Audit Firm Scalebox
9 minute read
Overview
The FRC is an improvement regulator. We want to work with firms to improve their ability to conduct high quality audits and promote competition and choice in the Public Interest Entity (PIE) audit market and other audit areas within the FRC's scope. We know that firms with smaller PIE audit portfolios or those new to the market face challenges in meeting our expectations and in understanding how we regulate audit firms.
The FRC’s Audit Firm Scalebox exists to help firms develop and maintain audit quality as they enter and grow in the PIE audit market. The Scalebox also allows us to understand these firms better, enhancing our supervisory approach accordingly.
What are the objectives of the Scalebox?
In brief, the objectives of the Scalebox are to:
- improve audit quality at firms in the Scalebox
- promote resilience in relevant sectors of the audit market
- support the FRC’s role as an improvement regulator, and
- enable the FRC to better fulfil its regulatory objectives.
How many firms are currently in the Scalebox?
There are currently 14 firms participating in the Scalebox. 12 of the firms have a PIE audit portfolio, whilst two firms does not currently perform PIE audits.
What do we expect the participating firms to achieve through the Scalebox?
Through their participation in the Scalebox initiative, we expect firms to focus on the following key areas to strengthen their position and meet regulatory requirements:
Enhancing audit quality
Firms should ensure their audits meet relevant standards set by the FRC. Sharing and (where appropriate) incorporating into the firm’s methodology and approach examples of good practice enhances overall audit quality. By doing so, the firms will contribute collectively to greater confidence in the profession and deliver work that meets regulatory and public expectations.
Building resilience
Firms should seek to develop strong systems and processes that enable them to operate effectively in the competitive PIE market. This means not only ensuring compliance with existing regulations but also establishing a foundation for long-term success.
Understanding regulatory expectations
Firms must develop a clear understanding of the FRC’s supervision and registration requirements to navigate the regulatory landscape effectively.
Developing strategic capabilities
Firms should invest in expertise, technology, and infrastructure to handle complex audits and respond to the evolving demands of the market. By doing so, they can position themselves for sustainable growth and success.
Our aim is to support firms in achieving these goals, helping them to strengthen their audit quality, resilience, and strategic capabilities in an increasingly challenging environment.
How does the Scalebox fit in with the FRC’s existing supervision and inspection work?
The Scalebox is a separate team within the FRC’s Audit Firm Supervision (AFS) team. AFS is part of the FRC’s Supervision division.
AFS, alongside other Supervision division teams (Audit Market Supervision and Audit Quality Review), conducts our formal supervision and inspection work for PIE audit firms and their responsible individuals (RIs). The Professional Body Supervision team oversees professional bodies who supervise and inspect non-PIE audits and their RIs.
The Scalebox is a means for existing PIE audit firms to obtain additional input from the FRC. Crucially, it also enables firms that may come within the FRC’s scope in the future to gain valuable insights from the FRC. Refer to ‘How does the Scalebox communicate findings?’ for more details of how the Scalebox may share information with other FRC teams.
Who can join the Scalebox?
All firms who are currently in the PIE audit market can join the Scalebox. Firms who are considering becoming PIE audit firms or who may come within the FRC’s scope in the future for other reasons are also eligible to join, giving them access to the FRC for the first time.
The 12 largest UK audit firms are subject to more frequent inspection and more extensive supervision activities, including thematic reviews. Not all Scalebox activities may be appropriate for these firms and the FRC will keep the participation of these firms under review as the Scalebox develops.
Participation in the Scalebox is entirely voluntary. Audit firms choose to join the initiative as a proactive step to enhance their audit quality, especially when entering or expanding within the PIE audit market. While it’s not mandatory, joining signals a firm’s commitment to continuous improvement and meeting high regulatory standards.
What does the Scalebox do?
The Scalebox is a flexible mechanism for us to engage with suitable firms in areas where they most need help. The Scalebox team focuses its work on areas where the FRC has common findings, where requirements are changing or where firms need to focus as they grow. These are identified in conjunction with our Supervision division teams, from our general knowledge of the audit market and from issues raised by firms themselves. The Scalebox team adapts its work to respond to new risks or issues as they arise.
