Question

You work in a chartered accounting firm and your partner, Sally Smith, has asked you to do some research and write a report to update her about the potential liability that auditors face as a result of the global financial crisis. The issue arose when a neighbour mentioned to Sally at the weekend that a global accounting firm has had a class action lodged against it over the collapse of Lehman Brothers. In your report talk about ASA701 Key Audit Matters and how this has changed the way auditors report

Answer 1

Key audit matters are 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.

Communication of Key Audit Matters

A separate section with title “Key audit matters” is to be included in the auditor’s report. In this section the language should clearly cover the following:

• Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period;

and

• These matters were addressed in the context of the audit of the financial statements as a whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a separate opinion on these matters.

SA 701 prescribes no threshold on number of key audit matters that needs to be communicated by auditor.

Placement of Key Audit Matters

Generally, Key audit matters section is required to be placed after the Basis for opinion paragraph and before the Management responsibility paragraph.

In case, ‘Material uncertainty relating to going concern’ section is required as per revised SA 570, then KAM section is placed after that section.

When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of Matter paragraph may be presented either directly before or after the Key Audit Matters section, based on the auditor’s judgment as to the relative significance of the information included in the Emphasis of Matter paragraph.

Situation when there is no key audit matter to communicate

There could be situations where there are no key audit matters to be communicated. The determination of KAM involves making a judgement about relative importance of matters that required significant auditor attention. In those circumstances where auditor determines that there are no KAM for communication, this needs to be communicated to those charged with governance and also to include in the auditor’s report.

Disclaimer of opinion and communication of KAM

When an auditor disclaims his overall opinion on financial statements, he is prohibited from communicating key audit matters, unless such reporting is required by law or regulation.

Potential examples of Key Audit Matters

1. Certain complex areas relating to revenue recognition

2. Provisions and contingencies

3. Taxation matters (multiple tax jurisdictions, uncertain tax positions, deferred tax assets)

4. Assessment of impairment

5. Put arrangements over non-controlling interests

6. IT systems and controls

The prime responsibility of auditors is to give reasonable assurance to the users of the financial statements that the information in the financial statements are true fair and free from material error. So anything that can obstruct this purpose is a potential liability for the auditor.