SA 701 KAMs
SA 701*
Communicating Key Audit Matters in the
Independent Auditor’s Report
(Effective for audits of financial statements for periods
beginning on or after April 1, 2018)
Contents
Paragraph(s)
Introduction
Scope of this SA ............................................................................................1−5
Effective Date ..................................................................................................... 6
Objectives ......................................................................................................... 7
Definition ........................................................................................................... 8
Requirements
Determining Key Audit Matters ................................................................. 9–10
Communicating Key Audit Matters ........................................................ 11−16
Communication with Those Charged with Governance ............................ 17
Documentation ................................................................................................. 18
Application and Other Explanatory Material
Scope of this SA ...................................................................................... A1−A8
Determining Key Audit Matters............................................................ A9−A30
Communicating Key Audit Matters ................................................... A31−A59
Communication with Those Charged with Governance ................ A60–A63
Documentation .............................................................................................. A64
Standard on Auditing (SA) 701, “Communicating Key Audit Matters in the
Independent Auditor’s Report”, should be read in the context of the
“Preface to the Standards on Quality Control, Auditing, Review, Other
Assurance and Related Services”, which sets out the authority of SAs
and SA 200, “Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on Auditing”.
* Issued in May 2016.
Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditor’s responsibility to
communicate key audit matters in the auditor’s report. It is intended to address
both the auditor’s judgment as to what to communicate in the auditor’s report and
the form and content of such communication.
2. The purpose of communicating key audit matters is to enhance the
communicative value of the auditor’s report by providing greater transparency
about the audit that was performed. Communicating key audit matters provides
additional information to intended users of the financial statements (“intended
users”) to assist them in understanding those matters that, in the auditor’s
professional judgment, were of most significance in the audit of the financial
statements of the current period. Communicating key audit matters may also
assist intended users in understanding the entity and areas of significant
management judgment in the audited financial statements. (Ref: Para. A1–A4)
3. The communication of key audit matters in the auditor’s report may also
provide intended users a basis to further engage with management and those
charged with governance about certain matters relating to the entity, the audited
financial statements, or the audit that was performed.
4. Communicating key audit matters in the auditor’s report is in the context of
the auditor having formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor’s report is not:
(a) A substitute for disclosures in the financial statements that the applicable
financial reporting framework requires management to make, or that are
otherwise necessary to achieve fair presentation;
(b) A substitute for the auditor expressing a modified opinion when required by
the circumstances of a specific audit engagement in accordance with SA
705 (Revised);1
(c) A substitute for reporting in accordance with SA 570 (Revised)2 when a
material uncertainty exists relating to events or conditions that may cast
significant doubt on an entity’s ability to continue as a going concern; or
(d) A separate opinion on individual matters. (Ref: Para. A5–A8)
5. This SA applies to audits of complete sets of general purpose financial
statements of listed entities and circumstances when the auditor otherwise
1
SA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report.
2
SA 570 (Revised), Going Concern, paragraphs 22–23.
SA 701 2
decides to communicate key audit matters in the auditor’s report. This SA also
applies when the auditor is required by law or regulation to communicate key
audit matters in the auditor’s report.3 However, SA 705 (Revised) prohibits the
auditor from communicating key audit matters when the auditor disclaims an
opinion on the financial statements, unless such reporting is required by law or
regulation.4
Effective Date
6. This SA is effective for audits of financial statements for periods beginning
on or after April 1, 2018.
Objectives
7. The objectives of the auditor are to determine key audit matters and, having
formed an opinion on the financial statements, communicate those matters by
describing them in the auditor’s report.
Definition
8. For purposes of the SAs, the following term has the meaning attributed
below:
Key audit matters - Those matters that, in the auditor’s professional judgment,
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.
Requirements
Determining Key Audit Matters
9. The auditor shall determine, from the matters communicated with those
charged with governance, those matters that required significant auditor attention
in performing the audit. In making this determination, the auditor shall take into
account the following: (Ref: Para. A9–A18)
(a) Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315.5 (Ref: Para. A19–A22)
(b) Significant auditor judgments relating to areas in the financial statements
3
SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, paragraphs 30–
31.
4
SA 705 (Revised), paragraph 29.
5
SA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and Its Environment.
3 SA 701
that involved significant management judgment, including accounting
estimates that have been identified as having high estimation uncertainty.
(Ref: Para. A23–A24)
(c) The effect on the audit of significant events or transactions that occurred
during the period. (Ref: Para. A25–A26)
10. The auditor shall determine which of the matters determined in accordance
with paragraph 9 were of most significance in the audit of the financial
statements of the current period and therefore are the key audit matters. (Ref:
Para. A9–A11, A27–A30)
Communicating Key Audit Matters
11. The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading “Key
Audit Matters,” unless the circumstances in paragraphs 14 or 15 apply. The
introductory language in this 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. (Ref:
Para. A31–A33)
Key Audit Matters Not a Substitute for Expressing a Modified Opinion
12. The auditor shall not communicate a matter in the Key Audit Matters
section of the auditor’s report when the auditor would be required to modify the
opinion in accordance with SA 705 (Revised) as a result of the matter. (Ref:
Para. A5)
Descriptions of Individual Key Audit Matters
13. The description of each key audit matter in the Key Audit Matters section of
the auditor’s report shall include a reference to the related disclosure(s), if any, in
the financial statements and shall address: (Ref: Para. A34–A41)
(a) Why the matter was considered to be one of most significance in the audit
and therefore determined to be a key audit matter; and (Ref: Para. A42–
A45)
(b) How the matter was addressed in the audit. (Ref: Para. A46–A51)
Circumstances in Which a Matter Determined to Be a Key Audit Matter is
Not Communicated in the Auditor’s Report
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14. The auditor shall describe each key audit matter in the auditor’s report
unless: (Ref: Para. A53– A56)
(a) Law or regulation precludes public disclosure about the matter; or (Ref:
Para. A52)
(b) In extremely rare circumstances, the auditor determines that the matter
should not be communicated in the auditor’s report because the adverse
consequences of doing so would reasonably be expected to outweigh the
public interest benefits of such communication. This shall not apply if the
entity has publicly disclosed information about the matter.