The activities that the Scalebox conducts are also flexible. The team regularly reviews how it goes about its work and focuses on the types of activities that are most effective and useful. The current workstreams within the Scalebox are as follows:
Audit area reviews
These consist of targeted reviews of specific areas within non-PIE audit files, rather than full file assessments. Bespoke, confidential feedback is provided to firms, highlighting both good practices and areas for improvement. The feedback is then anonymised and shared with all participating firms to support broader learning and development during round tables. Examples of the audit areas we have previously looked at include going concern, revenue, impairment, journals, use of experts and inventory.
Additionally, we have undertaken a collaborative review of specific audit areas with the ICAEW’s QAD team to further support firms in enhancing audit quality and addressing key challenges.
Full file reviews
A review of a non-PIE audit file for audits completed by firms within Scalebox. These reviews are not graded; instead, firms receive confidential feedback on both positive practices and suggested improvements.
Aide memoires
Practical guidance documents that summarise key insights and good practices identified through our reviews. These resources are designed to support firms in addressing common audit challenges, reinforcing key principles, and improving audit quality.
Off-the-shelf methodology reviews
A review of commonly used off-the-shelf audit methodologies to assess how they support audit quality. These reviews help to identify strengths, potential gaps, and areas where firms may need to supplement their approach to ensure that their teams perform high-quality audits.
Roundtables
We host regular collaborative discussions both online and in person, bringing firms together to share insights, observed good practices, and anonymised feedback. These sessions have to date covered a range of important topics, including root cause analysis, what to expect from an AQR review, lessons learned from enforcement cases, IT audit and data analytics.
It is important to note that the Scalebox:
- will not have any involvement in a specific audit prior to it being completed and archived.
- will not provide ‘pre-clearance’ or expressly approve any aspect of the audit work conducted by a firm, its audit approach, any aspect of its quality management system or its eligibility for registration with the FRC as a PIE Auditor. Non-PIE audit firms will be required to demonstrate that they meet the relevant criteria at the point they seek to formally register with the FRC as a PIE audit firm.
- will not prescribe how firms should develop their quality or risk management systems or respond to feedback provided by the FRC. Our role is to identify areas for improvement and share good practices. It is the firm’s responsibility to consider our feedback and to consider, in a timely manner, what action to take in the context of the firm’s business model and quality management procedures.
How can my firm apply?
If your firm already audits PIEs, before completing the application form, you may find it helpful to discuss with your supervisor whether the Scalebox is appropriate for your firm and in what areas. The Scalebox team may discuss a firm’s application with its supervisor.
In your application, you should explain why you wish to join the Scalebox, including details of your audit strategy and the nature and number of PIE or other FRC scope audits that you may be seeking to take on in the near future.
You will also need to demonstrate that improving audit quality is a primary objective for the firm and that the firm is prepared to make the necessary investment.
Before applying to the Scalebox, please read the Scalebox Terms and Conditions and the FRC Regulatory Privacy Notice.
If you wish to discuss the application process or find out more about the Scalebox before applying, please contact [email protected]
We will select firms to participate in the Scalebox based on our assessment of the information set out in a firm’s application and other information available to us, including our knowledge and understanding of the firm’s audit strategy and audit quality. If a firm’s application is rejected, we will explain the reasons for our decision and what the firm could do to make a successful future application.
What happens when I join the Scalebox?
Once you have submitted your application, the Scalebox team will contact you to confirm whether we consider your firm is suitable and, if so, to discuss any specific activities you are seeking to take part in.
We will aim to provide you with as much notice as possible of which of the activities the Scalebox team plans to conduct with your firm, to assist your resource planning. If we are unable to undertake any activities with your firm at this point in time, we will indicate where possible when we may be able to consider your firm again.
Once Scalebox activities are underway, it is likely that we will need your firm to provide relevant information. You must ensure that information provided is complete and accurate. You must also consider whether the information may lawfully be provided to the FRC, paying particular attention to confidentiality obligations, data protection legislation and any material covered by legal professional privilege. See also the Terms and Conditions for further information on a firm’s confidentiality obligations.
