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e Auditing & Assurance Standards Board (AuASB) recognises that small entities give rise to a number of special audit considerations. This Auditing and Assurance Guidance Statement (AGS) does not establish any new requirements for the audit of small entities; nor does it establish any exemptions from the requirements of AUSs. All audits of small entities are to be conducted in accordance with AUSs.
.02 The objective of this AGS is to describe the characteristics commonly found in small entities and indicate how they may affect the application of AUSs. This AGS includes:
(a) Discussion of the characteristics of small entities; and
(b) Guidance on the application of AUSs issued until March 2003 to the audit of small entities.
.03 The owner-manager of a small entity often needs assistance with the preparation of accounting records and a financial report. Professional Statement F1 “Professional Independence” deals with independence, and auditors considering rendering other services to small entity audit clients are to refer to this statement. The appendix to this AGS contains a commentary on the application of AUSs when auditors also prepare the accounting records and financial report of small entity audit clients.
.04 In determining the nature and extent of the guidance provided in this AGS, the AuASB has aimed to provide a level of guidance that will be of general applicability to all audits of small entities and that will assist the auditor in exercising professional judgement with respect to the application of AUSs. However, detailed guidance of a procedural nature has not been provided, as the issue of such guidance may undermine the proper exercise of professional judgement in auditing.
The Characteristics of Small Entities
.05 The auditor of any entity adapts the audit approach to the circumstances of the entity and the engagement. The audit of a small entity differs from the audit of a large entity as documentation may be unsophisticated, and audits of small entities are ordinarily less complex and may be performed using fewer assistants.
.06 The meaning of “small entity” in this context gives consideration not only to the size of an entity but also to its typical qualitative characteristics. Quantitative indicators of the size of an entity may include balance sheets totals, revenue and the number of employees, but such indicators are not definitive. Therefore it is not possible to give an adequate definition of a small entity solely in quantitative terms.
.07 For the purposes of this AGS, a small entity is any entity in which:
(a) There is concentration of ownership and management in a small number of individuals (often a single individual5); and
(b) One or more of the following are also found:
• Few sources of income;
• Unsophisticated record-keeping;
• Limited internal controls together with the potential for management override of controls.
.08 The qualitative characteristics described above are not exhaustive, they are not exclusive to small entities and small entities do not necessarily display all of those characteristics. For the purposes of this AGS, small entities will ordinarily display characteristic (a), and one or more of the characteristics included under (b).
Concentration of Ownership and Management
.09 Small business entities ordinarily have few owners; often there is a single proprietor. The owner may employ a manager to run the entity but is