Isa 701 Smart Notes

ISA 701 KEY AUDIT MATTERS
T h o s e m a tt e r s th at in auditor ’s professional
j u d g e m e n t were of m o s t s i g n i fi c a n c e in the audit
WHAT IS of FS of C u r re nt period ( e v e n if c o m p a r a ti v e FS
K E Y AU D I T M AT T E R S ? a r e p re s e n te d ) . K e y a u d i t m a tt e r s a r e s e l e c te d
f ro m m a tt e r s c o m m u n i c a t e d to t h o s e c h a r g e d
with g o v e r n a n c e .
M a n u fa c t u r i n g
Audit B a n k Audit
Advances
Inventory
I nve st m e nt
PPE Borrowing
Deposits
How to d e te r m i n e K e y Audit Matt ers ?
How to c o m m u n i c a t e K e y Audit Matt ers ?

Matt ers c o m m u n i c a t e d with Areas of higher assessed risk of material

th os e charged misstatement, or significant risks.
with
governance Significant auditor judgments relating to
Matt ers that required areas in the financial statements that involved
s i g n i fi cant auditor significant management judgment, including
accounting estimates identified as having high
att enti on 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 underlying

Nature and severity of Importance of the matter to
Nature and accounting policy or Nature and
difficulties in applying Severity of any intended users’
extent of complexity or materiality of
audit procedures or control understanding of the
subjectivity in corrected and
audit effort obtaining relevant and deficiencies financial statements as a management’s selection
needed. to whole, in particular its uncorrected
reliable audit evidence. related to the of an appropriate misstatements
address the matter. materiality to the financial accounting policy.
statements. related to the
matter. matter.
SSGC Provide g a s G a s shortage
Impor t a n d s a l e LNG
ISA 701 KEY AUDIT MATTERS S i g n i fi ca nt Event
S i g n i fi ca nt Auditor ’s
att enti on
C o m p a n y ’s F i n a n c i a l S t a t e m e n t
Matt ers t h at required Most s i g n i fi ca nt m a tt e r

Matt ers d i s c u s s e d with BOD s i g n i fi ca nt a u d i to r att enti on (KAM)
Substantive Procedure
P&L
YES (Key Audit Matter)
Revenue Diffi cult 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 re p a i r a n d m a i n t a i n a n c e for 1 y e a r s
Free S e r v i c e for 5 y e a r s
E sti m ate s , eff orts a n d ti m e not invo l ve d E sti m ate s , eff orts a n d ti m e not invo l ve d
Substantive Procedure
P&L
Purchases
OCCURRENCE c h e c k GDN
COMPLETENESS c h e c k GDN
EXPENSES c h e c k uti lity, rent, a g r e e m e n t
T h e s e a r e not KAM
BALANCE SHEET
Inventory I m p a i r m e n t - KAM
PPE I m p a i r m e n t - KAM
Re c e i va b l e I m p a i r m e n t - KAM
Paya b l e
C a s h bank
Bank loan
Pre p a y m e n t UNILEVER Audit O G D C L Audit
Share capital inventory inventory

Share premium E xistence E xi sten c e ( K A M )
Re s e r ve s
Va l u ati o n
Intangible impairment (KAM)
How to c o m m u n i c a t e KAM?
K e y Audit Matt er
K e y a u d i t m a tt e r s a r e t h o s e m a tt e r s that, in the auditor ’s

p ro fe s s i o n al j u d g m e n t , were of m o s t s i g n i fi c a n c e in the
a u d i t of the fi n a n c i a l s t a t e m e n t s [ o f the c u rrent p e r i o d ]
T h e s e m a tt e rs were a d d r e s s e d in the context of the a u d i t of

