ISA 701 KEY AUDIT MATTERS

Those matters that in auditor’s professional

judgement were of most significance in the audit
WHAT IS of FS of Current period (even if comparative FS
KEY AUDIT MATTERS? are presented). Key audit matters are selected
from matters communicated to those charged
with governance.

Manufacturing
Audit Bank Audit

Advances
Inventory
Investment
PPE Borrowing
Deposits

How to determine Key Audit Matters ?

How to communicate Key Audit Matters ?

 ISA 701 KEY AUDIT MATTERS

Matters communicated with Areas of higher assessed risk of materi-

those charged with al misstatement, or significant risks.
governance
Significant auditor judgments relating
Matters that required to areas in the financial statements
significant auditor that involved significant management
judgment, including accounting
attention
estimates identified as having high
estimation uncertainty.

KAM Effect on the audit of significant

events or transactions that occurred
during the period.

The nature and extent of communication with those charged with governance provides an indication of
which matters are of most significance. Other consideration in determining the relative significance of a
matter include

Nature of the
Nature and severity Importance of the
Nature and underlying Nature and
of difficulties in Severity of matter to intended
accounting policy or materiality of
extent of any control users’ understanding
applying audit complexity or corrected and
audit effort procedures or deficiencies of the financial subjectivity in uncorrected
needed. to obtaining relevant related to the statements as a whole, management’s
in particular its misstatements
address and reliable audit matter. selection of an related to the
the matter. evidence. materiality to the appropriate
financial statements. matter.
accounting policy.
 SSGC Provide gas Gas shortage

Import and sale LNG

ISA 701 KEY AUDIT MATTERS Significant Event

Significant Auditor’s
attention
Company’s Financial Statement

Matters that required Most significant matter

Matters discussed with BOD significant auditor attention (KAM)
 ISA 701 KEY AUDIT MATTERS

Substantive Procedure

P&L
YES (Key Audit Matter)
Revenue Difficult to verify
NO

IQ school of finance PAK Suzuki

Audit Audit

Revenue Not KAM Revenue KAM

Fees = Rs. 18,000 Car sold = Rs. 2,000,000

Free repair and maintainance for 1 years

Free Service for 5 years

Estimates, efforts and time not involved Estimates, efforts and time not involved
ISA 701 KEY AUDIT MATTERS

Substantive Procedure

P&L

Purchases

OCCURRENCE check GDN

COMPLETENESS check GDN

EXPENSES check utility, rent, agreement

These are not KAM

ISA 701 KEY AUDIT MATTERS

BALANCE SHEET

Inventory Impairment - KAM

PPE Impairment - KAM
Receivable Impairment - KAM
Payable
Cash bank
Bank loan
Pre payment UNILEVER Audit OGDCL Audit

Share capital inventory inventory

Share premium Existence Existence (KAM)
Reserves
Valuation
Intangible impairment (KAM)
ISA 701 KEY AUDIT MATTERS

How to communicate KAM?

Key Audit Matter

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]

These matters were addressed in the context of the audit of

the financial statements as a whole, and informing the
auditor’s opinion thereon, and the auditor does not provide
a separate opinion on these matters.
ISA 701 KEY AUDIT MATTERS

How to communicate Key Audit Matters ?

Impairment of inventory

Include a refernce to a related disclosure, if any !

Why this matter was considered to be one of the most

significant in the audit of the financial statement ?

What are the key audit procedure and how they are
addressed ?
 ISA 701 KEY AUDIT MATTERS

How to communicate Key Audit Matters ?

Impairment of inventory

Refer to note 4 of these financial statements

Include a where inventory had been recorded at an
refernce
to a related amount of Rs. 400M or impairment of
disclosure,if any ! inventory had been recorded at an amount
of Rs. 400M.

Why this matter The impairment of inventory is material to

was considered that financial statement and it involves
to be one of the
most significant in significant estimamtes and judgements
the audit of the therefore we have determine this matter as
financial statement ?
key audit matter.
ISA 701 KEY AUDIT MATTERS

How to communicate Key Audit Matters ?

