The Auditing and Assurance Standards Board of the Institute of Chartered Accountants of India has issued an Exposure Draft proposing a new auditing standard titled SA for the Audit of Financial Statements of Less Complex Entities, commonly known as SA for LCE.
The proposal reflects a shift towards proportional auditing, where audit effort is aligned with the complexity of the entity, without weakening the level of assurance expected from a statutory audit. For auditors, especially those servicing smaller and mid-sized entities, this draft deserves close attention.
Purpose of SA for LCE
SA for LCE is intended to provide a separate and self-contained audit framework for entities with straightforward operations and limited complexity. It recognises that applying the full set of Standards on Auditing to every entity, regardless of size or risk profile, can sometimes be inefficient without adding meaningful audit value.
Importantly, the Exposure Draft makes it explicit that audits under SA for LCE must still achieve reasonable assurance. Audit quality is not negotiable. Firms using this standard must continue to comply with Standard on Quality Management (SQM) 1, and where applicable, SQM 2.
The simplification lies in structure and scalability, not in lowering professional expectations.
Is the use of SA for LCE compulsory?
No. The proposed standard is entirely optional.
Even when an entity satisfies all the conditions of a Less Complex Entity, the auditor may still choose to apply the full Standards on Auditing. This decision is expected to be driven by professional judgment and engagement-specific risk considerations.
However, auditors may refer to SA for LCE in their audit report only when the standard is correctly applied and the entity genuinely qualifies. Incorrect application would prohibit such a reference.
Entities excluded from SA for LCE
The Exposure Draft clearly identifies entities that are outside the scope, regardless of size or turnover. SA for LCE cannot be applied to:
- Listed entities
- Banking companies
- Insurance companies
- Entities governed by a special statute or Act
- Holding companies, subsidiaries, or associates
- Audits involving group structures or reliance on other auditors
In effect, the standard is restricted to standalone entities with low audit complexity.
Qualitative eligibility conditions
Eligibility is not based on numbers alone. A key qualitative condition is that the entity must be exempt from reporting on Internal Financial Controls under Section 143(3)(i) of the Companies Act, 2013. Entities requiring IFC reporting are, by definition, considered too complex for SA for LCE.
Further, the entity should not have complex business models, layered ownership, unusual transactions, or sophisticated governance arrangements. If such complexity exists, SA for LCE is considered inappropriate even if monetary thresholds are met.
Quantitative thresholds for Less Complex Entities
To qualify as an LCE, all of the following limits must be met:
- Paid-up share capital not exceeding ₹10 crore
- Turnover for the immediately preceding financial year not exceeding ₹50 crore
- Borrowings or deposits not exceeding ₹25 crore at any time during the year
- Grants or donations, where applicable, not exceeding ₹25 crore at any time
- Employee strength not exceeding 100 at any point during the year
Exceeding even one limit disqualifies the entity from using SA for LCE.
Continuous reassessment during the audit
A notable requirement in the Exposure Draft is that eligibility is not a one-time assessment.
Auditors must evaluate the appropriateness of using SA for LCE during engagement acceptance and reassess it during audit planning and risk assessment. If information emerges that increases audit complexity, the auditor is required to transition to the full Standards on Auditing.
This ensures that the standard is applied only where it genuinely fits.
Core audit responsibilities that remain unchanged
Although the standard is simplified, several fundamental audit expectations remain intact:
- Management override of controls is always treated as a significant risk
- Fraud risk assessment remains mandatory
- Going concern evaluation is required in every audit
- Professional judgment and skepticism are central throughout
- Documentation requirements remain robust, particularly around materiality, judgments, misstatements, and conclusions
SA for LCE streamlines execution, not accountability.
Practical implications for audit firms
For audit firms, particularly small and medium practices, SA for LCE presents an opportunity to align audit effort more closely with client complexity. Firms should begin by:
- Reviewing existing client portfolios against LCE eligibility criteria
- Identifying engagements where SA for LCE may be appropriate
- Training teams on differences between SA for LCE and full SAs
- Strengthening documentation around eligibility and risk assessment
The Exposure Draft also encourages stakeholders to submit paragraph-wise feedback with clear reasoning and suggested improvements.
Comment deadline
Comments on the Exposure Draft must be submitted by March 20, 2026 to the Auditing and Assurance Standards Board, ICAI, Noida, or via email at aasb@icai.in.
Key Concerns/ Suggestions
Conclusion
SA for LCE represents a calibrated move towards proportional auditing in India. It recognises diversity in entity complexity while preserving the core principles of audit quality, independence, and public interest.
For auditors, it offers flexibility without shortcuts. For stakeholders, it promises clarity without compromise. The consultation phase is a valuable opportunity to help shape how this standard will work in practice.
Source:
ICAI’s Exposure Draft (Feb-26) of Standard on Auditing for Audits of Financial Statements of Less Complex Entities (SA for LCE)