Scope and objectives
The Auditing standards for communicating key audit matters in an auditor’s report. The purpose of communicating key audit matters is to enhance transparency and provide additional information to users of financial statements about the most significant matters in the audit of the financial statements of the current period. The significance of a matter is judged by the auditor in the context of quantitative and qualitative factors, such as relative magnitude, nature, effect, and the expressed interests of intended users or recipients.
Users of financial statements have expressed an interest in understanding significant judgments made by the auditor in forming the opinion on the financial statements as a whole because they are often related to the areas of significant management judgment in preparing the financial statements. Requiring auditors to communicate key audit matters in the auditor’s report may also enhance communications between the auditor and those charged with governance about those matters and increase attention by management and those charged with governance to the disclosures in the financial statements.
It is important to note that communicating key audit matters in the auditor’s report is not a substitute for disclosures in the financial statements that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation. It is also not a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement or reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
When the auditor expresses a qualified or adverse opinion in accordance with SA 705 (Revised), presenting the description of a matter giving rise to a modified opinion in the Basis for Qualified (Adverse) Opinion section helps to promote intended users’ understanding and to identify such circumstances when they occur. Separating the communication of this matter from other key audit matters described in the Key Audit Matters section, therefore, gives it the appropriate prominence in the auditor’s report.
Determining Key Audit Matters
The auditor’s responsibility in determining the Key Audit Matters (KAMs) during an audit. KAMs are those matters that required significant auditor attention in performing the audit. The auditor must determine the KAMs based on the matters communicated with those charged with governance, taking into account factors such as the significance of the matter and the auditor’s judgment.
The auditor’s determination of KAMs is limited to the matters of most significance in the audit of the financial statements of the current period, even when comparative financial statements are presented. Additionally, while the determination of KAMs is for the audit of the financial statements of the current period, it may be useful for the auditor to consider whether a matter that was a KAM in the prior period continues to be a KAM in the current period.
Matters that Required Significant Auditor Attention
The concept of significant auditor attention in the context of an audit of financial statements. It recognizes that the audit is risk-based and focuses on identifying and assessing the risks of material misstatement of the financial statements, designing and performing audit procedures responsive to those risks, and obtaining sufficient and appropriate audit evidence to provide a basis for the auditor’s opinion.
In areas where there is a higher assessed risk of material misstatement at the assertion level, the auditor is required to exercise more judgment in planning and performing audit procedures and in evaluating the results thereof. In such cases, the auditor is also required to obtain more persuasive audit evidence. The text explains that obtaining more persuasive audit evidence may involve increasing the quantity of evidence, obtaining more relevant or reliable evidence, or placing more emphasis on obtaining third-party evidence or corroborating evidence from independent sources.
SA 701 also states that areas of significant auditor attention often relate to areas of complexity and significant management judgment in the financial statements, and therefore often involve difficult or complex auditor judgments. The auditor’s overall audit strategy, the allocation of resources, and the extent of audit effort may be affected in relation to such matters. Senior personnel or experts in specialized areas of accounting or auditing may need to be involved in addressing these matters.
The specific communication requirements with those charged with governance and others in relation to areas of significant auditor attention. For example, SA 260 (Revised) requires the auditor to communicate significant difficulties encountered during the audit with those charged with governance. The SA 701 also acknowledges potential difficulties in relation to related party transactions and limitations on group audits.
The auditor may develop a preliminary view at the planning stage about matters that are likely to be areas of significant auditor attention in the audit and therefore may be key audit matters. The auditor may communicate this with those charged with governance when discussing the planned scope and timing of the audit. However, the auditor’s determination of key audit matters is based on the results of the audit or evidence obtained throughout the audit.
SA 701 explains that there are specific required considerations in the auditor’s determination of matters that require significant auditor attention. These considerations are intended to reflect areas of the audit of the financial statements that may be of particular interest to intended users. The applicability of more than one of these considerations to a particular matter communicated with those charged with governance may increase the likelihood of the auditor identifying that matter as a key audit matter.
Finally, SA 701 explains that areas of higher assessed risk of material misstatement or significant risks identified in accordance with SA 315 may be key audit matters. SA 260 (Revised) requires the auditor to communicate with those charged with governance about the significant risks identified by the auditor. The text notes that areas of significant management judgment and significant unusual transactions may often be identified as significant risks, and therefore often require significant auditor attention.
Considerations in Determining Those Matters that Required Significant Auditor Attention
The considerations that auditors should take into account when determining the matters that required significant auditor attention in an audit of financial statements. Specifically, the auditor should identify which of these matters are of most significance, and these are referred to as key audit matters.
