SA 701 deals with the responsibilities of an auditor to communicate the key audit matters in his/her audit report.
SA 701 is intended for addressing both the judgment of an auditor as to what is required to be communicated in his/her audit report and the content and form of such communication. The purpose of communicating key audit matters is:
- Enhancing the communicative value of the report of the auditor by offering better transparency about the audit which was executed.
- It offers additional information to users of such financial statements in assisting them to understand those matters which in the professional judgment of the auditor, were of critical importance in the audit of financial statements of the relevant period.
- It might also assist the users of such financial statements to understand the entity and also help in understanding the areas of crucial management judgment in such audited financial statements.
Communicating the key audit matters in the report of the auditor is with respect to an auditor having formed his/her opinion on financial statements overall. However, communicating the key audit matters in auditor’s report is:
- Not a substitute for the disclosures in financial statements that relevant financial reporting framework necessitates management to make, or which are otherwise essential for achieving fair presentation
- Not a substitute for an auditor expressing his/her modified opinion when circumstances of any specific audit engagement require such expression as per SA 705 (Revised)
- Not a substitute to report as per SA 570 (Revised) when any material uncertainty exists with respect to conditions or events which might bring substantial doubt on the ability of the entity in continuing as a going concern
- Not a separate opinion on the individual matters
Determining Key Audit Matters
The auditor should determine, from matters communicated with the person(s) charged with governance, those matters which mandated significant attention of the auditor in executing the audit. While determining this, the auditor should take into consideration the followings:
- Areas pertaining to higher assessed risk of the material misstatement, or substantial risks identified as per SA 315
- Substantial judgments of the auditor regarding areas in financial statements which had noteworthy management judgment, that includes accounting estimates which were identified with high uncertainty.
- The effect on such audit of substantial transactions or events which occurred during the relevant period.
The auditor should conclude which of the matters determined as per the aforesaid criteria are the most significant ones in the audit of financial statements of the relevant period and therefore are key audit matters.
Communicating Key Audit Matters
An auditor should describe each of the key audit matter, with the help of a suitable subheading, in the separate section of his/her audit report under “Key Audit Matters”.
A. Key Audit Matters aren’t a substitute to express a modified opinion An auditor shouldn’t communicate the matter in Key Audit Matters part of his/her report when he/she would require modifying the opinion as per SA 705 (Revised) as an end result of the matter.
B. Descriptions of Individual Key Audit Matters The descriptions of each of the key audit matter in Key Audit Matters areas of the report should have reference to related disclosures (if any), in financial statements and should address:
- Why such matter(s) was determined to be significant in the audit and consequently considered to be the key audit matter;
- How such matter(s) was addressed in such audit
C. Circumstances where a Matter determined as a Key Audit Matter isn’t part of the communication: An auditor should describe each of the key audit matter in his/her report unless:
- Any laws or regulations prevent public disclosure of such matter;
- In very rare scenarios, the auditor considers that such matter shouldn’t be communicated in his/her report since the adverse outcome of doing that would reasonably outweigh the benefits of public interest with such communication.
D. Form and Content of the Key Audit Matters Section in Other Circumstances In case the auditor considers, based on the circumstances and facts of the audit and entity, that there aren’t key audit matters for communicating, the auditor should provide a statement separately in a section to this effect in his/her report under “Key Audit Matters”.
Communication with Person(s) Charged with Governance
An auditor should communicate with the person(s) charged with governance:
- Matters which the auditor considers key audit matters
- In case applicable, based on the circumstances and facts of the entity and the audit, the determination of the auditor that there aren’t any key audit matters for the purpose of communicating in his/her report
An auditor should include in his/her audit documentation:
- Matters which required his/her significant attention as determined as per point 2, and the basis for his/her determination whether such matter is a key audit matter
- Where applicable, the basis for the auditor in determining that there aren’t key audit matters for the purpose of communicating with him/her
- Where applicable, the basis for the auditor in determining not to communicate in his/her report a matter which was considered to be a key audit matter
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