The UK’s Financial Reporting Council (FRC) has issued its inaugural guidance offering clarity to audit profession on the application of artificial intelligence (AI).

The guidance aims to facilitate a structured approach for integrating AI tools within audit processes and to clarify documentation requirements, thereby fostering innovation while ensuring audit quality.

Developed with input from the FRC's Technology Working Group, the guidance is intended to assist auditors and central teams at audit firms in the development and utilisation of AI tools.

It also sets out the regulatory expectations for third-party technology providers serving the audit industry.

FRC executive director of regulatory standards Mark Babington said: “AI tools are now moving beyond experimentation to becoming a reality in certain audit scenarios. When deployed responsibly, they have significant potential to enhance audit quality, support market confidence, drive innovation and ultimately contribute to UK economic growth.

“The FRC continues to support and encourage innovation in audit. This guidance aims to illustrate how AI can enhance audit work as well as clarify FRC expectations around proportionate, appropriate documentation of tools that use AI.”

“We recognise that this field is moving quickly and will continue to engage across the profession, both in the UK and internationally, to support innovation and the appropriate use of AI."

The FRC's thematic review, conducted alongside the guidance, provides insights into the certification processes for new technologies at the six largest audit firms.

It highlights good practices that are crucial for maintaining audit quality and summarises the firms' approaches to validating automated tools and techniques for audit purposes.

Key features of the guidance include a two-part structure with an illustrative example of AI application in audit and principles for documentation.

The guidance adopts a broad and forward-looking definition of AI, covering machine learning and deep learning models, and promotes a balanced approach to documentation to avoid excessive detail.

It also recognises the varying levels of explainability required depending on the context and usage of AI.

The principles outlined are versatile and applicable to a wide range of AI use cases in audit. They align with the UK government's five AI principles and are relevant for tools obtained from third-party providers.

While the guidance is comprehensive, it is not prescriptive and does not introduce new regulatory requirements, emphasising support for innovation within the existing framework.