Interaction between Descriptions of Key Audit Matters and Other Elements
Required to Be Included in the Auditor’s Report
15. A matter giving rise to a modified opinion in accordance with SA 705
(Revised), or a material uncertainty related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern in
accordance with SA 570 (Revised), are by their nature key audit matters.
However, in such circumstances, these matters shall not be described in the Key
Audit Matters section of the auditor’s report and the requirements in paragraphs
13–14 do not apply. Rather, the auditor shall:
(a) Report on these matter(s) in accordance with the applicable SA(s); and
(b) Include a reference to the Basis for Qualified (Adverse) Opinion or the
Material Uncertainty Related to Going Concern section(s) in the Key Audit
Matters section. (Ref: Para. A6–A7)
Form and Content of the Key Audit Matters Section in Other Circumstances
16. If the auditor determines, depending on the facts and circumstances of the
entity and the audit, that there are no key audit matters to communicate or that
the only key audit matters communicated are those matters addressed by
paragraph 15, the auditor shall include a statement to this effect in a separate
section of the auditor’s report under the heading “Key Audit Matters.” (Ref: Para.
A57– A59)
Communication with Those Charged with Governance
17. The auditor shall communicate with those charged with governance:
(a) Those matters the auditor has determined to be the key audit matters; or
(b) If applicable, depending on the facts and circumstances of the entity and
the audit, the auditor’s determination that there are no key audit matters to
communicate in the auditor’s report. (Ref: Para. A60–A63)
Documentation
5 SA 701
18. The auditor shall include in the audit documentation:6 (Ref: Para. A64)
(a) The matters that required significant auditor attention as determined in
accordance with paragraph 9, and the rationale for the auditor’s
determination as to whether or not each of these matters is a key audit
matter in accordance with paragraph 10;
(b) Where applicable, the rationale for the auditor’s determination that there are
no key audit matters to communicate in the auditor’s report or that the only
key audit matters to communicate are those matters addressed by
paragraph 15; and
(c) Where applicable, the rationale for the auditor’s determination not to
communicate in the auditor’s report a matter determined to be a key audit
matter.
***
Application and Other Explanatory Material
Scope of this SA (Ref: Para. 2)
A1. Significance can be described as the relative importance of a matter, taken
in context. The significance of a matter is judged by the auditor in the context in
which it is being considered. Significance can be considered in the context of
quantitative and qualitative factors, such as relative magnitude, the nature and
effect on the subject matter and the expressed interests of intended users or
recipients. This involves an objective analysis of the facts and circumstances,
including the nature and extent of communication with those charged with
governance.
A2. Users of financial statements have expressed an interest in those matters
about which the auditor had the most robust dialogue with those charged with
governance as part of the two-way communication required by SA 260
(Revised)7 and have called for additional transparency about those
communications. For example, users have expressed particular interest in
understanding significant judgments made by the auditor in forming the opinion
on the financial statements as a whole, because they are often related to the
areas of significant management judgment in preparing the financial statements.
A3. Requiring auditors to communicate key audit matters in the auditor’s report
may also enhance communications between the auditor and those charged with
governance about those matters, and may increase attention by management
and those charged with governance to the disclosures in the financial statements
6
SA 230, Audit Documentation, paragraphs 8–11 and A6.
7
SA 260 (Revised), Communication with Those Charged with Governance.
SA 701 6
to which reference is made in the auditor’s report.
A4. SA 3208 explains that it is reasonable for the auditor to assume that users
of the financial statements:
(a) Have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information in the financial
statements with reasonable diligence;
(b) Understand that the financial statements are prepared, presented and
audited to levels of materiality;
(c) Recognize the uncertainties inherent in the measurement of amounts
based on the use of estimates, judgment and the consideration of future
events; and
(d) Make reasonable economic decisions on the basis of the information in the
financial statements.
Because the auditor’s report accompanies the audited financial statements, the
users of the auditor’s report are considered to be the same as the intended users
of the financial statements.
Relationship between Key Audit Matters, the Auditor’s Opinion and Other
Elements of the Auditor’s Report (Ref: Para. 4, 12, 15)
A5. SA 700 (Revised) establishes requirements and provides guidance on
forming an opinion on the financial statements.9 Communicating key audit
matters is not a substitute for disclosures in the financial statements that the
applicable financial reporting framework requires management to make, or that
are otherwise necessary to achieve fair presentation. SA 705 (Revised)
addresses circumstances in which the auditor concludes that there is a material
misstatement relating to the appropriateness or adequacy of disclosures in the
financial statements.10
A6. When the auditor expresses a qualified or adverse opinion in accordance
with SA 705 (Revised), presenting the description of a matter giving rise to a
modified opinion in the Basis for Qualified (Adverse) Opinion section helps to
promote intended users’ understanding and to identify such circumstances when
they occur. Separating the communication of this matter from other key audit
matters described in the Key Audit Matters section, therefore, gives it the
appropriate prominence in the auditor’s report (see paragraph 15). The Appendix
in SA 705 (Revised) includes illustrative examples of how the introductory
8
SA 320, Materiality in Planning and Performing the Audit, paragraph 4.
