Key Audit Matters (KAM) in the Auditor’s Report

When the KAM section is required

• in audits of complete sets of general purpose financial statements of listed entities;
• when law or regulation requires key audit matters to be communicated;
• when the auditor decides to include them — for example, at the client’s request for investors;
• exception: when the auditor disclaims an opinion, ISA 705 prohibits communicating key audit matters unless required by law or regulation.

How the auditor selects key audit matters

Selection happens in two steps. First, from the matters communicated with those charged with governance (the board, supervisory board, audit committee), the auditor identifies those that required significant auditor attention (ISA 701 para 9). Then, from these, the auditor determines the matters of most significance — these are the key audit matters (para 10).

• areas of higher assessed risk of material misstatement, or significant risks identified under ISA 315;
• significant auditor judgments in areas involving significant management judgment, including accounting estimates with high estimation uncertainty;
• the effect on the audit of significant events or transactions during the period;
• how many matters to include is a matter of professional judgment; lengthy lists of KAM may be contrary to the notion of matters of most significance (para A30).

What is written about each key audit matter

Each key audit matter is described, with an appropriate subheading, in a separate section of the report headed “Key Audit Matters” (para 11). The introductory language states that these are the matters of most significance in the audit, that they were addressed in the context of the audit of the financial statements as a whole and in forming the opinion, and that the auditor does not provide a separate opinion on them.

• why the matter was considered one of most significance and therefore a key audit matter (para 13(a));
• how the matter was addressed in the audit (para 13(b)) — for example, the auditor’s approach, a brief overview of procedures, an indication of the outcome or key observations (para A46);
• a reference to the related disclosure in the financial statements, if any (para 13);
• the description should be succinct and balanced, limit highly technical auditing terms (para A34), and relate to the entity’s specific circumstances without generic or standardised language (para A47).

What KAM are not

Key audit matters are communicated in the context of an opinion already formed on the financial statements as a whole (ISA 701 para 4). So the KAM section does not replace other elements of the report.

• it is not a substitute for disclosures that management must make in the financial statements;
• it is not a substitute for a modified opinion where circumstances require one (ISA 705); a matter giving rise to a modified opinion is not described in the KAM section — instead a reference is made to the Basis for Qualified Opinion section (paras 12, 15);
• it is not a substitute for the material uncertainty related to going concern section (ISA 570) — that is by nature a key audit matter too, but it is described in its own section (para 15);
• it is not a separate opinion on individual matters.

If there are no key audit matters, or they cannot be disclosed

• if the auditor determines there are no key audit matters to communicate, the “Key Audit Matters” section is still included with a statement to that effect (para 16);
• for a listed entity this is rare: no KAM may be possible, for example, where operations are very limited (para A59);
• the auditor does not describe a key audit matter if law or regulation precludes public disclosure, or in extremely rare cases where the adverse consequences of disclosure would reasonably outweigh the public interest benefits; the second exception does not apply if the entity has publicly disclosed the information (para 14).

What this means for the company

• the auditor must communicate to those charged with governance which matters it has determined to be key audit matters, or that there are none (para 17) — the discussion takes place before the report is issued;
• the KAM section draws users’ attention to the disclosures the auditor refers to, so the quality of the notes becomes especially important;
• typical KAM topics are revenue recognition, valuation of inventories and receivables, impairment of assets and complex accounting estimates: prepare calculations and support for them in advance;
• the auditor documents which matters required significant attention and why each was or was not determined to be a key audit matter (para 18).