The German draft standard for audits of less complex entities (LCEs) compared with the IAASB draft

The German standards set the parameters regarding the type, complexity and size of the audited entity. The standards are restricted to use for mid-sized limited liability companies (and smaller ones) and to commercial partnerships; stock corporations and large limited liability companies are excluded. The EU size criteria is used to determine what a mid-sized limited liability company is.

The requirements were reduced to the relevant risk situation. From the pool of standards all those were removed which are not applicable (e.g., ISA 610) as well as almost all of the appendices. Should the actual circumstances of the audited company differ from this classification or typing, the auditor must comply with the necessary German requirements and also the necessary ISA standards.

The German approach is a “bottomup” approach in contrast to the IAASB “top-down” method which means that the auditor has to exclude the nonrelevant standards. These standards are only applicable to entities that use German accounting principles and do not have a complex IT.

The German standards require only the consideration of internal control, not an evaluation of it, because for simple entities such an evaluation is not needed. The risk assessment section of the requirements in ISA 540 was considerably shortened, as were the requirements for evaluating methods, data and assumptions for accounting estimates.

The German institute of Auditors (IDW) is confident that the new German standards guarantee an audit opinion with reasonable assurance, but the IDW remains interested in having international standards for LCE audits and would rather adopt those than creating its own German LCE standards. However, at the moment the IDW is of the opinion that the advantages of the IAASB standards are not adequate compared to the German version. For this reason Germany will continue to keep its own standards.

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