9
SA 700(Revised), paragraphs 10–15 and A1–A10.
10
See paragraph A7 of SA 705 (Revised).
7 SA 701
language in the Key Audit Matters section is affected when the auditor expresses
a qualified or adverse opinion and other key audit matters are communicated in
the auditor’s report. Paragraph A58 of this SA illustrates how the Key Audit
Matters section is presented when the auditor has determined that there are no
other key audit matters to be communicated in the auditor’s report beyond
matters addressed in the Basis for Qualified (Adverse) Opinion section or
Material Uncertainty Related to Going Concern section of the auditor’s report.
A7. When the auditor expresses a qualified or adverse opinion,
communicating other key audit matters would still be relevant to enhancing
intended users’ understanding of the audit, and therefore the requirements to
determine key audit matters apply. However, as an adverse opinion is expressed
in circumstances when the auditor has concluded that misstatements,
individually or in the aggregate, are both material and pervasive to the financial
statements:11
Depending on the significance of the matter(s) giving rise to an adverse
opinion, the auditor may determine that no other matters are key audit
matters. In such circumstances, the requirement in paragraph 15 applies
(see paragraph A58).
If one or more matters other than the matter(s) giving rise to an adverse
opinion are determined to be key audit matters, it is particularly important
that the descriptions of such other key audit matters do not imply that the
financial statements as a whole are more credible in relation to those
matters than would be appropriate in the circumstances, in view of the
adverse opinion (see paragraph A47).
A8. SA 706 (Revised)12 establishes mechanisms for auditors of financial
statements of all entities to include additional communication in the auditor’s
report through the use of Emphasis of Matter paragraphs and Other Matter
paragraphs when the auditor considers it necessary to do so. In such cases,
these paragraphs are presented separately from the Key Audit Matters section in
the auditor’s report. When a matter has been determined to be a key audit
matter, the use of such paragraphs is not a substitute for the description of the
individual key audit matter in accordance with paragraph 1313. SA 706 (Revised)
provides further guidance on the relationship between key audit matters and
Emphasis of Matter paragraphs in accordance with that SA.14
11
SA 705(Revised), paragraph 8.
12
SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report.
13
See paragraphs 8(b) and 10(b) of SA 706 (Revised).
14
SA 706 (Revised), paragraphs A1–A3.
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Determining Key Audit Matters (Ref: Para. 9–10)
A9. The auditor’s decision-making process in determining key audit matters is
designed to select a smaller number of matters from the matters communicated
with those charged with governance, based on the auditor’s judgment about
which matters were of most significance in the audit of the financial statements of
the current period.
A10. The auditor’s determination of key audit matters is limited to those matters
of most significance in the audit of the financial statements of the current period,
even when comparative financial statements are presented (i.e., even when the
auditor’s opinion refers to each period for which financial statements are
presented).15
A11. Notwithstanding that the auditor’s determination of key audit matters is for
the audit of the financial statements of the current period and this SA does not
require the auditor to update key audit matters included in the prior period’s
auditor’s report, it may nevertheless be useful for the auditor to consider whether
a matter that was a key audit matter in the audit of the financial statements of the
prior period continues to be a key audit matter in the audit of the financial
statements of the current period.
Matters that Required Significant Auditor Attention (Ref: Para. 9)
A12. The concept of significant auditor attention recognizes that an audit is risk-
based and focuses on identifying and assessing the risks of material
misstatement of the financial statements, designing and performing audit
procedures responsive to those risks, and obtaining audit evidence that is
sufficient and appropriate to provide a basis for the auditor’s opinion. For a
particular account balance, class of transactions or disclosure, the higher an
assessed risk of material misstatement at the assertion level, the more judgment
is often involved in planning and performing the audit procedures and evaluating
the results thereof. In designing further audit procedures, the auditor is required
to obtain more persuasive audit evidence the higher the auditor’s assessment of
risk.16 When obtaining more persuasive audit evidence because of a higher
assessment of risk, the auditor may increase the quantity of the evidence, or
obtain evidence that is more relevant or reliable, for example, by placing more
emphasis on obtaining third party evidence or by obtaining corroborating
evidence from a number of independent sources.17
15
See SA 710, Comparative Information—Corresponding Figures and Comparative Financial
Statements.
16
SA 330, The Auditor’s Responses to Assessed Risks, paragraph 7(b).
17
SA 330, paragraph A19.
9 SA 701
A13. Accordingly, 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.
A14. 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. In turn, this often affects the
auditor’s overall audit strategy, the allocation of resources and extent of audit
effort in relation to such matters. These effects may include, for example, the
extent of involvement of senior personnel on the audit engagement or the
involvement of an auditor’s expert or individuals with expertise in a specialized
area of accounting or auditing, whether engaged or employed by the firm to
address these areas.
A15. Various SAs require specific communications with those charged with
governance and others that may relate to areas of significant auditor attention.
