FRC Expectations on the Audit of SMEs: A More Proportionate, Practical Approach

The UK’s Financial Reporting Council (FRC) has announced a practical and more proportionate measures aimed at supporting small business growth.

The key points are:

Ø  The FRC’s latest announcement signals a more proportionate approach to SME audits in the UK. The main message is that audits of SMEs should be scaled to the size, nature and complexity of the business, rather than approached like reduced versions of large company audits.

Ø  This does not mean lower audit quality. It means applying auditing standards in a way that is practical, risk-based and relevant to smaller businesses.

Ø  A key development is updated guidance through Practice Note 28, which is intended to help auditors apply ISAs (UK) to SMEs in a more scalable and effective way.

Ø  The guidance focuses on areas that often create difficulty in SME audits, including:

·        understanding the entity and internal controls

·        fraud risk

·        going concern

·        accounting estimates

Ø  The FRC recognises that many SMEs are less complex entities, often with:

·        simple operations

·        owner-managed structures

·        basic accounting systems

·        fewer formal internal controls

Ø  Because of that, the FRC expects auditors to use professional judgement and avoid unnecessary procedures that do not add value.

Ø  The regulator also acknowledges a concern across the market that audit requirements and supervisory approaches can sometimes lead to more work than necessary for SME audits.

Ø  In response, the FRC is trying to reduce unnecessary burden while still maintaining robust audit standards.  One important point is documentation: the FRC expects SME audit files to be clear and sufficient, but generally less extensive than those for large or complex entities.

Auditors should document what is relevant and significant, rather than producing excessive paperwork simply to look comprehensive.

Ø  The FRC is also taking steps beyond guidance:

·        creating a working group with supervisory bodies to improve consistency in oversight of SME audits

·        launching a Technology Sandbox to help smaller firms adopt technology and AI in ways that improve audit quality

Ø  This is important because smaller audit firms often face barriers in using technology, despite its potential to improve efficiency and consistency.

Ø  The wider direction from the FRC is clear:

·        keep standards high

·        make audits proportionate

·        support smaller firms

·        avoid over-auditing

·        improve supervision and practical implementation

Ø  For auditors, this means a stronger expectation to deliver SME audits that are well-judged, efficient and tailored to the client.

Ø  For SMEs, it is a positive sign that the regulator wants audit to support growth, credibility and access to finance without imposing avoidable cost and complexity.

Key takeaway:

The FRC’s position is that a good SME audit should be targeted, proportionate and useful — not lighter in quality, but better aligned to the realities of smaller businesses.