the fi n a n c i a l s t a t e m e n t s a s a whole, a n d i n fo r m i n g the
auditor ’s opinion thereon, a n d the auditor d o e s not provide
a s e p a ra t e opinion o n t h e s e matt ers.
I m p a i r m e n t of inventory
I n c l u d e a refernce to a related dis clos ure, if a n y !
W h y this m a tt e r w a s c o n s i d e r e d to b e o n e of the m o s t
s i g n i fi c a nt in the a u d i t of the fi n a n c i a l s t a t e m e n t ?
W h a t a r e the ke y a u d i t p r o c e d u r e a n d h o w t h ey a r e
addressed ?
Refer to note 4 of t h e s e fi n a n c i a l s t a t e m e n t s
Include a w h e re inventory h a d b e e n r e c o r d e d a t a n
refernce
to a related a m o u n t of Rs. 4 0 0 M or i m p a i r m e n t of
disclosure,if any ! inventory h a d b e e n r e c o r d e d a t a n a m o u n t
of Rs. 400M.
Why this matter T h e i m p a i r m e n t of inventory is m a te r i a l to

was considered that fi n a n c i a l s t a t e m e n t a n d it involves
to be one of the
most significant in s i g n i fi c a nt e s ti m a m t e s a n d j u d g e m e n t s
the audit of the therefore w e h a v e d e te r m i n e this m a tt e r a s
financial statement ?
ke y a u d i t matt er.
O b ta i n the u n d e r s t a n d i n g of the
m a n a g e m e n t p r o c e s s to r e c o rd i m p a i r m e nt ,
What are the key
audit procedure test the controls over the r e c o rd i n g of
and how they are i m p a i r m e n t , c h e c k whether the a s s u m p ti o n s
addressed ?
used by m a n a g e m e n t are reasonable a n d
p e r fo r m s u b s t a n ti v e procedure.
Provision for wa r ra nt y
Include a Refer to note 4 of t h e s e fi n a n c i a l s t a t e m e n t s

refernce
to a related w h e re provision for wa r ra n t y h a d b e e n
disclosure,if any ! r e c o r d e d a t a n a m o u n t of Rs. 4 0 0 M .
Why this matter T h e a m o u n t is m a te r i a l to t h a fi nancia l

was considered s t a t e m e n t a n d provision for wa r ra nt y
to be one of the
most significant in i nvo l ve s s i g n i fi c a nt e s ti m a m t e s a n d
the audit of the j u d g e m e n t s therefore w e h a v e d ete r m i n e
financial statement ?
this m a tt e r a s ke y a u d i t matt er.
Provision for wa r ra nt y
Obtain the u n d e rs t a n d i n g of the
m a n a g e m e n t p r o c e s s of provision for
What are the key warranty, test the controls, c h e c k whether the
audit procedure a s s u m p ti o n s , n u m b e r of c l a i m s , nat ure of
and how they are
addressed ? c l a i m s , c o s t of c l a i m s u s e d b y m a n a g e m e n t
a r e r e a s o n a b l e a n d perform s u b s e q u e n t event
procedure.
Key audit matter = ISA 315 + ISA 500
PLANNING
Materiality
Signifi cant risk
Judgements
Esti mates
Substanti ve
procedure
I n c l u d e a refernce to a related dis clos ure, if a n y !
W h y this m a tt e r w a s c o n s i d e r e d to b e o n e of the m o s t
s i g n i fi c a nt in the a u d i t of the fi n a n c i a l s t a t e m e n t ?
W h a t a r e the ke y a u d i t p r o c e d u r e a n d h o w t h ey a r e
addressed ?
APPLICABILITY OF KEY AUDIT MATTER
K e y Audit Matt er a p p l i e s to a u d i t of c o m p l e t e s et of
g e n e ra l p u r p o s e fi n a n c i a l s t a t e m e n t s of listed enti ti es.
C i r c u m s t a n c e s w h e n the auditor other wise d e c i d e s to

c o m m u n i c a t e ke y a u d i t m a tt e r s in the auditor ’s report.
W h e n the auditor is required b y l aw or re g u l ati o n to

