An analysis of comment letters on a new, stand-alone standard for audits of less complex entities’ financial statements

Abstract

PurposeThe objective of this paper is to extend the debate on audit quality in the less complex entity (LCE) context by analyzing comment letters submitted to the International Auditing and Assurance Standards Board (IAASB). The IAASB has drafted a new, stand-alone standard for audits of LCEs’ financial statements.Design/methodology/approachThe Gioia method is utilized to conduct the qualitative analysis. This enables the material to shine and provide a comprehensive picture of the important aspects of the comment letters about the International Standard on Auditing (ISA) for LCEs. A content analysis of the 145 comment letters is conducted to identify the extent of the support for and the arguments against the new, stand-alone draft standard for audits of LCEs’ financial statements. In addition, this study considers how the comment letters describe the respondents’ views on audit quality in relation to the new standard. Finally, the tone of the comment letters and audit quality arguments is investigated.FindingsThe findings provide a useful framework of the most frequently used arguments supporting and opposing the ISA for LCEs. Within the themes identified, a wide variety of issues and concerns are discussed. The results reveal that the arguments in the comment letters are contradictory. For instance, when discussing audit quality, those interest groups that perceived many positive opportunities in the adoption of the ISA for LCEs thought that the audit quality would increase. Conversely, those interest groups that were skeptical about the success of the ISA for LCEs argued that the audit quality could be compromised by the general prejudice that the ISA for LCEs might be perceived as a lower-quality audit with fewer procedures.Originality/valueThis paper is, to the best of the authors’ knowledge, the first to examine the content of comment letters in the context of a new, stand-alone standard for audits of LCEs. The international audience can utilize the results in the context of the widely discussed issue of reducing LCEs’ auditing obligations. This study aims to contribute to the two streams of accounting literature concerning audit quality and political lobbying.

An examination of comment letters on suggested Part 10: audits of groups' financial statements in the proposed ISA for less complex entities

“…The second-highest participation rate was from Asia/Oceania (16.7%), and the lowest participation rate was from Africa (11.7%). These results are line with those of the first consultation round (Haapam€ aki and M€ aki, 2023).…”

“…The challenges in the transition and the perception of two different levels of audit were also brought up in the first consultation round (Haapam€ aki and M€ aki, 2023). The quotes below support these thoughts:…”

“…Researchers have utilized written comment letters because they are usually the main source available to them (Weetman et al, 1996). Therefore, a large number of articles have analyzed comment letters or similar submissions on proposed changes to accounting and auditing regulations or similar documents (for example, Jupe, 2000;Davis and Hay, 2012;Allam et al, 2017;Baudot et al, 2017;Haapam€ aki, 2022;Haapam€ aki and M€ aki, 2023). Moreover, content analysis of comment letters has been performed in many auditing studies as a technique to analyze the different and sometimes conflicting views of various parties (Davis and Hay, 2012;Haapam€ aki, 2022).…”

“…This kind of concerns was already highlighted during the first consultation round. The CLs of the first round emphasized that such a prohibition, along with the lack of clarity regarding the use of ISA for LCE for the audit of a component of a group audit engagement can have a significant detrimental effect on the implementation of the standard (Haapam€ aki and M€ aki, 2023).…”

“…However, many of the interest groups disagreed with the exclusion of audits of group financial statements from the proposed scope. They stated that the prohibition on employing the ISA for LCEs for group audits would heavily limit its potential use (Haapam€ aki and M€ aki, 2023). To clarify, group audits were not included in the scope of the original Exposure Draft of the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCEs).…”