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.

Outlines

00:00

🔍 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.

05:01

🗣️ 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.

Keywords

💡Key Audit Matters (KAMs)

Key Audit Matters are significant issues that the auditor identifies as requiring significant audit attention. They are intended to increase transparency and help stakeholders understand the most significant aspects of the audit. In the video, KAMs are discussed as a way to bridge the expectations gap by highlighting the complexities involved in the auditing process. The script mentions that KAMs are not required in interim financial reporting, indicating their specific application in annual audits.

💡Auditor's Report

The Auditor's Report is a document that communicates the auditor's opinion on the financial statements of a company. It includes an assessment of the company's financial health and the quality of its accounting practices. In the context of the video, the auditor's report is where KAMs are communicated, providing insight into the audit process and the matters that required the most audit effort and judgment.

💡Transparency

Transparency in the video refers to the openness and clarity with which information about the audit process is communicated to the public. The introduction of KAMs aims to enhance transparency by explicitly stating the areas of the audit that were most challenging or required the most attention, thereby giving stakeholders a better understanding of the audit process.

💡Expectations Gap

The Expectations Gap is a concept in auditing that refers to the difference between what the public expects from an audit and what auditors can realistically deliver. The video discusses KAMs as a tool to reduce this gap by providing a clearer picture of the audit process and the areas that were most significant, thereby aligning expectations with the actual scope of the audit.

💡Accounting Estimates

Accounting Estimates are the financial statements' components that require the auditor to make judgments about uncertain future events. In the video, it is mentioned that KAMs often involve areas that require significant judgment, particularly in relation to accounting estimates, which can be complex and subjective.

💡Significant Risks

Significant risks are potential events or conditions that could lead to a material misstatement in the financial statements. The video explains that auditors identify these risks early in the planning stage of the audit and that they may become KAMs if they require significant audit attention or judgment.

💡Matters with Governance

Matters with Governance refers to the issues that are discussed with those charged with governance, such as the board of directors. The video mentions that auditors must determine which matters require significant audit attention in consultation with those charged with governance, highlighting the collaborative aspect of the audit process.

💡Modified Opinion

A Modified Opinion in an auditor's report indicates that the financial statements are not presented fairly in accordance with the applicable financial reporting framework. The video explains that even if an auditor issues a modified opinion, they still need to communicate KAMs, which may or may not be related to the reason for the modification.

💡Discretion

Discretion in the context of the video refers to the auditor's judgment in determining the extent and nature of information to include in the KAMs section of the auditor's report. The video notes that the amount of detail provided in KAMs is at the auditor's discretion, which can result in varying levels of detail across different companies.

💡Regulation

Regulation in the video refers to the rules and laws that govern the audit process and the disclosure of information. It is mentioned that there may be instances where auditors are prevented from disclosing certain KAMs due to regulations, such as when auditing defense contractors where national security concerns might arise.

💡Audit Work Papers

Audit Work Papers are the documents that auditors create and maintain to support their audit procedures and conclusions. The video mentions that auditors need to document their rationale for choosing which matters to include as KAMs, often in more detail in the audit work papers than in the actual report.

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

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