One consideration for determining key audit matters is the level of interaction the auditor had with those charged with governance regarding a particular matter. The auditor may have had more in-depth and frequent discussions with those charged with governance on more complex matters, which could indicate that these matters are of more significance.
Other factors that may be relevant to determining the relative significance of a matter include its importance to users’ understanding of the financial statements, the nature and complexity of the underlying accounting policy, the severity of any control deficiencies identified, and the nature and extent of audit effort needed to address the matter.
Determining which matters are of most significance is a matter of professional judgment, and the number of key audit matters included in the auditor’s report may be affected by the size and complexity of the entity, the nature of its business and environment, and the facts and circumstances of the audit engagement. However, lengthy lists of key audit matters may not be consistent with the notion of identifying matters of most significance.
Communicating Key Audit Matters
In section of the ISA 701 standard outlines the requirements for communicating key audit matters in the auditor’s report. Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements. The auditor should describe each key audit matter, using an appropriate subheading, in a separate section of the auditor’s report under the heading “Key Audit Matters.”
The introductory language of this section of the auditor’s report must state that these matters were addressed in the context of the audit of the financial statements as a whole, and in forming the auditor’s opinion thereon, and that the auditor does not provide a separate opinion on these matters. Placing the separate Key Audit Matters section in close proximity to the auditor’s opinion may give prominence to such information and acknowledge the perceived value of engagement-specific information to intended users.
The order of presentation of individual matters within the Key Audit Matters section is a matter of professional judgment. For example, such information may be organized in order of relative importance, based on the auditor’s judgment, or may correspond to the manner in which matters are disclosed in the financial statements. The requirement in certain objectives to include subheadings is intended to further differentiate the matters.
When comparative financial information is presented, the introductory language of the Key Audit Matters section should be tailored to draw attention to the fact that the key audit matters described relate to only the audit of the financial statements of the current period, and may include reference to the specific period covered by those financial statements.
Key Audit Matters Not a Substitute for Expressing a Modified Opinion
The KAMs are matters that are of most significance in the audit and provide information about the areas of highest risk of material misstatement. The document emphasizes that the auditor shall not communicate a matter in the KAMs section of the auditor’s report when the auditor would be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter.
SA 701 also provides guidance on the description of individual KAMs. The description of each KAM should include a reference to the related disclosure(s), if any, in the financial statements and should address the auditor’s focus on particular matters during the audit. The adequacy of the description of a KAM is a matter of professional judgment. The nature and extent of information provided by the auditor is intended to be balanced in the context of the responsibilities of the respective parties.
The document further explains the concept of original information, which is any information about the entity that has not otherwise been made publicly available by the entity. The description of a KAM is not usually original information about the entity, as it describes the matter in the context of the audit. However, the auditor may consider it necessary to include additional information to explain why the matter was considered to be one of most significance in the audit and how the matter was addressed in the audit, provided that disclosure of such information is not precluded by law or regulation.
The document also highlights that management or those charged with governance may decide to include new or enhanced disclosures in the financial statements or elsewhere in the annual report relating to a KAM in light of the fact that the matter will be communicated in the auditor’s report. Such new or enhanced disclosures may be included to provide more robust information about the sensitivity of key assumptions used in accounting estimates or the entity’s rationale for a particular accounting practice or policy when acceptable alternatives exist under the applicable financial reporting framework.
Overall, the document provides guidance to auditors on how to describe KAMs in the auditor’s report in a clear and understandable manner that provides useful information to intended users without inappropriately being the provider of original information about the entity.
Circumstances in Which a Matter Determined to Be a Key Audit Matter is Not Communicated in the Auditor’s Report
The circumstances in which a matter determined to be a key audit matter may not be communicated in the auditor’s report. The International Standards on Auditing (ISA) requires the auditor to describe each key audit matter in the auditor’s report unless there are significant adverse consequences to the entity or the public that would outweigh the public interest benefits of such communication.
In determining whether not to communicate a key audit matter, the auditor must take into account the facts and circumstances related to the matter. The auditor may consider the entity’s reasons for not publicly disclosing the matter, such as legal or regulatory restrictions, and management’s views on the adverse consequences of such communication. However, management’s views alone do not alleviate the need for the auditor to determine whether the adverse consequences would reasonably be expected to outweigh the public interest benefits of communication.
The auditor may also need to consider the implications of communicating about a matter in light of relevant ethical requirements, as well as any legal or regulatory requirements to communicate with applicable regulatory, enforcement, or supervisory authorities. In some cases, the auditor may consider it appropriate to obtain legal advice.
