ACCA welcomes the opportunity to provide feedback on the Guidance for audits of smaller and/or less complex entities - Practice Note Exposure Draft (“the practice note”). In ACCA’s response to the FRC’s SME Market Study the importance of scaling back some of the UK ISAs so they ‘fit’ in an SME audit was highlighted. In addition, guidance on their application was highlighted as key to supporting audit firms and SME audit clients. We therefore commend the FRC for progress made on this important issue. ACCA conducted stakeholder outreach to inform our response.
International Standards on Auditing For Audits of Financial Statements of Less Complex Entities (“ISA for LCE”)
Based on feedback from stakeholders a formal consultation on the ISA for LCE, an international standard on auditing that has gone through the rigorous due process of the IAASB, is needed. We urge the FRC to seek stakeholder feedback on the implementation of the ISA for LCE in UK before forming a decision regarding its adoption in the UK. While we welcomed the FRC webinar in June 2025 discussing the ISA for LCE, and outlining the FRCs concerns in relation to the standard, we encourage the FRC to consider a formal consultation on the ISA for LCE, similar to all IAASB standards before being adopted in the UK. We see a benefit in having a formal consultation on this standard and would also welcome the opportunity to meet and discuss the consolidated views of our many SMP members.
At the outset it is important to highlight that while we are providing commentary on the practice note, we are not in a position to state we support the practice note as an alternative to the ISA for LCE until a formal consultation in relation to the ISA for LCE has been completed. We do accept that to the extent any clarity can be achieved via the practice note, in relation to applying certain UK ISAs to in scope entities, it may have value as an interim measure i.e. ahead of a formal consultation on the ISA for LCE.
Practice Note
Firstly, we note that the practice note is described as non-authoritative guidance and, as stated in paragraph 4 it “does not, and is not intended to, provide comprehensive guidance on the audits of small and/or less complex entities, so where no special considerations arise from a particular ISA (UK), no material is included. This PN does not contain commentary on all the requirements included in the ISAs (UK) and reading it should not be seen as an alternative to reading the relevant ISAs (UK) in their entirety.”
While this statement is understandable given that the practice note is a form of guidance, it represents a significant limitation when compared to the ISA for LCE, which is a standalone standard. The non-comprehensive and non-authoritative nature of this practice note could create practical difficulties for auditors of smaller and less complex entities. In particular there is a risk that auditors may rely in good faith on the guidance provided, only to be subsequently challenged in practice reviews or inspections that benchmark compliance against the full suite of ISAs (UK).
We therefore suggest that the FRC considers ways to mitigate this expectation gap for example, by expanding its coverage to provide a more complete reference framework for smaller/less complex audits. Doing so would enhance its usability while supporting consistency with inspection and monitoring expectations.
Notwithstanding the above, the practice note is considered a positive step as its publication allows for engagement with stakeholders on whether 1) the UK ISAs are scalable (i.e. enable proportionate audits as drafted) 2) the practice note provides sufficient additional guidance to contextualise existing provisions in the UK ISAs to demonstrate the UK ISAs are scalable and 3) whether there are any additional key areas of the UK ISAs that are barriers to achieving a proportionate and high-quality audit.
The practice note provides additional guidance on some of the existing scalability provisions in the UK ISAs i.e. those identified as hardest to scale by FRC outreach participants.
Based on feedback from our stakeholders while the practice note has been welcomed cautiously and there are several positives to the practice note, there was a clear message that there is more to be done including:
- Enhancing the guidance so that it can be practically implemented in the audit of various, in scope entities.
- Expand the guidance to cover additional areas.
- Enhancing the examples provided to ensure those are detailed enough and representative of the various company types.
- Adding examples in relation to the use of advanced technology such as Artificial Intelligence (AI), Machine Learning (ML), or Data Analytics tools and how such tools may be used proportionately to enhance audit quality or efficiency.
The audit framework must enable audit professionals to remain compliant while conducting proportionate high-quality audits for these smaller and/or less complex audits.
To read our comments in full, please download the document found on this page.
