The Financial Reporting Council (FRC) has issued significant changes to auditing standards to improve quality and accessibility in reporting, which will apply for audits of financial statements for periods beginning on or after 15 December 2026.

ISA (UK) 700 ‘Forming an Opinion and Reporting on Financial Statements’, ISA (UK) 701 ‘Communicating Key Audit Matters (KAMs) in the Independent Auditor’s Report’ and ISA (UK) 720 ‘The Auditors’ Responsibilities in Relation to Other Information’ now include revisions that aim to simplify and declutter the audit report, reduce the reporting burden and ensure the audit report provides more relevant information for investors.

Audit reports have become increasingly lengthy over the past decade and often include boilerplate disclosures and standardised information that is irrelevant to the entity being audited and of little value to investors.

“The FRC’s efforts to simplify auditor reporting through genuine reporting by exception, and to improve key audit matter descriptions, are welcome,” says Jayne Kerr, Director – Audit Public Policy Leader, Corporate Reporting Services at PwC. “These changes should promote transparency and help readers focus on what matters. However, it is important that requirements relating to internal controls are carefully implemented to avoid any misinterpretation of what these communications imply.”

Key observations on KAMs

The revisions include a new requirement for key observations on KAMs to be included, where relevant, in all audit reports in scope of ISA (UK) 701 to provide investors with more decision-useful information.

However, the proposed requirement for auditors to provide commentary on all significant qualitative aspects of the entity’s accounting practices as part of their key observations on KAMs has been scrapped. Instead, guidance suggests that this commentary could form the basis of a key observation if relevant. 

Internal controls

The FRC’s new guidance on internal controls is likely to have a big impact on auditors. 

For companies that follow the UK Corporate Governance Code, there is now a requirement to describe the impact of the entity’s controls on the audit and to report any significant deficiencies identified within the entity’s internal controls. 

Other changes include:

• the removal of proposed guidance for firms to justify why they are not seeking to place reliance on the entity’s internal controls; 
• further clarity on communication of instances where the auditor couldn’t rely upon the entity’s controls for audit purposes, even if controls satisfy entity requirements; 
• removal of proposed terminology such as ‘highly material’, which has been replaced with a set of considerations that include assessing whether the significant deficiency had a ‘significant and pervasive’ effect on the auditor’s risk assessment or response and whether the significant deficiency is relevant to stakeholders;
• wording in the auditor’s statement of responsibilities that sits on the FRC’s website, which highlights that describing the impact of controls on the audit and the identification of any significant deficiencies in internal control do not constitute an expression of opinion on the effectiveness of the entity’s system of internal controls. 

Firms expressed concerns over the FRC’s original proposed revisions to the treatment of internal controls in the audit report. These have been addressed to some extent, says Philip Lenton, Audit Technical Partner at Deloitte. “The FRC has dealt with some of the key concerns that we and others had raised over internal controls, but there is still some residual concern that the new requirements could be misinterpreted. 

“Once you start talking about controls, does that imply to people that auditors have done more work on controls than they actually have? We know that there are misunderstandings about auditors' roles and responsibilities in relation to controls, so there is potential for further confusion. It's something that auditors will need to be aware of when considering how to implement these new requirements.”

To this end, the FRC has published a myth-busting document to attempt to clarify requirements in relation to Provision 29.

Decluttering smaller audits

There have also been several revisions that should benefit smaller audits. These include the reversion to genuine reporting by exception and the removal of the requirement to report on the extent to which the audit was intended to detect irregularities, including fraud, for smaller businesses. This will only be required for audits in scope of ISA (UK) 701.

“For entities that aren’t in scope for key audit matters, the audit report will now be a lot easier,” says Lenton. “It will be more standardised and cut out unnecessary boilerplate language over irregularities that added to the length of the report. The removal of that boilerplate text will, I think, save time and cost for auditors in an area that people weren't particularly interested in.” 

Other information

Elsewhere, the FRC has proceeded with the proposal to remove the distinction between ‘other information’ and ‘statutory other information’ to create one, merged – simplified – category. 

The FRC also provides further clarity in ISA (UK) 720 to emphasise that the auditor’s responsibilities for other information remain limited to the auditor’s knowledge obtained during the course of the audit. 

The FRC will be undertaking an audit and assurance ‘Sandbox’ initiative on the new changes as well as updating the Bulletin on illustrative auditor reports.