Impairment of inventory

Obtain the understanding of the

management process to record impairment,
What are the key
audit procedure test the controls over the recording of
and how they are impairment, check whether the assumptions
addressed ?
used by management are reasonable and
perform substantive procedure.
 ISA 701 KEY AUDIT MATTERS

How to communicate Key Audit Matters ?

Provision for warranty

Include a Refer to note 4 of these financial statements

refernce
to a related where provision for warranty had been
disclosure,if any ! recorded at an amount of Rs. 400M .

Why this matter The amount is material to tha financial

was considered statement and provision for warranty
to be one of the
most significant in involves significant estimamtes and
the audit of the judgements therefore we have determine
financial statement ?
this matter as key audit matter.
ISA 701 KEY AUDIT MATTERS

How to communicate Key Audit Matters ?

Provision for warranty

Obtain the understanding of the
management process of provision for
What are the key warranty, test the controls, check whether the
audit procedure assumptions, number of claims, nature of
and how they are
addressed ? claims, cost of claims used by management
are reasonable and perform subsequent event
procedure.
ISA 701 KEY AUDIT MATTERS

How to communicate Key Audit Matters ?

Key audit matter = ISA 315 + ISA 500

PLANNING

Materiality

Significant risk

Judgements

Estimates

Substantive procedure
ISA 701 KEY AUDIT MATTERS

How to communicate Key Audit Matters ?

Include a refernce to a related disclosure, if any !

Why this matter was considered to be one of the most

significant in the audit of the financial statement ?

What are the key audit procedure and how they are
addressed ?
ISA 701 KEY AUDIT MATTERS

APPLICABILITY OF KEY AUDIT MATTER

Key Audit Matter applies to audit of complete set of

general purpose financial statements of listed entities.

Circumstances when the auditor otherwise decides to

communicate key audit matters in the auditor’s report.

When the auditor is required by law or regulation to

communicate key audit matters in the auditor’s
 ISA 701 KEY AUDIT MATTERS

KEY AUDIT MATTER IS NOT THE SUBSTITUE FOR

Communicating key audit matters in the auditor’s report is not:

A substitute for the auditor expressing a modified opinion when required
by the circumstances of a specific audit engagement in accordance with
ISA 705 (Revised);

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

A substitute for reporting in accordance with ISA 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;

A separate opinion on individual matters.

ISA 701 KEY AUDIT MATTERS

A substitute for the auditor expressing a modified opinion when required

by the circumstances of a specific audit engagement in accordance with
ISA 705 (Revised);

COMPANY

Impairment of inventory not recorded

ISA 705 Unmodified opinion

Modified opinion Key audit matter

Not the substitute of

Qualified Adverse modified opinion

Not the substitute of

ISA 705
ISA 701 KEY AUDIT MATTERS

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

COMPANY

Do not provide disclosure

Case / litigation against company

Disclose in KAM

KAM is not the substitute of a

disclosure that is required to
be provided by the management
as per the requirement of IFRS
ISA 701 KEY AUDIT MATTERS

A substitute for reporting in accordance with ISA 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;

COMPANY

Material uncertainity exist

related to going concern

Communicate in KAM Management

Don’t include in material

uncertainity section

KAM is not the substitute

of Material uncertainity
ISA 701 KEY AUDIT MATTERS

ELEMENTS OF KEY AUDIT MATTER

Unmodified opinion

Qualified opinion due to

material misstatement

Qualified opinion due to

scope limitation

Adversed opinion

Disclaimer

Material uncertainity relating

to going concern
ISA 701 KEY AUDIT MATTERS

INTERACTION OF KAM WITH OTHER ELEMENTS OF AUDIT REPORT

Key Audit Matter VS Material Uncertainty Relating to Going Concern

Company Audit

Events or conditions triggered

Doubts on going concerns

Management assessed going concern

Going concern assumption is appropriate

(does not intend to liquidate)

Material uncertainity exist

Adequately disclosed in F.S

 ISA 570 Concept of Going Concern

Yes Going Concern Assessment No Scope Limitation

Going Concern Material Material + Pervasive

Assumption Appropriate
Qualified Opinion Disclaimer

Yes No AB + AD Unmodified Opinion ?

