For the first time, audit reports of listed companies for Financial year 2018-19 will contain a section called Key Audit Matters (KAM). This section aims to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed. Communicating KAM may also assist intended users in understanding the entity and areas of significant management judgement in the audited financial statements. It will provide intended users of financial statements contextual information to help them differentiate between a large number of companies that receive ‘clean’ audit reports.
Standard on Auditing (SA) 701, Communicating Key Audit Matters in the Independent Auditor’s Report defines Key audit matters as ‘Those matters that, in the auditor’s professional judgement, 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.
Matters that may be reported as KAM
KAM may be related to complex matters that are disclosed in the financial statements. Examples may include impairment, provision for losses, valuation of financial instruments, revenue recognition, taxation matters, etc.
Expected benefits of KAM
- Better governance since it encourages two-way communication between the auditor and those charged with governance.
- Though KAM will not change the manner in which the numbers are reports. It, however, may encourage the management to give enhance disclosures relating to matters that are reported as KAM.
- Improve overall quality of audits as the auditor would have a greater focus on areas requiring careful judgement.
Determination of KAM
The implementation guide provides a funnel approach to determine which matters should be reported as KAM. It involves the following steps:
Step 1: KAMs should be identified from matters communicated with those charged with governance. Some of the matters that are normally communicated with those charged with governance include Auditor’s responsibilities in relation to audit, planned scope and timing of the audit including significant risks identified, significant findings from the audit, etc.
Step 2: From matters identified in Step 1, identify those matters that required significant auditor attention. Normally, these are the matters that pose challenges to the auditor in forming an opinion or obtaining evidence that in his judgement was sufficient and appropriate under the circumstances.
Step 3: From matters identified in Step 2, the auditor needs to determine which of those matters were of most significance in the audit of financial statements of the current period. Some of the points that may be considered at this step are:
- Areas where the auditor has more in-depth, frequent and robust interactions with those charged with governance.
- Restrictions imposed on the auditor/ significant delays or unwillingness to provide information by the management.
- Severity of control deficiencies.
Communicating KAM
There is no limit on the number of matters that can be reported as KAM. A separate section with title “Key Audit Matters” is to be included in the auditor’s report. In this section the language should clearly cover the following:
- Key audit matters are those matters that in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period; and
- 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 the auditor does not provide a separate opinion on these matters.
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