Different approaches to fraud risk assessment and its implications for audit planning: ISA versus isa less-complex entities

Abstract

Auditors are responsible for identifying and resolving material misstatements in financial statements based on relevant auditing standards. However, the International Standard on Auditing (ISA), commonly used as a reference, is often considered too complex for micro, small, and medium-sized enterprises (SMEs). In 2024, the International Auditing and Assurance Standards Board (IAASB) issued ISA for Less-Complex Entities (ISA LCE), which aims to provide audit standards tailored to entities with lower complexity levels. This study aims to examine the role of auditors in the assessment of fraud risks through two different auditing standard approaches, International Auditing Standards and Less Complex Entities (LCE)-based International Auditing Standards. The study uses a mixed-method approach. The quantitative approach employs from a survey of 85 auditors from various Public Accounting Firms (PAFs) and uses multiple regression analysis to examine auditor readiness in implementing ISA LCE audit standards. The results of the multiple regression analysis are triangulated by the qualitative research approach in the form of personal interviews with PAFs’ partners dan supervisors to explore how ISA LCE audit practices prevent fraud. The findings show that the application of ISA-LCE is more relevant for SMEs, considering their simple organizational structures and uncomplicated transactions. This standard also allows auditors to conduct audits more efficiently in terms of time and cost without sacrificing quality. The implementation of ISA-LCE also enhances transparency and accountability in SMEs' financial reporting. Reporting with ISA LCE is also more direct and focuses on key findings without requiring excessive detail. These findings offer valuable insights for academics, practitioners, and regulators regarding the implementation of ISA LCE standards in SMEs.