ISA 701 ‘Communicating Key Audit Matters in the intendent Auditor’s report’ was issued in 2015 and was applicable on the financial statement audited after 2016. This standard is more relevant to the requirements of other reporting standards (ISA 705 and 706); and the new reporting requirements in ISA 570 (Revised).
SCOPE OF ISA 701
ISA 701 deals with the Auditor’s responsibility to communicate the key audit matters in the Auditor’s report.
Such communication in the report gives its users an additional information about the financial statements about the professional judgment of Auditor. Users get more in-depth ideas about the management and those charged with the governance about certain matters related to entity and audited Accounts.
The application of ISA 701 is for listed entities. It is also applicable to unlisted entities where auditor communicates key audit matters in the auditor’s report.
WHAT ARE THE KEY AUDIT MATTERS?
A key audit matter is defined in the standard as
- Areas identified as significant risks in accordance with ISA 315 (revised) or involving significant auditor judgement
- Areas where auditor encountered significant difficulty during the audit
- Circumstances where auditor were forced to modify planned approach to audit
Areas of significant Auditor attention can be set in the planning stage. The number of key audit matters depends on the size and complexity of the entity, the nature of business and environment where it operates. It is important to note that Auditor’s scope in determining the key audit matters is limited to current financial period only. This means a key audit matter discovered in previous year may not be significant this year or may be irrelevant now. Similarly, next year’s financial statements may have material impact with some matters present in current year but not relevant to current year.
The concept of significant auditor attention relates to the fact that an audit is risk based and focuses on areas of higher assessed risks of material misstatement, including significant risks and areas of complexity.
Significant difficulty during the audit may be in case of related party transactions, limitation on the group audit or extensive unexpected effort required to obtain sufficient audit evidence.
Auditor may need to modify planned approach to the audit. Following are few examples;
- revision to auditor’s risk assessment and reevaluation of planned audit procedures with respect to a particular area of financial statements
- Auditor is not required by ISA 265 to report externally on significant deficiencies in internal control. However, the identification of a significant deficiency may be an indicator of a key audit matter relating to the areas of financial statements affected by the significant deficiency
COMMUNICATING KEY AUDIT MATTERS
The auditor is required to communicate the key audit matters in the report under the heading ‘key audit matters’. Each KAM shall be described in this section using an appropriate subheading. Auditor shall also explain about why such matter was one of most significant in the audit
- Placement of the key audit matters section in the auditor report
- Nature and extent of the description of a key audit matter in the auditor’s report
- Reference to where the matter is disclosed in the financial statements
- Communication with those charged with Governance
CIRCUMSTANCES WHERE THERE ARE NO KAM
In case Auditor, did not find any significant matter during the audit, this shall be communicated with the engagement quality control reviewer and with those charged with governance. The auditor shall explain in the auditor’s report that such communication has been made with those charged with governance and it has been determined that nothing significant found to report under this heading.
In accordance with ISA 230, Auditor shall document the key audit matters and professional judgments made in reaching this determination. Such documentation also provide an indication that other matters communicate with those charged with governance are not key audit matters.