[Opinion] Key Audit Matters—Need to Focus?

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Last Updated on 27 October, 2025

Key Audit Matters

CA Bimal R. Bhatt – [2025] 179 taxmann.com 527 (Article)

If not focused adequately, can a particular "Key Audit Matter" turned out to be a major risk factor for a company? If such a matter is not reported and subsequently, it resulted into a vital issue impacting the business itself, what would be the responsibility of non-executive and independent directors apart from Executive Management? Should Audit Committee Chairman be more knowledgeable and vigilant? Can Statutory Auditor be held responsible for such a lapse?

1. Key Audit Matter

Definition – Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.

2. 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.

The auditor shall determine which of the matters determined in accordance with above were of most significance in the audit of the financial statements of the current period and therefore, are the key audit matters.

These matters are very important for drawing the attention of investors, regulators, banks, financial institutions, suppliers, etc. These matters have significant impact on the overall functioning of a company. Hence, they require transparent approach by the management and equally important is the process adopted by the Statutory Auditor for their verification and arriving at a judgement. Reader should get a clear idea about them and its implications on the financial statements.

Note – The reader is requested to go through the basic compliance requirements of such reporting through ICAI publications and other regulatory authorities.

Let’s go through some of the vital “Key Audit Matters” impacting the correct interpretation and transparent disclosure as a part of responsible action and judgement of management as well as Statutory Auditor. The objective has to be of constant learning, analysis and implementation to increase the credibility of financial statements and audit profession.

1. Utilisation of Deferred Tax Assets on Unabsorbed Business Losses and Minimum Alternate Tax (‘MAT’) Credit

Key Audit Matter

How the Matter Addressed by the Auditor

GMR Hyderabad International Airport Limited, subsidiary of the Holding Company had been under tax holiday period until financial year 2021-22 and thereby had accumulated MAT credit asset of Rs. 574.49 crores (31 March 2024 – Rs. 521.11 crores) and has also recognised deferred tax on unabsorbed business loss of Rs.108.23 crores (31 March 2024 – Rs.113.48 crores) to the extent it is probable that the future taxable profits will be available against which such unused tax losses can be utilized (before the expiry period thereof for its utilization).

Under Ind AS 12 ‘Income taxes’, the carrying amount of deferred tax assets is required to be reviewed at the end of each reporting period.

Recognition of deferred tax assets is based on projected future profits which involves significant judgement regarding the likelihood of its realisation within the specified period through estimation of future taxable profits of and consequently there is a risk that the deferred tax asset comprising of MAT credit and unabsorbed business losses may not be realised within the specified period, if these future projections are not met.

In order to assess the recoverability of the recognized deferred tax assets on MAT credit and unabsorbed business loss, GHIAL has prepared revenue and profit projections which involves judgements and estimations such as estimating aeronautical tariff [which is determined by Airport Economic Regulatory Authority (“AERA”)] for GHIAL, revenue growth, passenger growth, profit margins, tax adjustments under the Income Tax Act, 1961 (‘IT Act’).

Further, as explained in note 41(xiii), during the previous year, Telecom Disputes Settlement Appellate Tribunal (‘TDSAT”) has passed an order in respect of an appeal, challenging various aspects of the aeronautical tariff order passed by AERA in respect of third control period from 01 April 2021 to 31 March 2026 against which AERA has filed an appeal with the Hon’ble Supreme Court.

Considering the materiality of the amounts involved, involvement of management’s estimation and judgment in determining reasonable certainty of sufficient future taxable income and thereby utilisation of deferred tax asset on MAT credit and unabsorbed business losses, this matter has been identified as a key audit matter for current year audit.

