Delving into Key Audit Matters: auditor responsibilities under ASA/ISA701

Summary

This 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.