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International Standard on Auditing for Less Complex Entities – How to Enhance Usability: Call for Views
Background
1In January 2025, the FRC launched its campaign to support small and medium-sized enterprises (SMEs) access audit services which are often important in supporting these businesses to secure the capital they need to scale, creating wealth and jobs. We have been aware of some challenges faced by SMEs to secure audit services at proportionate cost, which may affect their ability to grow, and in how auditing standards are interpreted and applied. Small and medium-sized entities are described in the Companies Act
2In February 2025, the FRC published its initial SME Audit Market Study Invitation to Comment. This was followed by an Emerging Findings report, as well as a consultation on a Practice Note for Smaller and Medium Sized Entities in July 2025.
3In the course of our engagement across these consultations, as well as in written responses received, stakeholders have expressed concern that some auditors face difficulties in applying the scalability provisions in International Standards on Auditing (ISAs) UK to proportionately audit SMEs, or that the ISAs (UK) do not address the needs of the smaller end of the SME audit market (entities below the statutory audit exemption threshold).
4The FRC's Practice Note for Smaller and Medium-Sized Entities, a remedy which would help address this issue, was welcomed both as demonstrating our interest in the SME segment of the audit market and for its practical approach to highlighting the existing opportunities for scalable and proportionate application of auditing requirements. We also received feedback on how the Practice Note could be enhanced to add further value to auditors. This feedback has been incorporated into Practice Note 28: Guidance for Audits of Smaller and Medium-sized Entities issued on 24 March.
5During these consultations, the FRC heard from stakeholders that – notwithstanding the intended publication of the Practice Note for Smaller and Medium-Sized Entities – we should adopt the Less Complex Entities (LCE) auditing standard issued by the International Auditing and Assurance Standards Board (IAASB), or that we should use it as the basis for a modified UK-specific standard for the audit of these entities. Stakeholders also requested that the FRC undertake a more extensive engagement exercise on the LCE auditing standard. The LCE standard is not intended for use in medium-sized company audits. In the UK, the scope and authority of the standard would mean that it could only be used for audits of non-complex, non-group entities small companies elegible to apply the audit exemption.
6The IAASB has since launched a project which will run through to June 2027 with proposals to maintain the LCE standard. As part of its regular engagement with the IAASB, the FRC will be supporting this project which provides an opportunity to not only address its concerns over the LCE standard, set out in this paper but also those of stakeholders.
7This call for views is being published ahead of our engagement with the IAASB's project on revising the LCE standard to better understand stakeholders' views on the LCE standard, including where there are changes which they would wish to see made at an international level.
The Less Complex Entities standard
8The IAASB initiated the LCE standard project in 2020 to address the unique needs of audits of smaller and less complex businesses. It is a single standard built on the foundation of the International Standards on Auditing (ISAs), with audits performed using the standard providing the same level of assurance for eligible audits: reasonable assurance.
9In 2021, the FRC publicly raised concerns regarding the LCE standard in its response to the IAASB's consultation on its exposure draft1. These included:
- When the standard was issued the IAASB proposed not updating it for an extended implementation period. This would mean differing requirements applying to LCE and ISA (UK) audits as standards are reviewed and updated meaning an audit would not be consistent.
- Whether the standard was required in the UK-specific context given the audit exemption threshold2 which means small private companies are not required to have an audit unless required by the company's articles, or requested by its members.
- The importance of avoiding a two-tier audit market with some choosing to undertake statutory audit work and some LCE audit work, not least given the regulatory focus on improving the resilience and capacity of the UK statutory audit market.
- Concerns that operating two audit methodologies would add to perceived costs and burdens on audit firms undertaking both LCE and statutory audit firms which would be passed onto businesses in audit fees. There would also be additional regulatory costs to maintain two frameworks of standards.
- A risk that, as businesses changed and grew, they may no longer meet the scope and authority criteria in the LCE standard with practitioners then being incentivised to explain away complexity to remain in scope of the standard.
- A related transitioning issue where an entity falls outside the scope of an LCE audit and has to apply ISAs (UK) instead both in that audit underway, and in the following period for which comparative figures are required (this has been recognised by the IAASB).
- The lack of application material in the standard could lead to inconsistent interpretation and application of requirements, resulting in risks around the consistent and efficient application of auditing standards and therefore quality.
10Given its concerns regarding the LCE standard, the FRC has not adopted it in the UK. To date, it has only been adopted in a very small number of jurisdictions globally.
11In the feedback which we received as part of the SME Audit Market Study and the Practice Note for Smaller and Medium-Sized Entities consultations, stakeholders suggested that the adoption of the LCE standard would allow for simpler and easier audits, with reduced audit cost. This is despite the IAASB stating that the requirements under the LCE standard are the same as an ISA (UK) audit, and that it expects that the time and resource costs required to perform engagements would not be reduced, as an LCE audit provides the same level of assurance, requires the same level of audit evidence, and results in the same auditor's report.
12However, stakeholders also suggested that while there was support for LCE standard, there were reservations about its adoption in its current format. Comments from stakeholders included that the LCE standard was not fit for purpose in the UK as currently issued, and that it was an imperfect solution to enhancing greater proportionality for small company audits.
13There were also suggestions from some stakeholders that the FRC should make changes to the LCE standard to address any concerns which had been identified. The FRC has licensing arrangements under which IAASB standards are issued for use in the UK which preclude the removal of requirements or the inclusion of material which could be construed as falling below the standard set by the international standards.
14Based on our engagement, we remain concerned that some stakeholders advocating for the adoption of the LCE standard may be doing so from an incorrect understanding of what the standard requires. Further, our engagement with other jurisdictional standard setters there have also been concerns that an auditor's report issued under the LCE standard would be seen as a lower quality audit, which was never intended.
15The FRC has continued to engage with the IAASB and other national standard setters and regulators, on possible changes to the standard that would support wider adoption. We welcome the launch of the IAASB's project with proposals to maintain the LCE standard, which runs through to June 2027. This project will address one of our concerns about the standard over the lack of alignment between the requirements in the LCE standard and those in the International Standards on Auditing as they are updated to reflect public interest issues, with the risk of different sets of requirements applying to the same work.
Call for views
16The FRC recognises that the IAASB's project provides an opportunity to engage with the IAASB on addressing issues with the current LCE standard, including those identified by stakeholders – especially where they are using the LCE standard for non-statutory audits.
17This call for views is not exploring the adoption of the LCE standard as currently issued in the UK, or on whether a revised version would be adopted. The FRC will consider the adoption of any revised LCE standard issued following the conclusion of the IAASB's project.
18To support the FRC's engagement with the IAASB as part of its project, and with other national standards setters and regulators, we would welcome responses from stakeholders to the following questions:
- What is your view on the LCE standard which has been issued by the IAASB?
- Are there any parts of the LCE standard which you believe the IAASB should focus on as part of its project to maintain or improve the standard? Please be as specific as possible.
- Would the LCE standard as currently issued, if used, provide any tangible benefits in the delivery of audits for less complex entities? If yes, please provide examples. If not, why is this the case?
19Please submit your response to [email protected] by 21 May 2026.
Financial Reporting Council
March 2026
Financial Reporting Council
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FRC response to Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities ↩
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Full details of the exemption threshold are set out in Sections 476 and 477 of the Companies Act 2006 ↩