Our audit procedures, including those performed in our joint audit of GHIAL conducted with M/s K S Rao and Co., with respect to assessment of recognition of deferred tax asset comprising of MAT credit and unabsorbed business losses and its utilisation as at reporting date included, but were not limited to the following:

Obtained and evaluated material accounting policy information with respect to recognition of tax credits in accordance with Ind AS 12;
Evaluated the design and tested the operating effectiveness of the management’s key controls implemented with respect to recognition of the deferred tax asset;
Obtained the understanding of the management’s process and tested the internal controls over preparation of computation of future accounting and taxable profits of the GHIAL, and expected utilisation of available MAT Credit and unabsorbed business losses within specified time period as per provision of the IT Act;
Reconciled the business results projections to the future business plans approved by the Holding Company’s and GHIAL’s board of directors;
Compared the prior year expected tax profits with the actual results to determine the efficacy of the management’s budgeting process;
Understood and tested the controls surrounding management’s evaluation of litigations and contingent liabilities;
Challenged the management’s assessment of underlying assumptions projections used, based on our knowledge of the industry, publicly available information and GHIAL’s strategic plans;
Obtained and evaluated sensitivity analysis performed by the management on the aforesaid key assumptions and performed further independent sensitivity analysis to determine impact of estimation uncertainty on the future taxable profits;
Tested the reasonableness of the forecasted tax liability computation as per the provisions of the IT Act, including assessment of the eligibility of various tax exemptions availed and MAT liability computation as per Section 115JB of the IT Act;
Obtained and reviewed the documents with respect to the litigations with AERA and inquired with the legal team about the status of the case pending with the Hon’ble Supreme Court; and
Assessed the appropriateness and adequacy of the disclosures related to deferred tax asset on MAT credit and unabsorbed business loss in the consolidated financial statements in accordance with the applicable accounting standards.

2. The Appropriateness of Management’s Use of the Going Concern Basis of Accounting

Key Audit Matter

How the Matter Addressed by the Auditor

The Management and Board of Directors of the Holding Company have evaluated the Group’s ability to continue as a going concern in the foreseeable future. This is based on various factors including, inter alia, past history of losses, projections of future operating cash flows, available credit limits with banks, available cash and bank balances and its ability to raise funds.

The Group has incurred losses and has cash outflows for operations during the year. These events and conditions require the Group to consider mitigating circumstances in support of Group’s ability to continue as a going concern.

The Group has used certain estimates and judgements to forecast its future cash requirement and its ability to generate future cash flows on a timely basis. These estimates and judgements include industry growth rate, projected market share of the Group, improved gross margins, launch of new products and expected operational efficiencies. These are fundamental for us to obtain sufficient appropriate audit evidence regarding the appropriateness of the use of the going concern basis of accounting.

The Group has relied on existing liquidity, sufficient future operating cash flows and ability to raise funds to prepare the consolidated financial statements on a going concern basis. Due to the judgement involved in this assessment made by the Management and Board of Directors, we have identified the appropriateness of management’s use of the going concern basis of accounting as a key audit matter.

In view of the significance of the matter, we applied the following audit procedures in this area, amongst others, to obtain sufficient appropriate audit evidence:

Evaluating the design and operating effectiveness of relevant controls over the Group’s forecasting process.
Obtaining an understanding of the estimates and judgements made by the Management in preparing the cash flow projections for next twelve months from the end of the reporting period. Testing the underlying data and evaluating the reasonableness of the assumptions used. For this, we compared the estimates with the industry reports. We also assessed consistency thereof with our expectations based on our understanding of the Group’s business.
Comparing the assumptions used in the forecasted statement of profit and loss and cash flows for the twelve months period ending 31 March 2026 with the Group’s business plan approved by the Board of Directors.
Applying sensitivities on the forecasts by considering plausible changes to the key assumptions used in the business plan.
Assessing the reliability of the cash flow forecasts through a retrospective analysis of actual performance subsequent to year-end in comparison to budgets.
Assessing the mitigating factors including subsequent funding plan considered by the Management.
Assessing the adequacy of related disclosures in the consolidated financial statements.

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Author: Taxmann

The statutory material is obtained only from the authorized and reliable sources
All the latest developments in the judicial and legislative fields are covered
Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
Every content published by Taxmann is complete, accurate and lucid
All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
The golden rules of grammar, style and consistency are thoroughly followed
Font and size that's easy to read and remain consistent across all imprint and digital publications are applied

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