional audit may not provide owner managers of a small business with advice and feedback that helps them with running their business. Review, or even some innovative new form of assurance, may be more appropriate.


There is the opportunity to be innovative and open a discussion about the right form of assurance that adds real value to a small business. The Nordic Federation's proposals could form the basis of a form of assurance that fits between a "review" and an "audit" as currently defined by the IAASB. A new name would be needed and the Nordic Federation's proposals need to be enhanced to reflect more "added value" concepts.


We trust that our comments assist the Nordic Federation by their work on this project.


We shall be pleased to discuss our comments further with you.


Kind regards

David Chitty

International Accounting and Audit Director