For example:
SA 260 (Revised) requires the auditor to communicate significant
difficulties, if any, encountered during the audit with those charged with
governance.18 The SAs acknowledge potential difficulties in relation to, for
example:
o Related party transactions19, in particular limitations on the auditor’s
ability to obtain audit evidence that all other aspects of a related party
transaction (other than price) are equivalent to those of a similar arm’s
length transaction.
o Limitations on the group audit, for example, where the group
engagement team’s access to information may have been restricted.20
SA 220 establishes requirements for the engagement partner in relation to
undertaking appropriate consultation on difficult or contentious matters.21
For example, the auditor may have consulted with others within the firm or
outside the firm on a significant technical matter, which may be an indicator
that it is a key audit matter. The engagement partner is also required to
discuss, among other things, significant matters arising during the audit
18
SA 260 (Revised), paragraphs 16(b) and A21.
19
SA 550, Related Parties, paragraph A42.
20
SA 600, Using the work of Another Auditor.
21
SA 220, Quality Control for an Audit of Financial Statements, paragraph 18.
SA 701 10
engagement with the engagement quality control reviewer.22
Considerations in Determining Those Matters that Required Significant
Auditor Attention (Ref: Para. 9)
A16. The auditor may develop a preliminary view at the planning stage about
matters that are likely to be areas of significant auditor attention in the audit and
therefore may be key audit matters. The auditor may communicate this with
those charged with governance when discussing the planned scope and timing
of the audit in accordance with SA 260 (Revised). However, the auditor’s
determination of key audit matters is based on the results of the audit or
evidence obtained throughout the audit.
A17. Paragraph 9 includes specific required considerations in the auditor’s
determination of those matters that required significant auditor attention. These
considerations focus on the nature of matters communicated with those charged
with governance that are often linked to matters disclosed in the financial
statements, and are intended to reflect areas of the audit of the financial
statements that may be of particular interest to intended users. The fact that
these considerations are required is not intended to imply that matters related to
them are always key audit matters; rather, matters related to such specific
considerations are key audit matters only if they are determined to be of most
significance in the audit in accordance with paragraph 10. As the considerations
may be interrelated (e.g., matters relating to the circumstances described in
paragraphs 9(b)-(c) may also be identified as significant risks), the applicability of
more than one of the considerations to a particular matter communicated with
those charged with governance may increase the likelihood of the auditor
identifying that matter as a key audit matter.
A18. In addition to matters that relate to the specific required considerations in
paragraph 9, there may be other matters communicated with those charged with
governance that required significant auditor attention and that therefore may be
determined to be key audit matters in accordance with paragraph 10. Such
matters may include, for example, matters relevant to the audit that was
performed that may not be required to be disclosed in the financial statements.
For example, the implementation of a new IT system (or significant changes to
an existing IT system) during the period may be an area of significant auditor
attention, in particular if such a change had a significant effect on the auditor’s
overall audit strategy or related to a significant risk (e.g., changes to a system
affecting revenue recognition).
Areas of Higher Assessed Risk of Material Misstatement, or Significant Risks
Identified in Accordance with SA 315 (Ref: Para. 9(a))
22
SA 220, paragraph 19.
11 SA 701
A19. SA 260 (Revised) requires the auditor to communicate with those charged
with governance about the significant risks identified by the auditor.23 Paragraph
A13 of SA 260 (Revised) explains that the auditor may also communicate with
those charged with governance about how the auditor plans to address areas of
higher assessed risks of material misstatement.
A20. SA 315 defines a significant risk as an identified and assessed risk of
material misstatement that, in the auditor’s judgment, requires special audit
consideration. Areas of significant management judgment and significant unusual
transactions may often be identified as significant risks. Significant risks are
therefore often areas that require significant auditor attention.
A21. However, this may not be the case for all significant risks. For example,
SA 240 presumes that there are risks of fraud in revenue recognition and
requires the auditor to treat those assessed risks of material misstatement due to
fraud as significant risks.24 In addition, SA 240 indicates that, due to the
unpredictable way in which management override of controls could occur, it is a
risk of material misstatement due to fraud and thus a significant risk.25
Depending on their nature, these risks may not require significant auditor
attention, and therefore would not be considered in the auditor’s determination of
key audit matters in accordance with paragraph 10.
A22. SA 315 explains that the auditor’s assessment of the risks of material
misstatement at the assertion level may change during the course of the audit as
additional audit evidence is obtained.26 Revision to the auditor’s risk assessment
and reevaluation of the planned audit procedures with respect to a particular
area of the financial statements (i.e., a significant change in the audit approach,
for example, if the auditor’s risk assessment was based on an expectation that
certain controls were operating effectively and the auditor has obtained audit
evidence that they were not operating effectively throughout the audit period,
particularly in an area with higher assessed risk of material misstatement) may
result in an area being determined as one requiring significant auditor attention.
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 (Ref: Para. 9(b))
A23. SA 260 (Revised) requires the auditor to communicate with those charged
23
SA 260 (Revised), paragraph 15.
24
SA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements,
paragraphs 26–27.
25
SA 240, paragraph 31.
26
SA 315, paragraph 31.
SA 701 12
with governance the auditor’s views about significant qualitative aspects of the
entity’s accounting practices, including accounting policies, accounting estimates
and financial statement disclosures.27 In many cases, this relates to critical
accounting estimates and related disclosures, which are likely to be areas of
significant auditor attention, and also may be identified as significant risks.
A24. However, users of the financial statements have highlighted their interest
in accounting estimates that have been identified as having high estimation
uncertainty in accordance with SA 54028 that may have not been determined to
be significant risks. Among other things, such estimates are highly dependent on
management judgment and are often the most complex areas of the financial
statements, and may require the involvement of both a management’s expert
and an auditor’s expert. Users have also highlighted that accounting policies that
have a significant effect on the financial statements (and significant changes to
those policies) are relevant to their understanding of the financial statements,
especially in circumstances where an entity’s practices are not consistent with
others in its industry.
