Driving audit innovation with FRC sandboxes and forums

The Financial Reporting Council (FRC) is inviting audit firms and stakeholders to take part in a range of innovation initiatives through its Innovation and Improvement Hub.

The projects provide an opportunity to share experience, explore new approaches and help shape the future of audit and assurance. Current areas of focus include SME audit materiality, audit technology and AI. 

Audit and assurance 

The FRC’s audit and assurance sandbox brings together a range of stakeholders from across the profession, led by the FRC’s Audit & Assurance Policy team, to encourage innovation, share good practice and support audit quality. 

Participation is voluntary and by invitation. The FRC welcomes applications from participants across the reporting space to share different perspectives and experiences, including auditors, preparers of financial information, audit committees and users of financial statements. 

One recent audit and assurance initiative looked at how materiality is determined for small and medium-sized entities (SMEs). The outputs, published on 4 June, highlight several points for practitioners to consider: 

• Materiality can have a significant impact on audit effort, particularly where the audit approach relies heavily on sample-based substantive testing, as is often the case in SME audits.  
• Appling expected ranges to appropriate benchmarks remains a common and compliant approach. However, professional judgement should always be applied.
• The broad ranges set out in the FRC’s 2017 thematic review of materiality have become the standard approach for many firms. However, these ranges may not always reflect what users of SME financial statements would consider a significant misstatement, meaning they may not be appropriate in every case.
• Practitioners said they were often reluctant to move away from the materiality ranges because they were worried about regulatory criticism. However, those ranges were originally developed using larger organisations and may not always be the best fit for SME audits. 
• There may be situations where the tolerance for misstatement may be higher, such as small subsidiaries within a large group, which mean materiality should be higher. 
• There will also be situations where the opposite is true, such as where entities are close to breaching borrowing covenants, where lower levels should be applied in response to the reduced tolerance for misstatement. 

The initiative found that common approaches to setting materiality may not always result in audit work that is proportionate to the risks and needs of each audit. Auditors remain responsible for deciding materiality. However, the FRC and recognised professional bodies have an important role in supporting the proportionate approach to SME audit inspections, giving auditors greater confidence to apply professional judgement when setting materiality. 

As we noted in our 2025 Audit Monitoring Annual Report, we'll continue to work closely with the FRC and our audit firms to share good practice and promote realistic expectations when it comes to audit quality. 

 Audit tech and AI 

The audit tech and AI sandbox aims to support audit firms looking to adopt AI, software and other technology to improve audit quality and drive better outcomes.  

The FRC welcomes interest from firms of all sizes, from those experimenting with agentic and generative AI to small firms taking their first steps in adopting AI. 

Rather than providing a detailed technical review of any proposed technology, the sandbox offers a collaborative space for information sharing and evaluation with other members, including the FRC’s expert teams. 

To be eligible for the sandbox, applicants should: 

• Be a UK registered audit firm. 
• Have identified a technology or AI application that could improve the audit quality and may be innovative for the firm or in the market. 
• Have considered how the technology would integrate with the practice's audit methodology, the relevant auditing standards, and key compliance issues. 
• Have progressed to a point where their proposed use of technology is ready for critical evaluation against regulatory frameworks (ready for testing or piloting or in limited deployment). 
• Commit time from appropriate staff to the sandbox. 

Find out more about the application process in detail on the FRC’s website. Applications close at 17:00 on Friday 17 July 2026. 

SME discussion forum for FRS 102 preparers  

The FRC has also launched a discussion forum for stakeholders applying FRS 102 in practice. 

The forum gives SME preparers, and those supporting SMEs with accounting and audit services, an opportunity to share feedback and discuss practical issues directly with the FRC’s policy teams. 

Meetings will take place twice a year and will cover practical challenges, emerging issues and future developments relating to FRS 102. 

Expressions of interest for the first round of meetings closed on 8 May 2026, however, you can still register for FRC updates to hear about future opportunities to join the forum.