Additionally, law or regulation may preclude public disclosure by either management or the auditor about a specific matter determined to be a key audit matter. For example, certain laws may specifically prohibit public communication that might prejudice an investigation by an appropriate authority into an actual or suspected illegal act, such as matters related to money laundering.
Interaction between Descriptions of Key Audit Matters and Other Elements Required to Be Included in the Auditor’s Report
The requirements for auditors when including key audit matters in their report.
In cases where there is a matter that gives rise to a modified opinion or a material uncertainty related to the entity’s ability to continue as a going concern, these matters are by their nature key audit matters but should not be described in the Key Audit Matters section of the report. Instead, the auditor must report on these matters in accordance with the applicable standards and include a reference to the Basis for Qualified (Adverse) Opinion or the Material Uncertainty Related to Going Concern section in the Key Audit Matters section.
If the auditor determines that there are no key audit matters to communicate or that the only key audit matters communicated are those matters addressed, they must include a statement to this effect in a separate section of the auditor’s report under the heading “Key Audit Matters.”
The determination of key audit matters involves making a judgment about the relative importance of matters that required significant auditor attention. In most cases, it’s rare that the auditor would not determine at least one key audit matter, but in certain limited circumstances, such as for a listed entity with very limited operations, the auditor may determine that there are no key audit matters.
Communication with Those Charged with Governance
The requirements for auditors to communicate with those charged with governance in relation to the Key Audit Matters (KAMs) identified during the audit. The auditor must communicate the KAMs to those charged with governance, or if there are no KAMs, communicate that fact.
The timing of communication about KAMs will vary depending on the circumstances of the engagement. However, the auditor may communicate preliminary views about KAMs when discussing the planned scope and timing of the audit. This can help to alleviate practical challenges of attempting to have a robust two-way dialogue about KAMs at the time the financial statements are being finalized for issuance.
Communication with those charged with governance enables them to be made aware of the KAMs that the auditor intends to communicate in the auditor’s report and provides them with an opportunity to obtain further clarification where necessary. The auditor may consider it useful to provide those charged with governance with a draft of the auditor’s report to facilitate this discussion.
The communication with those charged with governance also addresses the rare circumstances in which a matter determined to be a KAM is not communicated in the auditor’s report. In such cases, communication with those charged with governance is required. The requirement to communicate with those charged with governance when the auditor has determined there are no KAMs to communicate in the auditor’s report may provide an opportunity for the auditor to have further discussion with others who are familiar with the audit and the significant matters that may have arisen. These discussions may cause the auditor to re-evaluate the auditor’s determination that there are no KAMs.
Documentation
The requirements for documentation in the auditing process. Specifically, the auditor must include in their audit documentation information related to key audit matters, which are significant areas of the audit that required significant auditor attention. The auditor must also document their rationale for determining whether or not each of these matters is a key audit matter.
If the auditor determines that there are no key audit matters to communicate in the auditor’s report, or that the only key audit matters are those addressed by certain objectives, they must document their rationale for that determination. Similarly, if a matter is determined to be a key audit matter but is not communicated in the auditor’s report, the auditor must document their rationale for that decision as well.
Overall, the auditor’s documentation should be sufficient to allow an experienced auditor with no previous connection to the audit to understand the significant professional judgments made by the auditor, including their determination of key audit matters. The documentation may include the auditor’s communications with those charged with governance and other audit documentation related to each individual matter.
Quiz: Communicating Key Audit Matters in the Independent Auditor’s Report
1. Why is it important to communicate key audit matters in the auditor’s report?
a) To increase attention by management and those charged with governance to the disclosures in the financial statements.
b) To provide additional information to users of financial statements about the most significant matters in the audit.
c) To enhance transparency.
d) All of the above.
Answer: d)
2. What are key audit matters (KAMs)?
a) Matters that require significant auditor attention in performing the audit.
b) Matters communicated with those charged with governance.
c) Matters that are of most significance in the audit of the financial statements.
d) All of the above.
Answer: d)
3. How should key audit matters be described in the auditor’s report?
a) They should be described in a separate section of the report under the heading “Key Audit Matters.”
b) They should be described in the basis for qualified (adverse) opinion section.
c) They should be described in the material uncertainty related to going concern section.
d) They should be described in the financial statements.
Answer: a)
4. When may a matter determined to be a key audit matter not be communicated in the auditor’s report?
a) When there are significant adverse consequences to the entity or the public that would outweigh the public interest benefits of communication.
b) When the auditor would be required to modify the opinion as a result of the matter.
c) When there are legal or regulatory restrictions on public disclosure.
d) All of the above.
Answer: d)
5. What should auditors communicate with those charged with governance?
a) Key audit matters identified during the audit.
b) Preliminary views about key audit matters when discussing the planned scope and timing of the audit.
c) That there are no key audit matters to communicate.
d) All of the above.