The Effect on the Audit of Significant Events or Transactions that Occurred
during the Period (Ref: Para. 9(c))
A25. Events or transactions that had a significant effect on the financial
statements or the audit may be areas of significant auditor attention and may be
identified as significant risks. For example, the auditor may have had extensive
discussions with management and those charged with governance at various
stages throughout the audit about the effect on the financial statements of
significant transactions with related parties or significant transactions that are
outside the normal course of business for the entity or that otherwise appear to
be unusual.29 Management may have made difficult or complex judgments in
relation to recognition, measurement, presentation or disclosure of such
transactions, which may have had a significant effect on the auditor’s overall
strategy.
A26. Significant economic, accounting, regulatory, industry, or other
developments that affected management’s assumptions or judgments may also
affect the auditor’s overall approach to the audit and result in a matter requiring
significant auditor attention.
27
SA 260(Revised), paragraph 16(a).
28
See paragraphs 10–11 of SA 540, Auditing Accounting Estimates, Including Fair Value
Accounting Estimates, and Related Disclosures.
29
See paragraphs 16(a), 16(c) and A22, and Appendix 2 of SA 260 (Revised).
13 SA 701
Matters of Most Significance (Ref: Para. 10)
A27. Matters that required significant auditor attention also may have resulted in
significant interaction with those charged with governance. The nature and extent
of communication about such matters with those charged with governance often
provides an indication of which matters are of most significance in the audit. For
example, the auditor may have had more in-depth, frequent or robust interactions
with those charged with governance on more difficult and complex matters, such
as the application of significant accounting policies that were the subject of
significant auditor or management judgment.
A28. The concept of matters of most significance is applicable in the context of
the entity and the audit that was performed. As such, the auditor’s determination
and communication of key audit matters is intended to identify matters specific to
the audit and to involve making a judgment about their importance relative to
other matters in the audit.
A29. Other considerations that may be relevant to determining the relative
significance of a matter communicated with those charged with governance and
whether such a matter is a key audit matter include:
The importance of the matter to intended users’ understanding of the
financial statements as a whole, in particular, its materiality to the financial
statements.
The nature of the underlying accounting policy relating to the matter or the
complexity or subjectivity involved in management’s selection of an
appropriate policy compared to other entities within its industry.
The nature and materiality, quantitatively or qualitatively, of corrected and
accumulated uncorrected misstatements due to fraud or error related to the
matter, if any.
The nature and extent of audit effort needed to address the matter,
including:
o The extent of specialized skill or knowledge needed to apply audit
procedures to address the matter or evaluate the results of those
procedures, if any.
o The nature of consultations outside the engagement team regarding
the matter.
The nature and severity of difficulties in applying audit procedures,
evaluating the results of those procedures, and obtaining relevant and
reliable evidence on which to base the auditor’s opinion, in particular as the
auditor’s judgments become more subjective.
SA 701 14
The severity of any control deficiencies identified relevant to the matter.
Whether the matter involved a number of separate, but related, auditing
considerations. For example, long-term contracts may involve significant
auditor attention with respect to revenue recognition, litigation or other
contingencies, and may have an effect on other accounting estimates.
A30. Determining which, and how many, of those matters that required
significant auditor attention were of most significance in the audit of the financial
statements of the current period is a matter of professional judgment. The
number of key audit matters to be included in the auditor’s report may be
affected by the size and complexity of the entity, the nature of its business and
environment, and the facts and circumstances of the audit engagement. In
general, the greater the number of matters initially determined to be key audit
matters, the more the auditor may need to reconsider whether each of these
matters meets the definition of a key audit matter. Lengthy lists of key audit
matters may be contrary to the notion of such matters being those of most
significance in the audit.
Communicating Key Audit Matters
Separate Key Audit Matters Section in the Auditor’s Report (Ref: Para. 11)
A31. Placing the separate Key Audit Matters section in close proximity to the
auditor’s opinion may give prominence to such information and acknowledge the
perceived value of engagement-specific information to intended users.
A32. The order of presentation of individual matters within the Key Audit
Matters section is a matter of professional judgment. For example, such
information may be organized in order of relative importance, based on the
auditor’s judgment, or may correspond to the manner in which matters are
disclosed in the financial statements. The requirement in paragraph 11 to include
subheadings is intended to further differentiate the matters.
A33. When comparative financial information is presented, the introductory
language of the Key Audit Matters section is tailored to draw attention to the fact
that the key audit matters described relate to only the audit of the financial
statements of the current period, and may include reference to the specific period
covered by those financial statements (e.g., “for the year ended March 31,
20X1”).
Descriptions of Individual Key Audit Matters (Ref: Para. 13)
A34. The adequacy of the description of a key audit matter is a matter of
professional judgment. The description of a key audit matter is intended to
15 SA 701
provide a succinct and balanced explanation to enable intended users to
understand why the matter was one of most significance in the audit and how the
matter was addressed in the audit. Limiting the use of highly technical auditing
terms also helps to enable intended users who do not have a reasonable
knowledge of auditing to understand the basis for the auditor’s focus on
particular matters during the audit. The nature and extent of information provided
by the auditor is intended to be balanced in the context of the responsibilities of
the respective parties (i.e., for the auditor to provide useful information in a
concise and understandable form, while not inappropriately being the provider of
original information about the entity).
