FRC announcements: Audit supervision, SME audits and calls for feedback

The Financial Reporting Council (FRC) has announced changes to audit supervision, new guidance to support more proportionate and efficient SME audit guidance and current calls for stakeholder feedback. Find out what’s changing, what it means for firms and the latest consultations you can respond to.

Evolved approach to audit supervision

On 25 March, the FRC introduced its evolved approach to audit supervision.

This marks a major development in the FRC’s audit supervisory model, with a more proportionate, effective and joined up framework designed to improve audit quality and strengthen resilience across the UK audit market.

The revised approach places firms’ Systems of Quality Management (SoQM) at the centre of supervision activity. It’s designed to strengthen audit quality, promote a more resilient audit system, and make sure that the UK continues to offer an environment where organisations can confidently grow and scale.

Implementation will begin in April 2026 for the largest Public Interest Entity (PIE) audit firms, with further developments piloted during 2026/27.

This work complements the FRC’s other key projects, including Building Capacity and Capability for Smaller Firms and the SME market study. It also supports a more coordinated supervisory framework across both PIE and non-PIE audits.

Measures to support SME audits

On 25 March, the FRC announced a package of measures to make audits more proportionate and efficient for small and medium-sized enterprises (SMEs).

These measures form part of the FRC’s wider work with ICAS and the other Recognised Supervisory Bodies (RSBs) to support a more proportionate approach to the conduct and supervision of audit. They are designed to make SME audits more practical, proportionate and appropriate for smaller, less complex businesses.

The measures include:

• New guidance to support auditors apply auditing standards in a way that is relative to the complexity and size of the business.
• A new programme of engagement with auditors of SMEs to support understanding of this new guidance.
• A Technology Sandbox within the FRC’s Innovation and Improvement Hub which will enable smaller audit firms to get support when adopting AI and new technology to improve audit quality.
• A new working group with the RSBs to promote more consistency in how audits of SMEs are supervised.
• Engagement with stakeholders on the international Less Complex Entities auditing standard, providing UK stakeholders with the opportunity to influence its future development (as commented upon elsewhere in this Audit News).

Two key early outputs from this work are the final report on the SME audit market study and Practice Note 28 - Guidance for audits of small and medium-sized entities, both published on 24 March 2026.

SME audit market study

The market study found that:

• The SME audit market is broadly functioning well, with some strong competition and good availability of audit services.
• Nearly 9 in 10 audits are delivered by firms outside the largest UK audit firms.
• Most SMEs report no issues finding an auditor and consider audit fees to represent good value for money.

Some SMEs identified opportunities to make audits more efficient and proportionate. In particular:

• Regulatory requirements and the way audits are supervised can lead to more work being done than is necessary.
• There’s a perception that auditing standards don’t always scale well for smaller, less complex businesses. There’s also a need for clearer guidance to support more proportionate application in practice.
• There’s mixed understanding of how ethical requirements apply. Some SME auditors are not fully using existing flexibilities within the Ethical Standard.
• The current supervisory framework may, in some cases, discourage a more risk-based and proportionate approach to SME audits.
• Smaller audit firms can face barriers to adopting and tailoring new technologies, including AI, due to limited resources and technical expertise. These firms often rely on off-the-shelf solutions.
• There’s a lack of clarity on how technologies, including AI, can be used to add clear value to SME audits.
• While audits are generally seen as valuable, they may not always be the most proportionate option for all SMEs. There is scope to better support businesses in maximising the benefits of the audit process.
• Levels of knowledge and understanding of audit vary across the SME market, highlighting a need for greater awareness and support for both auditors and businesses.

Practice Note 28: Guidance for audits of small and medium-sized entities

Practice Note 28 provides guidance to auditors on how to apply the requirements of the International Standards on Auditing (ISA) to the audit of financial statements of SMEs in a scalable, proportionate and effective way. The guidance is designed to be applicable regardless of an entity’s legal structure, so should be relevant to a wide range of entities, including companies, charities and public sector bodies.

Firms involved in SME audits should read the practice note as a priority. It will help set clearer expectations for auditors of SMEs, but also RSBs and the FRC for what a good SME audits should look like.

The latest edition of our Audit News newsletter doesn’t include detailed comment on this practice note. Future newsletters and ICAS’ audit monitoring work will refer to and reflect the guidance.

Calls for stakeholder feedback

On 26 March, the FRC launched two consultations to support the development of UK audit policy.

International Standard for Auditing for Less Complex Entities

The FRC is calling for stakeholders views on the International Standard for Auditing for Less Complex Entities (‘ISA for LCE’). This will inform its ongoing engagement with the International Auditing and Assurance Standards Board (IAASB).

The primary purpose of the call is to better understand stakeholders’ views on the ISA for LCE, including desired amendments for the standard at an international level. Audit firms are encouraged to share their views on how audits of less complex entities can be delivered more proportionately while providing the same level of assurance and evidence as a full ISA (UK) audit.

At this stage, the FRC is not exploring the adoption of the LCE standard in the UK. Any future consideration of potential adoption will follow the conclusion of the IAASB’s project.

Read the call for views and submit your response by Thursday 21 May 2026.

ISA (UK) 250 and ISA (UK) 270

The FRC is also re-consulting on proposed revisions to ISA (UK) 250 and ISA (UK) 270. This is to make sure auditors take a proportionate approach to a key area of their engagements with entities:

• The revisions to ISA (UK) 250 seek to introduce a risk-based approach to audit work on laws and regulations, focusing on risks of material misstatement that are due to non-compliance with laws and regulations. This includes the removal of the outdated distinction between 'direct' and 'indirect' laws and regulations, a focus on laws that are 'fundamental' to how an entity operates and clarification that specialist legal expertise will not normally be required.
• ISA (UK) 270 is renamed, renumbered and made more principles-based to make clear that reporting obligations to appropriate authorities can arise across any area of the audit, not only in cases of non-compliance with laws and regulations. The revised standard also provides greater clarity on which authorities auditors should report to and confirms that this may mean reporting to more than one authority.

Read the consultation document and send your written response to the consultation by Thursday 28 May 2026.

The FRC will announce most of its remaining consultations in June, September and December 2026.