International Standard on Auditing (ISA) 701, effective for audits of financial statements for periods ending on or after 15 December 2016, deals with the auditor’s responsibility to identify and communicate key audit matters (KAMs) in the auditor’s report. The auditing team at GCS Malta discusses this further in the article below.
What are key audit matters?
KAMs are defined as:
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 (ISA 701. Para 8.)
ISA 701 applies to audits of complete sets of general-purpose financial statements of listed entities as well as circumstances when the auditor otherwise decides to communicate key audit matters in the auditor’s report. The auditor may also be required by law or regulation to communicate KAMs in the auditor’s report.
However, it is important to note that ISA 705 (revised) does not allow the auditor to communicate KAMs when the auditor issues a disclaimer of opinion on the financial statements unless such reporting is required by law or regulation.
How to determine KAMs
When determining KAMs, the auditor needs to consider the following:
- Areas of significant risks identified in accordance with ISA 315 (revised)
- The effect on the audit of significant events or transactions that occurred during the period
- 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
After considering these points, auditors should determine which matters were of most significant during the audit and therefore, are to be included as KAMs in the auditor’s report.
Communicating KAMs
What is the purpose of communicating KAMs?
The purpose of communicating KAMs in the auditor’s report is to enhance the communicative value of the auditor’s report by providing increased transparency about the audit performed and assisting intended users in better understanding the financial statements. How are KAMs communicated?
When the auditor has determined which matters will be regarded as KAMs, the auditor must ensure that each matter is appropriately described in the auditor’s report. Here is a checklist to follow:
- Describe each key audit matter
- List the information in a separate section of the auditor’s report under the heading Key Audit Matters
- Include a short description as to why the matter was determined to be the most significant and how the matter was addressed in the audit
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