HEHENDRAWANTOAUDIT, ACCOUNTING & TAX

ARTICLE · AUDIT AND ASSURANCE

ISA for LCE: Proportionate Audits Without Lowering Quality

Who may use it, why entity size is not enough, and what Indonesian audit firms and management should prepare

By Hendrawanto, SE., Ak., CA., CLI., AseanCPA., CPA., CFI. · · Baca dalam Bahasa Indonesia

An audit desk showing a structured evidence path in the foreground and a more complex information network in the background

The ISA for LCE addresses a real problem: an audit of a less complex entity must remain robust, while its requirements and documentation should be easier to navigate and proportionate to the engagement. It is a mistake to describe it as a “light ISA,” a “cheap audit,” or the automatic standard for every small business.

The International Auditing and Assurance Standards Board (IAASB) issued the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities on 6 December 2023. This standalone standard is effective for audits of financial statements for periods beginning on or after 15 December 2025—but only in jurisdictions that adopt or permit its use. By July 2026, the IAASB reported that more than 30 jurisdictions had adopted it.

GlobalFinal standard issued in 2023; internationally effective for periods beginning 15 December 2025 where adopted or permitted.
IndonesiaIAPI says adoption is in progress, targeting periods beginning 31 December 2027. A target is not a final effective requirement.
2026 updateProposed changes on fraud, going concern, public-interest concepts and experts remain an Exposure Draft.

What Changes—and What Does Not

The ISA for LCE is standalone: an auditor does not need to move back and forth through every ISA to design the audit. Its requirements follow the engagement flow—fundamental concepts, evidence and documentation, engagement quality management, acceptance, planning, risk assessment, responses, completion and forming an opinion. Part 10 adds special requirements for eligible group audits.

The outcome does not change. The auditor still obtains reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance remains a high, but not absolute, level of assurance. Professional scepticism and judgement, sufficient appropriate evidence, quality management, communication, documentation and an auditor's report remain essential.

Same destination, tailored route
ISAsThe complete framework for a broad range of entities and complexity.
Reasonable assurance
a high level of assurance
ISA for LCEA proportionate standalone standard for eligible entities.
Proportionality changes navigation and relevant requirements. It does not lower the audit objective or the quality of evidence required.

Indonesia: Prepare, but Do Not Apply Prematurely

At 15 October 2026, IAPI's public SPAP index still lists the 2025 Indonesian Standards on Auditing and does not list the ISA for LCE as an effective Indonesian standard. In an official article dated 10 September 2026, IAPI said that adoption by DSPAP I–IAPI was under way and targeted an effective date for periods beginning on or after 31 December 2027.

That date must be read as an adoption target, not current authority to issue an auditor's report under the ISA for LCE. The standard's Indonesian form, scope, quantitative thresholds, transition rules and effective date require IAPI's final decision. In the meantime, IAASB materials are appropriate for horizon scanning, training and gap analysis.

Eligibility: Four Gates and a Reassessment

Eligibility is not established by a single revenue figure, employee count or private-company status. A defensible decision must pass every gate below.

Decision path for using the ISA for LCE
  1. JurisdictionHas the local regulator or standard setter adopted or permitted its use?If not: stop.
  2. ProhibitionsIs the entity or engagement within a prohibited category?If yes: use applicable ISAs/SAs.
  3. ComplexityDo the qualitative characteristics show that the entity is genuinely less complex?Size alone is insufficient.
  4. Local thresholdsAre all local quantitative limits or entity-class rules met?Follow the jurisdiction.
  5. ReassessAfter risk assessment, does the basis for use remain appropriate?Document or transition.
Every gate must be passed. Where there is uncertainty about whether an engagement is within scope, the standard says the ISA for LCE is not appropriate.

Gate 1—Jurisdictional Adoption or Permission

The IAASB sets the global standard, but legislative or regulatory authorities and national standard setters decide who may use it. They may prohibit additional entity classes, modify qualitative characteristics or establish quantitative thresholds. A firm's methodology policy cannot replace jurisdictional authority.

Gate 2—Explicit Prohibitions

Under the ISA for LCE's Authority, the standard may not be used where law or regulation prohibits it; the entity is listed; one of its main functions is taking deposits from the public; or one of its main functions is providing insurance to the public. A jurisdiction may add other prohibited classes.

Group-audit restrictions require careful reading. The ISA for LCE cannot be used where a component itself is in a prohibited class or component auditors are involved, except where their involvement is limited to physical presence for a specific audit procedure. An entity may therefore be small by size yet prohibited because of its public-interest function or engagement structure.

Gate 3—Qualitative Complexity

If no prohibition applies, the auditor considers whether the entity's overall characteristics are genuinely less complex. The indicators are not an absolute checklist, and no single characteristic determines the answer.

Six lenses on complexity
Business and industryFew business lines or revenue streams; the model and regulation do not create pervasive complex risks.
Ownership and governanceTransparent ownership and beneficial owners; a straightforward organisation and management team.
Finance functionCentralised records, few reporting personnel, and relatively direct transactions and reporting processes.
Information technologyCommercial software or a simple IT environment without complex integrations and system changes.
Estimates and reportingFew high-uncertainty estimates, complex instruments or difficult accounting judgements.
Group structureFew entities, locations and jurisdictions; simple consolidation; no restrictions on access to information.
“Five or fewer” in some IAASB examples is an indicator—not a universal threshold. Jurisdictions may establish different limits.