Answer: d)
6. How should auditors document key audit matters?
a) Include information related to key audit matters in the audit documentation.
b) Document their rationale for determining whether or not each matter is a key audit matter.
c) Document their rationale if a matter determined to be a key audit matter is not communicated in the auditor’s report.
d) All of the above.
Answer: d)
7. What factors should auditors consider when determining key audit matters?
a) The level of interaction with those charged with governance.
b) Importance to users’ understanding of the financial statements.
c) Nature and complexity of the underlying accounting policy.
d) All of the above.
Answer: d)
8. Are key audit matters a substitute for disclosures in the financial statements required by the applicable financial reporting framework?
a) Yes, they are a complete substitute.
b) No, they are not a substitute.
c) Key audit matters may partially substitute disclosures in the financial statements.
d) Key audit matters are only required when disclosures in the financial statements are not sufficient.
Answer: b)
9. How should key audit matters be ordered within the Key Audit Matters section of the auditor’s report?
a) In order of relative importance based on the auditor’s judgment.
b) In the same order as they are disclosed in the financial statements.
c) In alphabetical order.
d) In chronological order.
Answer: a)
10. Who is responsible for determining key audit matters?
a) Those charged with governance.
b) Management of the audited entity.
c) External auditors.
d) A joint decision by all parties involved.
Answer: c)
Additional questions:
11. What is the purpose of communicating key audit matters in the auditor’s report?
a) To provide detailed explanations of financial statement disclosures.
b) To enhance transparency and provide additional information to users of financial statements.
c) To substitute the need for disclosures in the financial statements.
d) To express a modified opinion on the financial statements.
Answer: b)
12. How does determining key audit matters differ from determining areas of significant auditor attention?
a) Key audit matters focus on disclosure requirements, while areas of significant auditor attention focus on audit procedures.
b) Key audit matters consider the interests of intended users, while areas of significant auditor attention focus on management judgments.
c) Key audit matters involve communication with those charged with governance, while areas of significant auditor attention do not.
d) Key audit matters only apply to audits of listed entities, while areas of significant auditor attention apply to all audits.
Answer: b)
13. When might a matter that was a key audit matter in the prior period no longer be a key audit matter in the current period?
a) When the matter has been resolved or no longer poses significant risk.
b) When the matter is related to management judgments that have changed.
c) When the matter is no longer of interest to users of financial statements.
d) When the matter is not material to the financial statements.
Answer: a)
14. How can auditors exercise more judgment and obtain more persuasive audit evidence in areas of higher assessed risk?
a) By increasing the quantity of evidence obtained.
b) By obtaining more relevant or reliable evidence.
c) By placing more emphasis on obtaining third-party evidence.
d) All of the above.
Answer: d)
15. In relation to key audit matters, what are the specific communication requirements with those charged with governance?
a) Communication of significant difficulties encountered during the audit.
b) Communication of related party transactions and limitations on group audits.
c) Communication of significant risks identified by the auditor.
d) All of the above.
Answer: d)
16. How does the auditor’s determination of key audit matters relate to the size and complexity of the entity?
a) The larger and more complex the entity, the more key audit matters are likely to be determined.
b) The smaller and less complex the entity, the more key audit matters are likely to be determined.
c) The size and complexity of the entity have no influence on the determination of key audit matters.
d) The size and complexity of the entity directly determine the content of key audit matters.
Answer: a)
17. What is the purpose of including the Key Audit Matters section in close proximity to the auditor’s opinion?
a) To provide additional information on the auditor’s qualifications and expertise.
b) To draw attention to the importance of key audit matters.
c) To separate the auditor’s opinion from key audit matters.
d) To avoid confusion between key audit matters and financial statement disclosures.
Answer: b)
18. How should auditors address key audit matters that would require a modified opinion or disclose material uncertainties?
a) By including them in the Key Audit Matters section of the auditor’s report.
b) By providing a separate section for modified opinions and material uncertainties.
c) By communicating them directly to those charged with governance.
d) By excluding them from the auditor’s report entirely.
Answer: b)
19. What information should be included in the description of each key audit matter?
a) References to related disclosures in the financial statements.
b) The auditor’s focus on particular matters during the audit.
c) Explanations of why the matter is considered significant in the audit.
d) All of the above.
Answer: d)
20. How can management or those charged with governance respond to the communication of key audit matters?
a) By modifying the auditor’s opinion.
b) By including new or enhanced disclosures in the financial statements.
c) By challenging the auditor’s determination of key audit matters.
d) By providing additional evidence to support the audit conclusions.
Answer: b)
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