Draft Turkish "Standard for Audits of Financial Statements of Less Complex Entities" (ISA for LCE)

Entities that may fall within the scope of the ISA for LCE

The Turkish version of the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE) may be applied in audits of the financial statements of less complex entities (LCEs). The typical characteristics of these entities are as follows:

1. Operations and business model

• The entity's operations consist of a limited number of business lines or revenue streams.

• The sector in which it operates does not involve heavy regulatory or prudential requirements.

• It does not involve widespread financial risks or complex financial instruments.

2. Organisational structure

• It has a simple management structure (for example, a key management team of fewer than 5 people).

• It has a small number of employees.

• It has no complex structure of associates, subsidiaries or branches (i.e. it does not prepare group financial statements).

3. Ownership structure

• Ownership is transparent; shareholders are directly known.

• These are family businesses or small partnerships.

4. Finance function and IT systems

• It uses simple accounting software, without customised ERP systems.

• IT processes and the internal control environment are not complex.

• The financial reporting function is centralised and run by a small number of staff (for example, 5 or fewer).

5. Financial reporting

• There are no significant accounting estimates or complex measurement models.

• Simple financial reporting frameworks (for example, TFRS for SMEs or local standards) are used.

6. Group audit (if any)

• These may be simple structures consisting of at most a few (for example, 5 or fewer) entities.

• All components use similar accounting policies and the same reporting period.

• The consolidation process is simple and does not involve complex adjustments.

Entities excluded from (prohibited under) the ISA for LCE

Under paragraph A.1, the ISA for LCE cannot be applied in the following cases:

1. Situations prohibited by legislation

• If national legislation prohibits the use of the ISA for LCE or requires other standards (for example, the full ISAs) to be applied.

2. Listed entities

• All entities that are public or whose shares are traded on an organised market are excluded.

3. Public interest entities

The following are strictly outside the scope of the ISA for LCE:

• Entities that take deposits from the public (for example, banks and participation finance institutions).

• Entities that provide insurance to the public (insurance and reinsurance companies).

• Other specific classes that regulators have designated as "prohibited from using the ISA for LCE" (for example, financial holding companies and pension funds).

4. Group (consolidated) financial statements

• The ISA for LCE cannot be used for group audits. Exception:

  • Cases in which component auditors only perform limited procedures (for example, inventory counts or document inspection).

• If any entity in the group falls into the prohibited classes above, the entire group is outside the scope of the ISA for LCE.

Quantitative thresholds (to be set by local authorities)

• The KGK or regulators will set the size thresholds for an entity to be considered a "less complex entity".

  • For example, according to the European Commission definition:

Entities with fewer than 50 employees and annual turnover or a balance sheet total not exceeding €10 million are considered small enterprises.

• In Türkiye, these thresholds may be defined differently (for example, on the basis of total assets, net sales and number of employees).