ISA 701 - COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR’S REPORT

Question 1

ISA 701

What is a KEY Audit Matter (KAM)?

Answer 1

What is a KEY Audit Matter (KAM)?

KAM is defined in ISA 701 as:

‘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’.

Question 2

ISA 701

ISA 701 FRAMEWORK for determining KAMs

Answer 2

1/ POOL
In determining KAM, the auditor takes into account:

– Areas of SIGNIFICANT risks

– SIGNIFICANT auditor judgments relating to areas in the FS that involved significant management judgment, and

– The effect on the audit of SIGNIFICANT events or transactions that occurred during the period.

It is anticipated that there will only be a small number of such key matters disclosed in the auditor’s report as the auditor would select matters that are the most significant for the current year audit. It is envisaged that there will be at least one KAM for an audit of a listed entity.

2/ C
The KAM matter must have been Communicated to TCWG

3/ A
The KAM matter must have required Significant Auditor attention

4/ T
T The KAM matter must have been correctly Treated in the FS

5/ S
The KAM matter must be Significant for the current year audit

• MATTERS involving the MOST communication with TCWG.
• MATTERS requiring the MOST significant auditor attention.
• MATTERS is very important to intended users’ understanding of the FS as a whole, in particular, its materiality.

Question 3

ISA 701

Why is it important that the auditor identifies Key Audit Matters?

Answer 3

1/ ISA 701 requires auditors of LISTED companies must identify KAMs.
In the rare circumstance that the auditor has determined that there were no matters that require significant auditor
attention and accordingly there are no KAMs to communicate, the Auditor’s Report details this as follows
Key Audit Matters
“We have determined that there are no key audit matters to communicate in our report.”
Auditors of NON-LISTED entities may voluntarily elect to communicate KAMs but are not required to do so.

However, if they choose to communicate KAMs, they must fully comply with ISA 701.

2/ KAMs must be given significant auditor attention (special audit consideration, focused attention)

3/ KAMs must be communicated to Those Charged With Governance.

4/ Per ISA 701, these matters must be communicated to the users of FS.
Communication to users will be through a section in the auditor’s report outlining KAMs & provide a summary of how the auditors addressed these matters.
The KAM section has helped users of FS better understand the areas that the auditor considers to be the most important in the audit & provide transparency on how the audit that has been carried out.
This in turn will serve to increase confidence in the audit process & the perception of audit quality.

Question 4

ISA 701

DIFFICULTIES of having a KAM section in auditor reports

Answer 4

1/ KAM sections of each company will look different as a result of auditor judgement. This will result in the lack of comparability and consistency of content in KAM sections.

2/ The increased explanations of the individual KAMs would result in an increase in the volume of the report & shareholders may end up not reading anything in the auditor’s report.

3/ There is the likelihood of standardised disclosures being included since the same KAMs appear in every audit.

Question 5

ISA 701

What are auditors required to communicate in the KAM section?

Answer 5

At the BEGINNING of the KAM section

• HEADING - Key Audit Matters
• EXPLANATION of what is a Key Audit Matter

INDIVIDUAL KAMs

1/ An appropriate sub-heading for each Key Audit Matter

2/ A description of the individual Key Audit Matter:

− Should be entity-specific

− Should complement, and not repeat or contradict, what has been disclosed in the FS, while providing the audit perspective on those matters

− Should not imply that the matter has not been appropriately resolved by the auditor in forming the opinion on the FS

3/ A reference to the related disclosure NOTE, if any

4/ An explanation about WHY the matter was:

• Identified as a KAM &
• Considered to be one of most significance in the CURRENT YEAR audit

5/ HOW the matter was addressed in the audit. Eg: A brief overview of procedures performed by the auditor

Question 6

ISA 701

Key Audit Matters

Answer 6

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Basis for Qualified Opinion section we have determined the matters described below to be the key audit matters to be communicated in our report.