AB + AD Adverse Opinion

Material Alternate Basis (AB) Material

Qualified
+ Opinion
Uncertainty Exist Adequately Disclosed AB + AD Material Adverse
+
(AD) Pervasive Opinion

No ? AB + AD Adverse Opinion

Unmodified MURTGC
Yes
Material + Pervasive
Yes Adverse Opinion
Adequately
Disclosed Misstatement Material
No
Qualified Opinion
ISA 701 KEY AUDIT MATTERS

Matters communicated with

those charged with YES !
governance ?
Matters that required
significant auditor
attention ? YES !

KAM ?
YES !
 ISA 701 KEY AUDIT MATTERS

Going concern

ISA 570 ISA 701

How to communicate going concern in KAM?

Material Uncertainty
Key Audit Matter VS Relating to Going Concern
ISA 701 KEY AUDIT MATTERS

Opinion
Basis for Opinion

Material Uncertainty relating to Going Concern

(if applicable)
ISA 701 KEY AUDIT MATTERS

Key Audit Matters

Introductory
The Paragraph:
auditor shall describe each key audit matter, using an
appropriate subheading, in a separate section of the auditor’s
report under the heading “Key Audit Matters,” The
introductory language in this section of the auditor’s report
shall state that

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];

These matters were addressed in the context of the audit of

the financial statements as a whole, and informing the
auditor’s opinion thereon, and the auditor does not provide
a separate opinion on these matters.
 ISA 701 KEY AUDIT MATTERS

PPE

INVENTORY

RECEIVABLE

Introductory paragraph

In addition to matter as described in material uncertainity relating

to going concern section, following are the key audit matters.

Impairment of PPE Impairment of inventory Impairment of receivable

ISA 701 KEY AUDIT MATTERS

Listed company audit

Impairment of Impairment of Impairment of

PPE Inventory Receivable

Management has not recorded

impairment of inventory

ISA 701 ISA 705

KAM Misstatement
ISA 701 KEY AUDIT MATTERS

FINANCIAL
STATEMENTS = IFRS

ON ACCOUNT OF

SELECTION OF APPLICATION OF
ACCOUNTING ACCOUNTING DISCLOSURE
POLICY POLICY

NON DISCLOSURE INADEQUATE

MATERIAL
MATERIAL +
PERVASIVE

YES YES
Qualified Opinion Adverse Opinion

Except for inventory, these

Financial Statements are These Financial Statements
are NOT prepared in
prepared in accordance accordance with IFRS
with IFRS
ISA 701 KEY AUDIT MATTERS

ISA 701
(KAM)
Impairment VS
of Inventory
ISA 705
(MODIFIED OPINION)

Opinion (modified)

Except for inventory these financial statements

are prepared in accordance with IFRS.
ISA 701 KEY AUDIT MATTERS

Key Audit Matters

Introductory Paragraph:
The auditor shall describe each key audit matter, using an
appropriate subheading, in a separate section of the auditor’s
report under the heading “Key Audit Matters,” The
introductory language in this section of the auditor’s report
shall state that
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];

These matters were addressed in the context of the audit of

the financial statements as a whole, and informing the
auditor’s opinion thereon, and the auditor does not provide
a separate opinion on these matters.
 ISA 701 KEY AUDIT MATTERS

In addition to the matter as described in basis of qualified

opinion section, following are the key audit matters.

Impairment of PPE Impairment of receivable Impairment of inventory

ISA 701 KEY AUDIT MATTERS

If inventory is material or pervasive

COMPANY

Asset = Rs.100

Inventory = Rs.90 Misstatement of 70 to 80

Significant portion of F.S KAM of Rs. 10?

ISA 705 Matters on which adversed opinion was given

Is there any other KAM?

