Key Audit Matters Under SA 701 Explained

Introduction

The introduction of Key Audit Matters (KAMs) marked a significant evolution in auditor reporting by enhancing the transparency of the audit process and providing users of financial statements with greater insight into matters that demanded the auditor’s greatest attention. However, the introduction of KAMs has also raised an important practical question. Since every audit involves several significant matters requiring considerable auditor judgment and effort, should each of these matters automatically be reported as a Key Audit Matter?

In practice, auditors frequently encounter complex accounting estimates, significant risks, unusual transactions, deficiencies in internal controls, and disagreements with management. While these matters may require substantial audit attention, SA 701 does not require every significant audit issue to be communicated as a Key Audit Matter. Instead, the Standard prescribes a disciplined process for determining which matters should ultimately be communicated in the auditor’s report.

The distinction is important because excessive reporting may obscure rather than enhance the usefulness of the auditor’s report. Accordingly, SA 701 requires auditors to exercise professional judgment in selecting only those matters that were of most significance in the audit of the current period’s financial statements.

Relevant Provisions of SA 701

The objective of SA 701 is to enhance the communicative value of the auditor’s report by providing greater transparency regarding the audit that was performed. The Standard establishes a structured framework for identifying, evaluating and communicating Key Audit Matters.

Para 5 of SA 701 – Applicability of SA 701

This SA applies to audits of complete sets of general-purpose financial statements of listed entities and circumstances when the auditor otherwise decides to communicate key audit matters in the auditor’s report. This SA also applies when the auditor is required by law or regulation to communicate key audit matters in the auditor’s report. However, SA 705 (Revised) prohibits the auditor from communicating key audit matters when the auditor disclaims an opinion on the financial statements, unless such reporting is required by law or regulation.

Accordingly:

(a) Reporting of Key Audit Matters is mandatory for listed entities unless the Standard specifically provides otherwise.

(b) For unlisted entities, reporting of KAMs is generally optional, unless required by applicable law or regulation or the auditor voluntarily elects to communicate them.

Para 9 and Para 10 of SA 701 – Determining Key Audit Matters

The auditor shall determine, from the matters communicated with those charged with governance, those matters that required significant auditor attention in performing the audit. In making this determination, the auditor shall take into account the following:

(a) Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with SA 315.

(b) Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty.

(c) The effect on the audit of significant events or transactions that occurred during the period.

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