A35. Original information is any information about the entity that has not
otherwise been made publicly available by the entity (e.g., has not been included
in the financial statements or other information available at the date of the
auditor’s report, or addressed in other oral or written communications by
management or those charged with governance, such as a preliminary
announcement of financial information or investor briefings). Such information is
the responsibility of the entity’s management and those charged with
governance.
A36. It is appropriate for the auditor to seek to avoid the description of a key
audit matter inappropriately providing original information about the entity. The
description of a key audit matter is not usually of itself original information about
the entity, as it describes the matter in the context of the audit. However, the
auditor may consider it necessary to include additional information to explain why
the matter was considered to be one of most significance in the audit and
therefore determined to be a key audit matter, and how the matter was
addressed in the audit, provided that disclosure of such information is not
precluded by law or regulation. When such information is determined to be
necessary by the auditor, the auditor may encourage management or those
charged with governance to disclose additional information, rather than the
auditor providing original information in the auditor’s report.
A37. Management or those charged with governance may decide to include
new or enhanced disclosures in the financial statements or elsewhere in the
annual report relating to a key audit matter in light of the fact that the matter will
be communicated in the auditor’s report. Such new or enhanced disclosures, for
example, may be included to provide more robust information about the
sensitivity of key assumptions used in accounting estimates or the entity’s
rationale for a particular accounting practice or policy when acceptable
alternatives exist under the applicable financial reporting framework.
A38. SA 720(Revised) defines the term annual report and explains that
documents such as a management report, management commentary, or
operating and financial review or similar reports by those charged with
SA 701 16
governance (e.g., a directors’ report); a Chairman’s statement; or corporate
governance statement/reports may form part of the annual report.30 SA
720(Revised) addresses the auditor’s responsibilities relating to other information
included in the annual report. Although the auditor’s opinion on the financial
statements does not cover the other information the auditor may consider this
information, as well as other publicly available communications by the entity or
other credible sources, in formulating the description of a key audit matter.
A39. Audit documentation prepared during the audit can also be useful to the
auditor in formulating the description of a key audit matter. For example, written
communications, or the auditor’s documentation of oral communications, with
those charged with governance and other audit documentation provides a useful
basis for the auditor’s communication in the auditor’s report. This is because
audit documentation in accordance with SA 230 is intended to address the
significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions, and
serves as a record of the nature, timing and extent of the audit procedures
performed, the results of those procedures, and the audit evidence obtained.
Such documentation may assist the auditor in developing a description of key
audit matters that explains the significance of the matter and also in applying the
requirement in paragraph 18.
Reference to Where the Matter is Disclosed in the Financial Statements (Ref:
Para. 13)
A40. Paragraphs 13(a)-(b) requires the description of each key audit matter to
address why the auditor considered the matter to be one of most significance in
the audit and how the matter was addressed in the audit. Accordingly, the
description of key audit matters is not a mere reiteration of what is disclosed in
the financial statements. However, a reference to any related disclosures
enables intended users to further understand how management has addressed
the matter in preparing the financial statements.
A41. In addition to referring to related disclosure(s), the auditor may draw
attention to key aspects of them. The extent of disclosure by management about
specific aspects or factors in relation to how a particular matter is affecting the
financial statements of the current period may help the auditor in pinpointing
particular aspects of how the matter was addressed in the audit such that
intended users can understand why the matter is a key audit matter. For
example:
30
SA 720(Revised), “The Auditor’s Responsibilities Relating to Other Information”, paragraphs
12(a) and A1–A3.
17 SA 701
When an entity includes robust disclosure about accounting estimates, the
auditor may draw attention to the disclosure of key assumptions, the
disclosure of the range of possible outcomes, and other qualitative and
quantitative disclosures relating to key sources of estimation uncertainty or
critical accounting estimates, as part of addressing why the matter was one
of most significance in the audit and how the matter was addressed in the
audit.
When the auditor concludes in accordance with SA 570 (Revised) that no
material uncertainty exists relating to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern, the
auditor may nevertheless determine that one or more matters relating to
this conclusion arising from the auditor’s work effort under SA 570
(Revised) are key audit matters. In such circumstances, the auditor’s
description of such key audit matters in the auditor’s report could include
aspects of the identified events or conditions disclosed in the financial
statements, such as substantial operating losses, available borrowing
facilities and possible debt refinancing, or non-compliance with loan
agreements, and related mitigating factors.31
Why the Auditor Considered the Matter to Be One of Most Significance in the
Audit (Ref: Para. 13(a))
A42. The description of a key audit matter in the auditor’s report is intended to
provide insight as to why the matter was determined to be a key audit matter.
Accordingly, the requirements in paragraphs 9–10 and the application material in
paragraphs A12–A29 related to determining key audit matters may also be
helpful for the auditor in considering how such matters are to be communicated
in the auditor’s report. For example, explaining the factors that led the auditor to
conclude that a particular matter required significant auditor attention and was of
most significance in the audit is likely to be of interest to intended users.
A43. The relevance of the information for intended users is a consideration for
the auditor in determining what to include in the description of a key audit matter.
This may include whether the description would enable a better understanding of
the audit and the auditor’s judgments.
A44. Relating a matter directly to the specific circumstances of the entity may
also help to minimize the potential that such descriptions become overly
standardized and less useful over time. For example, certain matters may be
determined as key audit matters in a particular industry across a number of
entities due to the circumstances of the industry or the underlying complexity in
31
See paragraph A3 of SA 570(Revised), Going Concern.
