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FRC Practice Note for SME Audits At a glance
At a glance
The Financial Reporting Council (FRC) has developed comprehensive guidance in the form of a Practice Note to help auditors apply International Standards on Auditing (ISAs) more effectively when auditing smaller or less complex entities.
Our Approach
The FRC’s approach centres on empowering auditors to use professional judgement while maintaining quality when auditing smaller, less complex entities.
Smaller entities often have simpler business models, fewer complex transactions, and different risk profiles compared to large corporations. The guidance focuses on scalability, allowing auditors to tailor their approach while fully complying with auditing standards.
The Practice Note was developed collaboratively with a working group of audit practitioners, professional bodies, and methodology suppliers, ensuring it reflects real-world challenges and practical solutions.
Key Objectives
- Clarity and Confidence: The guidance identifies where auditors should apply professional judgement when auditing smaller entities, particularly with more complex standards like ISA (UK) 315. This reduces uncertainty and gives practitioners confidence to make proportionate decisions.
- Practical Application: Real-world examples demonstrate how auditing standards are scalable and can be applied practically in less complex audits, showing what good practice looks like in everyday situations.
- Proportionality: The guidance provides clear indications of appropriate audit documentation levels, discouraging over-documentation while ensuring compliance requirements are met.
Who is this Practice Note for?
Which audited entities fall within the scope of this practice note is a matter for professional judgement. However, smaller and/or less complex entities are typically those where:
- Ownership and/or control of the entity is concentrated in a small number of individuals who are actively involved in managing the business; and
- the operations are uncomplicated with few sources of income and activities; and
- business processes and accounting systems are simple; and
- internal controls are relatively few and may be informal.
The guidance has been written for all statutory auditors in the UK. However, we recognise that it may be particularly useful for smaller audit firms operating in the market.
Consultation
The Practice Note is undergoing a comprehensive three-month public consultation period, running from July to October 2025. This forms part of our broader SME audit market study, ensuring stakeholder views directly inform our final guidance.
We particularly welcome responses from audit practitioners working with SMEs, small audit firms, SME business owners, professional bodies, and other stakeholders in the audit ecosystem. Your insights will help us refine the guidance to ensure it meets real-world needs while maintaining appropriate standards.
How to Engage with Us
The FRC recognises that effective regulation requires ongoing dialogue with those we regulate and serve. We encourage all stakeholders to contribute their expertise and experience to help us deliver guidance that genuinely improves audit practice while maintaining the quality and reliability that users of financial statements require.
Formal Consultation Response: Submit detailed written responses addressing the specific consultation questions, which cover practical application, implementation challenges, and potential improvements to the proposed guidance. Simply email James Ferris at [email protected]
Market Study Participation: Engage with our ongoing SME audit market study, which examines broader challenges in the audit market and potential system-wide remedies requiring action from multiple organisations.
Implementation Timeline
To allow sufficient time to incorporate stakeholder feedback, while ensuring timely delivery of support to the audit profession, the FRC is planning to publish a finalised Practice Note for SME audits early in the new year.
Get in touch
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Birmingham office: 5th Floor, 3 Arena Central, Bridge Street, Birmingham, B1 2AX
+44 (0)20 7492 2300
www.frc.org.uk
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