For enhancing the communicative value of the Auditor’s Report, the concept of Key Audit Matters was introduced in SA 701: Communicating Key Audit Matters in the Independent Auditor’s Report. The introduction of Key Audit Matters in the Auditor’s Report offers better transparency about audit and provides additional information to the users of financial statements in assisting them to understand those matters which are of critical importance in the auditor’s professional judgment. Currently, these are made applicable only to listed companies in India.
What are Key Audit Matters?
The matters which in the auditor’s professional judgment, we 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.
Key Audit Matters are described in a separate section of the auditor’s report under the subheading “Key Audit Matters” Each Key Audit Matter has its description. The description includes why the matter was of significance in the current period audit and therefore determined to be a Key Audit Matter and the relevant audit procedures the auditor performed to address the matter. The description of the Key Audit Matter is specific to each entity and written in a way that is useful to users while avoiding standard language and auditor jargon.
Determining Key Audit Matters
The auditor should determine Key Audit Matters from matters communicated with the persons charged with governance, those matters that required significant attention from the auditor in executing the audit. While determining this, the auditor should take into consideration the followings:
- Areas about the higher assessed risk of the material misstatement, or substantial risks identified as per SA 315.
- Substantial judgments of the auditor regarding areas in financial statements which had significant management judgment, that includes accounting estimates which were identified with high uncertainty.
- The effect on such audit of significant transactions or events which occurred during the relevant period.
The auditor should conclude which of the matters determined as per the aforesaid criteria are the most significant ones in the audit of financial statements of the relevant period and therefore are key audit matters.
Understanding of Key Audit Matters
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 matters that pose challenges to the auditor in obtaining sufficient appropriate audit evidence or pose challenges to the auditor in forming an opinion on the financial statements may be particularly relevant in the auditor’s determination of key audit matters.
It can also be said that the key audit matters better describe what an audit is and what an auditor does by providing an insight into the audit process for the matters which are most significant and peculiar in auditing the financial statements of the entity.
Communication of Key Audit Matter
A separate section with the title “Key audit matters” is to be included in the auditor’s report. An auditor should describe each of the key audit matters, with the help of a suitable subheading, in a separate section of the auditor’s report.
The language should cover the following:
- 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.
- 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.
SA 701 prescribes no threshold on several key audit matters that need to be communicated by the auditor.
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Posted by:
CA Ankur Vajpayee
AKGVG & Associates