Gate 4—Local Quantitative Thresholds

A local authority may use revenue, assets, employee numbers or other measures to clarify the scope. Those numbers work with the qualitative assessment; they do not replace it. An entity below a threshold may still be too complex, while an entity above it may be excluded even when its operations are simple.

Reassessment After Understanding the Entity

The initial decision is made at acceptance or continuance, but complexity may only emerge as the auditor gains an understanding and assesses risk. The engagement partner must reassess appropriateness, document the basis, and—if the standard is no longer suitable—determine how to transition to full ISAs or SAs under the jurisdiction's rules and engagement circumstances. Having already started with an LCE template is not a reason to stay with the wrong framework.

Three Cases That Test the Logic

Small does not always mean less complex
Owner-managed distributorOne location, one revenue stream, active owner, standard accounting software, straightforward transactions and estimates.
Candidate—not automatic
Deposit-taking fintechA small team and modest revenue, but one main function is taking deposits from the public.
Prohibited by the Authority
Four-entity groupConsolidation appears simple, but component auditors perform audit work at subsidiaries.
Check group-audit prohibition
These examples are illustrative. An actual decision requires jurisdictional rules, engagement facts and documented professional judgement.

How the Standard Is Organised

  1. Parts 1–3: fundamental concepts; audit evidence and documentation; and engagement quality management.
  2. Parts 4–9: acceptance/continuance, planning, identifying and assessing risks, responses, completion, and forming an opinion and reporting.
  3. Part 10: special considerations for eligible group financial statement audits.
  4. Appendices and Essential Explanatory Material: definitions, application assistance and explanations supporting the requirements.

Easier navigation is not permission to ignore circumstances outside the standard's design. Where a complex matter falls outside that design, compliance with the ISA for LCE alone may not yield sufficient appropriate evidence. Selecting a few full-ISA requirements to “patch” an unsuitable engagement does not automatically make the ISA for LCE appropriate.

Practical Impact for Audit Firms, CFOs and Audit Committees

Audit Firms and Auditors

  • Build an eligibility form that separates prohibitions, complexity indicators and local thresholds—not one question asking whether the client is small.
  • Set who approves use, when reassessment occurs and how a transition to full SAs/ISAs will be managed.
  • Map methodology, templates, report libraries, technical consultation, training and inspections. The engagement partner must still be from a firm applying the ISQMs or national requirements at least as demanding.
  • Train teams on boundary cases. The risk is not only a flawed procedure but choosing a framework that is unauthorised or unsuitable.

Directors and CFOs

  • Do not request ISA for LCE merely to reduce fees. Reporting, systems, transaction, estimation and group complexity must be disclosed completely.
  • Prepare an entity map, ownership and beneficial owners, revenue streams, IT applications, unusual transactions, major estimates and consolidation process.
  • Understand that omitting irrelevant work does not reduce management's responsibility for the financial statements, controls, data and access to information.

Audit Committees

  • Ask for the jurisdictional basis and eligibility documentation—not just whether the entity is “small.”
  • Ask how quality, scepticism, independence and evidence will be maintained.
  • Ensure business changes, acquisitions, new systems, complex financing or material estimates trigger reassessment.

A 90-Day Readiness Plan

  1. Days 1–30—map. Name an owner; study the Authority and final standard; inventory potential engagements without concluding eligibility before Indonesia's final rules.
  2. Days 31–60—design. Draft the prohibition/complexity matrix, consultation protocol, reassessment points, methodology gap analysis, training plan and quality controls.
  3. Days 61–90—simulate. Run tabletop tests on anonymised engagements, identify difficult judgement areas, test transition to full SAs, and refine documentation. Do not issue an ISA for LCE report before it is permitted.

The 2026 Proposed Revision Is Still a Draft

On 22 July 2026, the IAASB issued an exposure draft of targeted changes to align the ISA for LCE with revised standards on fraud and going concern, changes to listed-entity and public-interest-entity definitions, and the use of an auditor's expert. Comments close on 17 November 2026. Those proposals are not final and should not be mixed with the currently issued ISA for LCE requirements.

Conclusion

The ISA for LCE offers a more proportionate audit without offering a lower level of assurance. Its value is a standalone standard focused on less complex circumstances; its risk is overly broad use. The first question is therefore not “What is the company's revenue?” but “Does the jurisdiction permit it, are all prohibitions cleared, is complexity appropriate, are local thresholds met, and does that conclusion remain valid after risk assessment?”

In Indonesia, the appropriate response at 15 October 2026 is to prepare methodology and competence while waiting for IAPI's final decision. See also Financial Statement Audit, Audit Evidence in the AI Era, or the Proposal page.

Official References

This article is educational information, not an audit opinion or professional advice for a particular engagement. Indonesian status and eligibility must be determined from applicable standards, jurisdictional decisions and engagement facts. The Indonesian version is the original text.