ICAI’s Implementation Guide to “Standard on Auditing (SA)-701: Communicating Key Audit Matters in the Independent Auditor’s Report”
In 2016, the ICAI has issued a series of new/ revised standards on auditor’s reporting comprising Revised SA 700, SA 705, SA 706, SA 260, SA 570 and a new SA 701, “Communicating Key Audit Matters in the Independent Auditor’s Report”, as under:
SA 701 is mandatory in the case of audit of listed entities and casts a new reporting requirement on auditors of listed entities to communicate key audit matters in their audit reports. This Standard is also applicable in audit of unlisted entities in situations where law or regulation requires communication of key audit matters in the audit report. SA 701 is effective for audits of financial statements for periods beginning on or after April 1, 2018. SA 701 has strong inter-relationship with other elements of the audit report e.g. emphasis of matter/ other matter paragraphs, modified opinion, going concern aspect.
As a proactive measure, the AASB of ICAI has issued an Implementation Guide on SA 701 (Communicating Key Audit Matters in the Independent Auditor’s Report)) for guidance of members in discharging their reporting responsibilities under this Standard in an effective manner, as under:
The Implementation Guide has been written in simple and easy to understand language and contains detailed guidance on various issues involved in this new reporting requirement. For ease of usage and understanding of the readers, the Implementation Guide has been written in a “Question – Answer” format containing frequently asked questions (FAQs) on SA 701 and responses to those questions.
The purpose of communicating key audit matters is to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed. Communicating key audit matters provides additional information to users of the financial statements and auditor’s report thereon to assist them in understanding those items that, in auditor’s professional judgment, were most significant to the audit. Communicating key audit matters may also assist intended users in understanding the entity and areas of significant management judgment in the audited financial statements.
Communicating key audit matters in the auditor’s report is in the context of having formed an opinion on the financial statements as a whole and does not constitute a separate opinion on individual matters. Communicating key audit matters in the auditor’s report is not:
i) a substitute for disclosures in the financial statements that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation.
ii) a substitute for expressing a modified opinion when required by the circumstances of a specific audit in accordance with SA 705 (Revised).
iii) a substitute for reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
iv) a separate opinion on individual matters.
SA 701 requires the communication of key audit matters in the auditor’s report for audits of complete sets of general purpose financial statements of listed entities or when required by law or regulation.
Key audit matters 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.
The auditor is required to communicate with those charged with governance the matters to be included in auditor’s report. This communication is intended to make management and those charged with governance aware of the matters that auditor intends to communicate in the auditor’s report, and to provide them with an opportunity to obtain further clarification when necessary. It may also enable management or those charged with governance to consider whether new or enhanced disclosures may be useful when these matters will be communicated in the auditor’s report.
The auditor may provide those charged with governance a draft of the auditor’s report to assist with these discussions. However, the final content of the auditor’s report, which is also required to be communicated to those charged with governance, remains the auditor’s responsibility.
From the matters that required significant auditor attention, the auditor determines matters which were of the most significance in the audit of the financial statements of the current period and therefore are KAMs. In most cases, KAMs will relate to significant or complex matters disclosed in the financial statements. Examples of KAMs might include valuation of goodwill and other long-term assets, valuation of financial instruments, difficult or unique aspects of revenue recognition, or accounting for significant acquisitions. KAMs are included in a separate section of the auditor’s report with introductory language explaining the nature and intent of KAMs, including that the matters were addressed in the context of the audit as a whole and that the auditor does not provide a separate opinion on these matters.
It will be important for KAMs to be relevant and useful for investors and other users. To accomplish this, auditors must make sure that the information is as entity-specific as possible, and related to the facts and circumstances of the audit of the current period.
However, it remains the responsibility of management, with the oversight of those charged with governance, to communicate relevant information to users about entity and its financial performance, including providing adequate disclosures in accordance with the applicable financial reporting framework.