SA 701 18
financial reporting. In describing why the auditor considered the matter to be one
of most significance, it may be useful for the auditor to highlight aspects specific
to the entity (e.g., circumstances that affected the underlying judgments made in
the financial statements of the current period) in order to make the description
more relevant for intended users. This also may be important in describing a key
audit matter that recurs over periods.
A45. The description may also make reference to the principal considerations
that led the auditor, in the circumstances of the audit, to determine the matter to
be one of most significance, for example:
Economic conditions that affected the auditor’s ability to obtain audit
evidence, for example illiquid markets for certain financial instruments.
New or emerging accounting policies, for example entity-specific or
industry-specific matters on which the engagement team consulted within
the firm.
Changes in the entity’s strategy or business model that had a material
effect on the financial statements.
How the Matter Was Addressed in the Audit (Ref: Para. 13(b))
A46. The amount of detail to be provided in the auditor’s report to describe how
a key audit matter was addressed in the audit is a matter of professional
judgment. In accordance with paragraph 13(b), the auditor may describe:
Aspects of the auditor’s response or approach that were most relevant to
the matter or specific to the assessed risk of material misstatement;
A brief overview of procedures performed;
An indication of the outcome of the auditor’s procedures; or
Key observations with respect to the matter,
or some combination of these elements.
Law or regulation or national auditing standards may prescribe a specific form or
content for the description of a key audit matter, or may specify the inclusion of
one or more of these elements.
A47. In order for intended users to understand the significance of a key audit
matter in the context of the audit of the financial statements as a whole, as well
as the relationship between key audit matters and other elements of the auditor’s
report, including the auditor’s opinion, care may be necessary so that language
used in the description of a key audit matter:
Does not imply that the matter has not been appropriately resolved by the
auditor in forming the opinion on the financial statements.
19 SA 701
Relates the matter directly to the specific circumstances of the entity, while
avoiding generic or standardized language.
Takes into account how the matter is addressed in the related disclosure(s)
in the financial statements, if any.
Does not contain or imply discrete opinions on separate elements of the
financial statements.
A48. Describing aspects of the auditor’s response or approach to a matter, in
particular when the audit approach required significant tailoring to the facts and
circumstances of the entity, may assist intended users in understanding unusual
circumstances and significant auditor judgment required to address the risk of
material misstatement. In addition, the audit approach in a particular period may
have been influenced by entity-specific circumstances, economic conditions, or
industry developments. It may also be useful for the auditor to make reference to
the nature and extent of communications with those charged with governance
about the matter.
A49. For example, in describing the auditor’s approach to an accounting
estimate that has been identified as having high estimation uncertainty, such as
the valuation of complex financial instruments, the auditor may wish to highlight
that the auditor employed or engaged an auditor’s expert. Such a reference to
the use of an auditor’s expert does not reduce the auditor’s responsibility for the
opinion on the financial statements and is therefore not inconsistent with
paragraphs 14–15 of SA 620.32
A50. There may be challenges in describing the auditor’s procedures,
particularly in complex, judgmental areas of the audit. In particular, it may be
difficult to summarize the procedures performed in a succinct way that
adequately communicates the nature and extent of the auditor’s response to the
assessed risk of material misstatement, and the significant auditor judgments
involved. Nonetheless, the auditor may consider it necessary to describe certain
procedures performed to communicate how the matter was addressed in the
audit. Such description may typically be at a high level, rather than include a
detailed description of procedures.
A51. As noted in paragraph A46, the auditor may also provide an indication of
the outcome of the auditor’s response in the description of the key audit matter in
the auditor’s report. However, if this is done, care is needed to avoid the auditor
giving the impression that the description is conveying a separate opinion on an
individual key audit matter or that in any way may call into question the auditor’s
opinion on the financial statements as a whole.
Circumstances in Which a Matter Determined to Be a Key Audit Matter is
32
SA 620, Using the Work of an Auditor’s Expert.
SA 701 20
Not Communicated in the Auditor’s Report (Ref: Para. 14)
A52. Law or regulation may preclude public disclosure by either management or
the auditor about a specific matter determined to be a key audit matter. For
example, law or regulation may specifically prohibit any public communication
that might prejudice an investigation by an appropriate authority into an actual, or
suspected, illegal act (e.g., matters that are or appear to be related to money
laundering).
A53. As indicated by paragraph 14(b), it will be extremely rare for a matter
determined to be a key audit matter not to be communicated in the auditor’s
report. This is because there is presumed to be a public interest benefit in
providing greater transparency about the audit for intended users. Accordingly,
the judgment not to communicate a key audit matter is appropriate only in cases
when the adverse consequences to the entity or the public as a result of such
communication are viewed as so significant that they would reasonably be
expected to outweigh the public interest benefits of communicating about the
matter.
A54. The determination not to communicate a key audit matter takes into
account the facts and circumstances related to the matter. Communication with
management and those charged with governance helps the auditor understand
management’s views about the significance of the adverse consequences that
may arise as a result of communicating about a matter. In particular,
communication with management and those charged with governance helps to
inform the auditor’s judgment in determining whether to communicate the matter
by:
Assisting the auditor in understanding why the matter has not been publicly
disclosed by the entity (e.g., if law, regulation or certain financial reporting
frameworks permit delayed disclosure or non-disclosure of the matter) and
management’s views as to the adverse consequences, if any, of disclosure.
Management may draw attention to certain aspects in law or regulation or
other authoritative sources that may be relevant to the consideration of
adverse consequences (e.g., such aspects may include harm to the entity’s
commercial negotiations or competitive position). However, management’s
views about the adverse consequences alone do not alleviate the need for
the auditor to determine whether the adverse consequences would
reasonably be expected to outweigh the public interest benefits of
communication in accordance with paragraph 14(b).
Highlighting whether there have been any communications with applicable
regulatory, enforcement or supervisory authorities in relation to the matter,
in particular whether such discussions would appear to support
management’s assertion as to why public disclosure about the matter is not
21 SA 701
appropriate.
Enabling the auditor, where appropriate, to encourage management and
those charged with governance to make public disclosure of relevant
information about the matter. In particular, this may be possible if the
concerns of management and those charged with governance about
communicating are limited to specific aspects relating to the matter, such
that certain information about the matter may be less sensitive and could be
communicated.
The auditor also may consider it necessary to obtain a written representation
from management as to why public disclosure about the matter is not
appropriate, including management’s view about the significance of the adverse
consequences that may arise as a result of such communication.
A55. It may also be necessary for the auditor to consider the implications of
communicating about a matter determined to be a key audit matter in light of
relevant ethical requirements. In addition, the auditor may be required by law or
regulation to communicate with applicable regulatory, enforcement or
supervisory authorities in relation to the matter, regardless of whether the matter
is communicated in the auditor’s report. Such communication may also be useful
to inform the auditor’s consideration of the adverse consequences that may arise
from communicating about the matter.
A56. The issues considered by the auditor regarding a decision to not
communicate a matter are complex and involve significant auditor judgment.
Accordingly, the auditor may consider it appropriate to obtain legal advice.
Form and Content of the Key Audit Matters Section in Other Circumstances
(Ref: Para. 16)
A57. The requirement in paragraph 16 applies in three circumstances:
(i) The auditor determines in accordance with paragraph 10 that there are no
key audit matters (see paragraph A59).
(ii) The auditor determines in accordance with paragraph 14 that a key audit
matter will not be communicated in the auditor’s report and no other matters
have been determined to be key audit matters.
(iii) The only matters determined to be key audit matters are those
communicated in accordance with paragraph 15.
A58. The following illustrates the presentation in the auditor’s report if the auditor
has determined there are no key audit matters to communicate:
Key Audit Matters
[Except for the matter described in the Basis for Qualified (Adverse)
SA 701 22
Opinion section or Material Uncertainty Related to Going Concern
section,] We have determined that there are no [other] key audit
matters to communicate in our report.
A59. The determination of key audit matters involves making a judgment about
the relative importance of matters that required significant auditor attention.
Therefore, it may be rare that the auditor of a complete set of general purpose
financial statements of a listed entity would not determine at least one key audit
matter from the matters communicated with those charged with governance to be
communicated in the auditor’s report. However, in certain limited circumstances
(e.g., for a listed entity that has very limited operations), the auditor may
determine that there are no key audit matters in accordance with paragraph 10
because there are no matters that required significant auditor attention.
Communication with Those Charged with Governance (Ref: Para. 17)
A60. SA 260 (Revised) requires the auditor to communicate with those charged
with governance on a timely basis.33 The appropriate timing for communications
about key audit matters will vary with the circumstances of the engagement.
However, the auditor may communicate preliminary views about key audit
matters when discussing the planned scope and timing of the audit, and may
further discuss such matters when communicating about audit findings. Doing so
may help to alleviate the practical challenges of attempting to have a robust two-
way dialogue about key audit matters at the time the financial statements are
being finalized for issuance.
A61. Communication with those charged with governance enables them to be
made aware of the key audit matters that the auditor intends to communicate in
the auditor’s report, and provides them with an opportunity to obtain further
clarification where necessary. The auditor may consider it useful to provide those
charged with governance with a draft of the auditor’s report to facilitate this
discussion. Communication with those charged with governance recognizes their
important role in overseeing the financial reporting process, and provides the
opportunity for those charged with governance to understand the basis for the
auditor’s decisions in relation to key audit matters and how these matters will be
described in the auditor’s report. It also enables those charged with governance
to consider whether new or enhanced disclosures may be useful in light of the
fact that these matters will be communicated in the auditor’s report.
A62. The communication with those charged with governance required by
paragraph 17(a) also addresses the extremely rare circumstances in which a
matter determined to be a key audit matter is not communicated in the auditor’s
report (see paragraphs 14 and A54).
33
SA 260 (Revised), paragraph 21.
23 SA 701
A63. The requirement in paragraph 17(b) to communicate with those charged
with governance when the auditor has determined there are no key audit matters
to communicate in the auditor’s report may provide an opportunity for the auditor
to have further discussion with others who are familiar with the audit and the
significant matters that may have arisen (including the engagement quality
control reviewer, where one has been appointed). These discussions may cause
the auditor to re-evaluate the auditor’s determination that there are no key audit
matters.
Documentation (Ref: Para. 18)
A64. Paragraph 8 of SA 230 requires the auditor to prepare audit
documentation that is sufficient to enable an experienced auditor, having no
previous connection with the audit, to understand, among other things, significant
professional judgments. In the context of key audit matters, these professional
judgments include the determination, from the matters communicated with those
charged with governance, of the matters that required significant auditor
attention, as well as whether or not each of those matters is a key audit matter.
The auditor’s judgments in this regard are likely to be supported by the
documentation of the auditor’s communications with those charged with
governance and the audit documentation relating to each individual matter (see
paragraph A39), as well as certain other audit documentation of the significant
matters arising during the audit (e.g., a completion memorandum). However, this
SA does not require the auditor to document why other matters communicated
with those charged with governance were not matters that required significant
auditor attention.
SA 701 24