At the conclusion of any activities, we will consider and discuss with you whether any further activities or follow up work are appropriate.
All firms may also be invited to events where we share good practice and other insights, whether or not the firm has been accepted into the Scalebox.
How does the Scalebox communicate findings?
A primary focus of the Scalebox is providing bespoke feedback to individual firms.
We know that firms would like the Scalebox to be a ‘safe space’ for them to obtain FRC input, and therefore the Scalebox operates on a general principle that information gathered during Scalebox activities will not be shared with any other party.
However, exceptions to this will need to be made where a disclosure is:
- deemed by the FRC to be necessary in the public interest, or
- to facilitate co-ordination with regulatory activities being undertaken by the FRC or a firm’s RSB and does not include the outcome of Scalebox activities, for example to avoid both the Scalebox team and an RSB reviewing the same audit.
Public interest disclosures will be made only to the following:
- the FRC’s PIE Auditor Registration team and/or an RSB’s Registration Committee: for example, if issues identified are considered to be of public interest in the context of a firm or an RI’s eligibility to be registered;
- the FRC’s Case Examiner or an RSB’s disciplinary team: for example, if the issues identified are considered to be of public interest in the context of taking action to address deficiencies in an individual audit (in relation to the ISAs or the Ethical Standard) or breaches of other requirements such as an RSB’s Code of Ethics; and
- persons specified or described in Parts 1 and 2, Schedule 11A Companies Act 2006, for example, the FCA or the PRA.
We will operate an internal process for making public interest disclosure decisions. Such decisions will have regard to the General principles for considering the public interest in our work, published in November 2022. For example, we will assess the nature, severity and public impact of the matter. We will not seek the consent of a firm before making such a disclosure but will notify a firm that a disclosure has been made, unless such notification would cause the FRC to be in breach of any obligation, regulation or legislation.
Once a disclosure has been made, the information disclosed will be subject to the normal processes operated by the party to whom the disclosure has been made. For example, disclosures to the FRC’s Case Examiner may then be referred to the FRC’s Conduct Committee to determine whether an investigation should be opened.
We may also report, internally or externally, anonymised themes, lessons or findings from Scalebox activities. The FRC will seek the consent of a Scalebox firm (or any audited entity) before externally publishing any information that may identify the details or outcomes of any Scalebox work conducted with that firm (or in relation to the audit of that entity). However, the FRC may publish the names of firms that have participated in the Scalebox.
Where can I get more information on how the FRC regulates audit firms?
Our Approach to Audit Supervision publication provides an overview of our regulatory approach, and our What Makes a Good Smaller PIE Audit Firm guide provides an overview of our quality expectations and our approach to supervision, aimed particularly at firms with smaller PIE audit portfolios or those considering entering the PIE audit market.
See also our pages on PIE Auditor Registration. Registration with the FRC is the first step for a firm considering entering the PIE audit market. Firms and relevant RIs must be registered with the FRC before they are permitted to conduct any audit work on PIEs. Contact our Registration team ([email protected]) for more details.
What else is the FRC doing to help firms enter or grow in the PIE audit market?
As well as publishing auditing standards and related guidance, the FRC reports extensively on our findings from supervision and inspection work as well as producing numerous thematic reviews every year. These reports contain insights into good practice examples that we have seen, as well as pitfalls and where we see common quality gaps. Reading these documents will provide firms with extensive examples that they can apply to their own practices.
Follow the links on this page to access some of our key recent publications. Firms can also sign up for FRC subscriber notes to keep on top of our new publications.
The Audit & Assurance Sandbox is also available to audit firms. This is an initiative of our Regulatory Standards division which is designed to lead a collaborative and innovative approach to identifying and developing solutions to technical and policy issues in the audit and assurance space. Further details on our current Sandbox projects can be found in the Audit & Assurance Sandbox section of this website.
Participation is by invitation, but applications to be considered for individual Sandbox projects can be submitted to [email protected].
How does an audit firm apply to become a PIE Auditor?
If an audit firm intends to audit a PIE in the next 24 months, visit the Public Interest Entity (PIE) Auditor Registration page for further details.