# Key Audit Matters (KAM) – SA 701

## What is KAM?

Key Audit Matters are matters that, in the auditor's professional judgement, were of most significance in the audit of the current period's financial statements.

## When to Include KAM in the Audit Report?

Situation	Requirement
Listed entity	Mandatory
Mandated by law or regulation	Mandatory
Other cases	Auditor's discretion

> Special Rule: If there are no KAMs to report → Auditor issues a "Disclaimer of Opinion" (unless law/regulation states otherwise).

## How are KAMs Selected?

The auditor selects KAMs from matters already communicated to Those Charged with Governance (TCWG), applying professional judgement.

### Factors Considered:

Factor 1 – Areas of High Risk of Material Misstatement (ROMM) [SA 315]

Significant risk areas identified during the audit.

Factor 2 – Areas of Significant Auditor Judgement

Areas where the auditor exercised significant judgement in addressing issues.

Factor 3 – Impact of Significant Events/Transactions during the year

e.g., Merger, Acquisition, Demerger, major IT system change.

## Important Limitations of KAM

KAM is NOT a substitute for:

Disclosures required by the applicable Financial Reporting Framework (FRF) (management's responsibility)
Modification in the Independent Audit Report per SA 705
Going Concern (MURG) disclosures
Emphasis of Matter (EOM) paragraphs under SA 706

Worked example

### Example 1

Scenario: An entity undergoes a major demerger during the year. The accounting treatment of the demerger involves significant judgement and carries high ROMM. → Answer: This qualifies as a KAM. It was significant to the audit and should be communicated to TCWG and included as a KAM in the audit report.

### Example 2

Scenario: An auditor completes the audit of a listed company and finds NO matters significant enough to report as KAM. → Answer: The auditor cannot leave the KAM section blank. A 'Disclaimer of Opinion' must be issued unless law/regulation provides otherwise.

⚠️ Common exam mistakes

Confusing KAM with EOM Para — KAM relates to matters most significant to the AUDIT PROCESS; EOM Para relates to matters fundamental to USER UNDERSTANDING of the FS.
Thinking KAM is mandatory for ALL entities — it is mandatory only for listed entities and where required by law/regulation.
Treating KAM as a substitute for required disclosures — KAM does NOT replace disclosures required by the applicable FRF.
Selecting KAMs from ALL audit matters — KAMs must be selected only from matters already communicated to TCWG.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →