Delving into Key Audit Matters: auditor responsibilities under ASA/ISA701
Summary
TLDRThis video delves into the concept of Key Audit Matters (KAMs) under ISA 701, explaining their purpose to enhance transparency and reduce the expectations gap in auditing. KAMs are not a substitute for financial disclosures but rather provide insight into the audit process, highlighting areas requiring significant auditor attention and judgment. The video outlines the criteria for determining KAMs, the auditor's discretion in communication, and the requirement to discuss these matters with those charged with governance. It also addresses the implications of KAMs in modified audit opinions and the expectation of continuous learning and research in this evolving area of auditing.
Takeaways
- 📚 Key Audit Matters (KAMs) are a requirement under ISA 701 for increasing transparency in audits, providing insights into the audit process.
- 🌐 In the US, the equivalent is CAM (Critical Audit Matters), while internationally and in Australia, it's referred to as KAM.
- 🚫 KAMs are not required in interim financial reporting or condensed financial reports.
- 🔍 The purpose of KAMs is to enhance public understanding of the audit process and reduce the expectations gap.
- 📋 KAMs are communicated within the auditor's report and are not substitutes for financial disclosures or modified audit opinions.
- 🛠️ Auditors determine KAMs based on significant audit effort or attention, such as areas of high risk or requiring significant judgment.
- 🗣️ It's the auditor, not management, who decides which matters are considered KAMs.
- 💡 Communication of KAMs is done under a subheading in the auditor's opinion section, with the extent of detail at the auditor's discretion.
- 🚫 There may be instances where disclosure of a KAM is prevented due to legal or regulatory restrictions.
- ✅ Even with a modified audit opinion, KAMs must still be included, though they may not relate to the reason for the modification.
- 📝 Auditors must discuss KAMs with those charged with governance and document their rationale for choosing them.
Q & A
What is the difference between CAMs and KAMs?
-CAMs stands for Critical Audit Matters, which is used in the US, while KAMs stands for Key Audit Matters, used under international and Australian standards. They are fairly identical in purpose but differ in terminology.
What is the primary goal of KAMs?
-The primary goal of KAMs is to increase transparency for firms and provide the public with a better understanding of the auditor's role, thereby decreasing the expectations gap.
Where are KAMs communicated in the financial reporting process?
-KAMs are communicated in the auditor's report, specifically under a subheading in the ordered opinion on key audit matters.
Do KAMs replace disclosures in the financial report?
-No, KAMs are not substitutes for disclosures in the financial report. They provide insight into the audit process but do not replace the need for detailed financial disclosures.
What are the requirements for determining KAMs?
-The auditor must determine from matters that required significant audit effort or attention, typically those that involve increased effort, senior staff involvement, or more professional judgment.
Who decides which matters are considered KAMs?
-The auditor, not management, makes the choice regarding which matters are considered KAMs.
What must be included when describing KAMs?
-When describing KAMs, the auditor must explain why the matter was important, why extra effort was needed, and how the increased risk was addressed.
Can there be situations where KAMs are not disclosed?
-Yes, there can be situations where KAMs are not disclosed due to legal or regulatory restrictions, or if the auditor believes that the public interest might be harmed.
What happens if an auditor has to give a modified opinion?
-Even with a modified opinion, the auditor still has to include KAMs. The KAMs may or may not be related to the reasons for the modified opinion.
How should the absence of KAMs be communicated?
-If there are no KAMs to communicate or if the only KAMs are those that cannot be disclosed due to secrecy, the auditor must include a statement to that effect in the auditor's report.
What is the expected future development regarding KAMs?
-KAMs are a relatively new concept, and there is an expectation of significant research and development in this area, including analysis of KAMs for different companies and the evolution of communication styles and practices.
Outlines
🔍 Introduction to Key Audit Matters (KAM)
This paragraph introduces the concept of Key Audit Matters (KAM) in the context of auditing standards, comparing the U.S.'s CAM with the international and Australian standards' KAM. The purpose of KAM is to enhance transparency and provide the public with a better understanding of the auditor's role, aiming to reduce the expectations gap. KAMs are required to be communicated in the auditor's report and are meant to provide insight into the audit process without substituting financial report disclosures or modifying audit opinions. The paragraph also discusses the scope of KAMs, emphasizing that they are determined by the auditor and are not chosen by management. KAMs are identified from significant audit or attention areas, typically those requiring increased effort, such as higher risk of material misstatement or significant risks identified early in the audit planning stage.
🗣️ Communicating and Documenting Key Audit Matters
The second paragraph delves into how auditors communicate KAMs, which is through a subheading in the auditor's report. The amount of detail provided in KAMs is at the auditor's discretion, leading to variability in the extent of information across different companies. The paragraph explains that KAMs must include why a matter was significant and how the auditor addressed it. There may be instances where KAMs cannot be disclosed due to legal restrictions or national security concerns. The paragraph also addresses the requirement to include a statement if there are no KAMs to communicate or if the only KAMs are those that cannot be disclosed. Auditors are required to discuss KAMs with those charged with governance and document their rationale for the choices made regarding KAMs. The paragraph concludes by noting that KAMs are a relatively new concept and anticipates future research and analysis in this area, highlighting the learning curve for practitioners in effectively communicating KAMs.
Mindmap
Keywords
💡Key Audit Matters (KAMs)
💡Auditor's Report
💡Transparency
💡Expectations Gap
💡Accounting Estimates
💡Significant Risks
💡Matters with Governance
💡Modified Opinion
💡Discretion
💡Regulation
💡Audit Work Papers
Highlights
Introduction to Key Audit Matters (KAMs) and their role in increasing transparency and reducing the expectations gap in auditing.
Difference between CAMs in the US and KAMs under international and Australian standards.
Requirement for KAMs in annual financial reporting but not in interim or condensed financial reports.
The purpose of KAMs is to provide insight into the audit process and highlight matters that required significant auditor attention.
KAMs are not a substitute for financial report disclosures or a separate opinion on individual matters.
The auditor's responsibility to communicate KAMs within the auditor's report.
KAMs are determined by the auditor, not by management, based on significant audit effort or attention required.
Identification of areas that are high risk of material misstatement or significant risks identified during the planning stage.
KAMs often involve judgments related to accounting estimates or significant events and transactions.
Communication of KAMs through a subheading in the auditor's opinion section of the report.
Variability in the level of detail provided for KAMs depending on the auditor's discretion.
Requirements for auditors to explain why a matter was considered important and how they addressed it.
Potential restrictions on disclosing KAMs due to legal or regulatory constraints.
Procedures to follow when giving a modified opinion and the inclusion of KAMs in such cases.
Guidance on what to include in the report when there are no KAMs to communicate or when certain KAMs are undisclosed.
The importance of discussing KAMs with those charged with governance and documenting these discussions.
Challenges and learning curve for auditors in writing KAMs, including finding the right language and communication style.
Future plans for a video analyzing KAMs from different companies and the availability of KPMG reports on the subject.
Transcripts
[Music]
what's up what it fans and welcome to my
video explaining a si is a 701 about key
audit matters now if you're watching is
in your from the US you are having
something coming called critical audit
matters they're fairly identical but
it's just a C a.m.
whereas here under international and
account and Australian standards we've
got K a.m. so what are these k AMS in my
contents there's not very much here what
are the key audit matters and
communicating with them and of course
the explanatory material Australia is
harmonized on a sa is a 701 about cams
the only thing that is different is that
key audit matters are not required in
interim financial reporting with
condensed financial reports the whole
purpose of key audit matters was to try
and increase the transparency for firms
in regards to understanding what the
auditor does so it's trying to get a
better on give the public a better
understanding and also decrease some of
that expectations gap if we can show the
public how complicated our role is then
maybe they'll have a better
understanding of what to expect from the
audit so if we look at the scope and
introduction of the standard we have to
communicate key audit matters in the
auditor's report so this is something
within the audit report and it's about
as I mentioned providing greater
transparency and assist them in
understanding matters that we thought
were most significant so this is insight
into the audit process when we
communicate them what we're doing is
we're not this is quite important key
audit matters are not substitutes for
disclosures in the financial report we
don't substitute it for expressing a
modified opinion or for issuing a going
concern issue and it's not a separated
opinion on individual matters it's still
part of the entire audit but we're just
saying
shareholders these are the things that
required the most ordered a
decision-making and judgment and it's
not as black and white as you might
think it could be so what are our
requirements and our requirements say
that we have to determine from the
matters with those charged with
governance those things that required
significant audit or attention what do
we mean by things that require
significant order it ordered our
attention well those are things that
typically would require increased effort
so that might mean an instance where we
use more senior staff where we needed to
use more time where we needed to have
more professional judgment so what
things do we consider well areas that
are highest risk of material
misstatement or significant risks that
we identify early back in the planning
stage of the audit so it's very possible
that significant risks from the planning
stage may become key or it matters as I
mentioned before ones that require
judgments especially relating to
accounting estimates or significant
events or transactions so the order to
decides which things are going into the
key audit matters it's not management
it's the auditor who makes that choice
so how do we communicate the key audit
matters we communicate our key audit
matters by having a subheading in the
orderd opinion on key audit matters and
it's really up to the auditors
discretion about how much information
needs to go into those cams so you'll
see a big difference some companies will
have a lot other companies won't have so
much so what exactly does the order to
need to say well when we describe our
key audit matters we have to say why it
was important to us why did we need to
spend extra effort and how did we deal
with that so really what was our
response to the increased risk that came
from that key audit matter now sometimes
we might be prevented from disclosing a
cam so there could be a law or a
regulation or we think that there's a
possibility that it might outweigh the
public
so there's only as if you're auditing
perhaps a defense contract or a military
defense contractor there could be some
areas where you might not be allowed to
disclose your key or it matter now what
happens if you have to give a modified
opinion well you still have to have your
key or it matters your key audit matters
may not be actually related to why you
modified your opinion they might be
other areas of the accounts but you
still need to include them now the
standard does have a section with what
happens if there are no key order
matters to communicate or that the only
key audit matters are those addressed by
paragraph 15 which is sort of the
secrecy and ones that you can't disclose
then we need to include a statement to
this effect for most publicly listed
firms it would be impossible to believe
that there would be no key audit matters
there's always going to be something
that's going to require auditor
attention now I need to talk to those
charged with governor's about the key
audit matters we will often talk to them
about that report and then we need to
document it so just like everything else
in the audit I need to talk about why I
made my choices so I need to include the
rationale for my choices and you might
even do so in more detail in your audit
work papers then you do in the actual
key audit matters if I decide there are
no cams then I have to include that as
well or if there are some that I choose
not to communicate then I need to
include evidence about why I'm not
communicating with them so key unit
matters are only relatively new I plan a
future video where I'm going to look at
key audit matters for a couple of
different companies and we can analyze
them there's also some great reports
from KPMG that were prepared based on
the Australian sort of I guess first
years worth of experience with key audit
matters it's also an area that we're
expecting to see a significant amount of
research in this area and one thing that
practitioners have told me when it comes
to key audit matters they definitely had
a big learning curve about writing cams
so they really needed to figure out what
was the language that they were going to
use the style of communication the tone
of communication how do you give enough
information without giving too much away
so keep an eye out make sure you
subscribe to the channel for my future
video on chaotic matters as usual if you
thought the video was useful
I'd love a thumbs up if you have any
questions pop them in the comments and I
will see you next time
[Music]
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