The Financial Reporting Council’s Practice Note 28 (PN 28) provides practical guidance on applying auditing standards for small and medium-sized entities, helping auditors improve efficiency while maintaining audit quality and professional compliance.

PN 28 was issued in March 2026. The guidance was created to help auditors apply International Standards on Auditing (ISAs UK) in a manner that is scalable, proportionate and effective for smaller and less complex businesses.

For many years, audit firms and SME stakeholders argued that existing auditing standards were designed primarily for larger and more complex organisations. Applying the same extensive procedures to small businesses often increased audit costs, documentation burdens and administrative pressures without necessarily improving audit quality.

PN 28 aims to address these concerns by providing practical guidance on how auditors can tailor their work to reflect the size, structure and risk profile of SMEs.

The guidance does not replace ISAs (UK) or introduce a separate auditing standard. Instead, it demonstrates how professional judgement can be used to apply existing standards proportionately. The FRC has emphasised that auditors must still comply fully with auditing requirements, but they may adapt the nature, timing and extent of procedures where appropriate for smaller entities.

PN 28 is intended for a broad range of entities, including medium-sized companies, voluntary audits of small businesses, subsidiaries with limited operations, charities, and other organisations with relatively straightforward business models. However, the guidance is not suitable for public interest entities or businesses with significant complexity, such as extensive international operations or highly sophisticated financial instruments.

One of the most valuable aspects of PN 28 is its focus on risk-based auditing. The guidance encourages auditors to concentrate resources on areas that present genuine risks of material misstatement rather than adopting a purely checklist-driven approach. For SMEs, this can improve efficiency while maintaining audit quality. Areas such as management override, revenue recognition, related-party transactions and going concern assessments remain critical, but the procedures performed should reflect the entity’s actual circumstances.

The guidance also addresses planning, documentation, group audit considerations and audit conclusions. Importantly, it recognises that many SMEs have simpler governance structures and less formal internal controls than larger organisations. Auditors are therefore encouraged to understand how smaller businesses operate in practice rather than expecting large-company control frameworks.

The introduction of PN 28 forms part of the FRC’s wider SME initiative, which seeks to improve access to audit services and reduce unnecessary reporting burdens.

Alongside the guidance, the FRC has announced additional measures including engagement with smaller audit firms, increased consistency in audit supervision, and exploration of technology and AI tools that may support SME audits in the future.

Overall, Practice Note 28 represents a pragmatic response to long-standing concerns within the SME audit market. While it does not simplify auditing standards themselves, it provides auditors with clearer guidance on applying those standards proportionately. If implemented effectively, PN 28 could help improve audit efficiency, reduce unnecessary complexity, and strengthen confidence in SME financial reporting across the UK.