Key Audit Matters
One significant change with the Auditor Reporting standards is the new International Standard on Auditing (ISA) ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. The ISA applies both to audits of financial statements of listed entities and in circumstances when the auditor otherwise decides to communicate key audit matters in the auditor’s report. This ISA also applies when the auditor is required by law or regulation to communicate key audit matters in the auditor’s report. It may therefore be relevant to different sized entities and all practitioners, including small- and medium-sized practices (SMPs).
The standard is intended to address both the auditor’s judgment as to what to communicate in the auditor’s report and the form and content of such communication. The purpose of communicating key audit matters is to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed. Key Audit Matters (KAM) are defined 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.”
In determining KAM, the auditor takes into account:
(a) Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment;
(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; and
(c) The effect on the audit of significant events or transactions that occurred during the period.
The description of each KAM in the auditor’s report shall include a reference to the related disclosure(s), if any, in the financial statements and will address:
(a) Why the matter was considered to be one of most significance in the audit and, therefore, determined to be a key audit matter; and
(b) How the matter was addressed in the audit.
