Communicating Key Audit Matters in the Independent Auditor's Report

Objective

1. To determine key audit matter; and

2. To report such key audit matter after forming an opinion on the financial statement

Scope

1. This SA applies to the audit of complete sets of general purpose financial statements of listed entities; or

2. Circumstances where auditor otherwise decides to communicate key audit matter in auditors report; or

3. When auditor is required by law or regulation to communicate key audit matters in the audit report.

Note:-

It is pertinent to note that SA 705 prohibits the auditor from  communicating key audit matters when auditor disclaims an opinion on the financial statements.

What is Key audit matter?

These are those matters which in the auditors professional judgement were considered to be most significant during the audit of financial statement for the current year and which were communicated to TCWG.

How to determine Key audit matter?

Auditor shall determine, from the matters communicated with TCWG during audit of current year, matters that required significant auditor attention in performing the audit. In making this determination, the auditor shall take into account the following:

a) Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with SA 315.

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.

c) The effect on the audit of significant events or transactions that occurred during the period.

The auditor shall determine which of the matters as determined above were of most significance in the audit of the financial statements of the current period and therefore are the key audit matters.

How to Communicate Key audit matter?

1. Auditor shall describe each key audit matter, using an appropriate subheading, separately in the auditor report under the heading 'Key Audit Matters,' unless under the following circumstances

(a) Law or regulation precludes public disclosure about the matter; or

(b) In extremely rare circumstances, auditor should not

communicate in the auditor's report when its adverse consequences would reasonably be expected to outweigh the public interest benefits of such communication; or

(c) A matter giving rise to a modified opinion in accordance with SA 705 (Revised); or

(d) A matter that may cast significant doubt on the entity's ability to continue as a going concern in accordance with SA 570 (Revised).

2. The introductory language in this 'Key audit matters' section of the auditor's report shall state that:

(a) Key audit matters are those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements [of the current period]; and

(b) 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.

3. Auditor should provide for description of each key audit matter in the auditor's report and shall also include a reference to the related disclosure(s), if any, in the financial statements and shall address the following also:

(a) Why the matter was considered to be one of most significance in the audit; and

(b) How the matter was addressed in the audit.

4. If auditor determines, depending on the facts and circumstances of the entity and the audit, that there are no key audit matters to communicate then he shall include a statement to this effect in the audit report.

Obligation of auditor to communicate with TCWG

It is the responsibility of auditor to communicate with TCWG matters that has been determined to be the key audit matter.

Documentation requirement of the SA 701

In the audit documentation following shall be included:-

(a) Matters that required significant auditor attention and the rationale for determination as to whether or not each of these matters is a key audit matter

(a) If no key audit matters is identified rationale behind the same.

(b) Rationale for not communicating key audit matter in the auditor's report.