YES NO
ISA 701 KEY AUDIT MATTERS

COMPANY
Going concern disclosure is not adequate
AUDIT

Material + Pervasive Material uncertatinity

Adversed opinion

KAM F.S IFRS

Inventory
Receivable
PPE
ISA 701 KEY AUDIT MATTERS

Key Audit Matters

Introductory Paragraph:
The auditor shall describe each key audit matter, using an
appropriate subheading, in a separate section of the auditor’s
report under the heading “Key Audit Matters,” The
introductory language in this section of the auditor’s report
shall state that

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];

These matters were addressed in the context of the audit of

the financial statements as a whole, and informing the
auditor’s opinion thereon, and the auditor does not provide
a separate opinion on these matters.
 ISA 701 KEY AUDIT MATTERS

In addition to the matter as described in basis for adverse

opinion section, following are key audit matters.

Impairment of PPE Impairment of inventory Impairment of receivable

ISA 701 KEY AUDIT MATTERS

Adverse opinion
These Financial Statements are not prepared in accordance
with IFRS.

Introductory Paragraph:
The auditor shall describe each key audit matter, using an
appropriate subheading, in a separate section of the auditor’s
report under the heading “Key Audit Matters,” The
introductory language in this section of the auditor’s report
shall state that

In addition to the matter as described in basis for adverse

opinion section, there are no other key audit matter to
communicate.
ISA 701 KEY AUDIT MATTERS

Provisions and contingent liabilities

Extract from Audit Report of Financial Statement 2016

Area of Focus

Refer to the Report of the Audit Committee, note 14(d) - Working

capital (provisions) and note 18-Contingent liabilities and legal
proceedings.
The group faces a number of threatened and actual legal and
regulatory cases. There is a high level of judgement required in
estimating the level of provisioning and/or the level of disclosure
required.
 ISA 701 KEY AUDIT MATTERS
How our audit addressed the area of focus
We evaluated the design and implementation of controls in respect of
litigation and regulatory procedures, which we found to be satisfactory for the
purposes of our audit.

Our procedures included the following:

Based on the evidence obtained, whilst noting the Inherent uncertainty

with such legal and regulatory matters, we determined that the level of
provisioning at 30 June 2016 to be appropriate.
We assessed the appropriateness of the related disclosures in note 14(d) and
note 18 of the group financial statements, and believed these to be reasonable.
ISA 701 KEY AUDIT MATTERS

Evaluation of controls
Inquiry with the management
Send external confirmation to lawyer
Evaluation of adequacy of disclosure NO

Qualified opinion

KAM VS Material Uncertainity Related To Going Concern

KAM VS Modefied Opinion

Disclaimer
ISA 701 KEY AUDIT MATTERS

Disclaimer
Unless required by law or regulation,when the auditor disclaims
an opinion on the financial statements, the auditor’s report shall
not include KAM section in accordance with ISA 701.

No KAM

Startup

Listed
company Operations
not started Key Audit Matters
We have nothing to report in this
Dormant regaerd.There are no KAM in this
company company.
ISA 701 KEY AUDIT MATTERS

EXCEPTION TO COMMUNICATE KEY AUDIT MATTER

The auditor shall describe each key audit matter

in the auditor’s report unless:

Law or regulation precludes public disclosure about the matter; or

In extremely rare circumstances

The auditor determines that the matter should not be communicated
in the auditor’s report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits
of such communication. This shall not apply if the entity has publicly
disclosed information about the matter.
ISA 701 KEY AUDIT MATTERS

KEY AUDIT MATTERS

Definition
How to identify?
How to communicate?
KAM VS Other elements
KAM is not substitute
Applicability
Exception
ISA 701 KEY AUDIT MATTERS

The matters that required significant

auditor’s attention and the rationale
for the auditor’s determination as to
whether or not each of these matters
is a key audit matter.

Where applicable, the rationale for

the auditor’s determination that
DOCUMENTATION there are no key audit matters to
communicate in the auditor’s report.

Where applicable, the rationale for

the auditor’s determination not to
communicate in the auditor’s report a
matter determined to be a key
audit matter.