c o m m u n i c a t e ke y a u d i t m a tt e r s in the auditor ’s
KEY AUDIT MATTER IS NOT THE SUBSTITUE FOR
Communicating key audit matters in the auditor’s report is not:
A substi tute for the a udito r e x p r e s s i n g a m o d i fi e d opinion w h e n required

b y the c i r c u m s t a n c e s of a s p e c i fi c a u d i t e n g a g e m e n t in a c c o r d a n c e with
ISA 7 0 5 ( Re v i s e d ) ;
A substi tute for d i s c l o s u re s in the fi n a n c i a l s t a t e m e n t s t hat the a p p l i c a b l e

fi n a n c i a l repor ti ng f ra m e w o r k requires m a n a g e m e n t to m a k e , or t hat a re
otherwise n e c e s s a r y to a c h i e v e fair presentati o n
A substi tute for repor ti ng in a c c o r d a n c e with ISA 5 7 0 ( R e v i s e d ) w h e n a

m a te r i a l u n c e r ta i nt y exists relati ng to e v e n t s or co n d i ti o n s t hat m a y c a s t
s i g n i fi ca nt d o u b t o n a n enti ty ’s ability to c o nti n u e a s a g o i n g c o n c e r n ;
A s e p a r a t e opinion o n individual matt ers.

A substi tute for the a udito r e x p r e s s i n g a m o d i fi e d opinion w h e n required
b y the c i r c u m s t a n c e s of a s p e c i fi c a u d i t e n g a g e m e n t in a c c o r d a n c e with
ISA 7 0 5 ( Re v i s e d ) ;
CO M PA N Y
I m p a i r m e n t of inventory not re c o rd e d
ISA 705 U nm o di fi e d opinion
Modifi ed opinion K e y a u d i t m a tt e r
X
Not the substi tute of
Qualifi ed A d v e rs e modifi ed opinion
Not the substi tute of

ISA 705
A substi tute for d i s c l o s u re s in the fi n a n c i a l s t a t e m e n t s t hat the a p p l i c a b l e
fi n a n c i a l repor ti ng f ra m e w o r k requires m a n a g e m e n t to m a k e , or t hat a re
otherwise n e c e s s a r y to a c h i e v e fair presentati o n
CO M PA N Y
Do not p rov i d e d i s c l o s u re
C a s e / liti gati on a g a i n s t c o m p a n y
D i s c l o s e in KAM
KAM is not the substi tute of a

d i s c l o s u re that is required to
b e p ro v i d e d b y the m a n a g e m e n t
a s pe r the re q u i re m e nt of IFRS
A substi tute for repor ti ng in a c c o r d a n c e with ISA 5 7 0 ( R e v i s e d ) w h e n a
m a te r i a l u n c e r ta i nt y exists relati ng to e v e n t s or co n d i ti o n s t hat m a y c a s t
s i g n i fi ca nt d o u b t o n a n enti ty ’s ability to c o nti n u e a s a g o i n g c o n c e r n ;
COMPANY
Material uncertainity exist

related to g o i n g c o n c e r n
C o m m u n i c a t e in KAM Management
Don’t i n c l u d e in m ate rial

uncertainity secti on
KAM is not the substi tute

of Material uncertainity
ELEMENTS OF KEY AUDIT

MATTER
Unm o di fi e d opinion
Qualifi ed opinion d u e to
m a te r i a l m i s s t a t e m e n t
Qualifi ed opinion d u e to
s c o p e limitati on
A d v e r s e d opinion
Disclaimer
Material uncer tainit y relati ng

to g o i n g c o n c e r n
INTERACTION OF KAM WITH OTHER ELEMENTS OF AUDIT REPORT
K e y Audit Matt er V S Material Uncertainty Re l ati n g to G o i n g C o n c e r n
C o m p a n y Audit
Events or co n d i ti o n s t ri g ge re d
Doubts on goin g concerns
Management assessed going concern
G o i n g c o n c e r n a s s u m p ti o n is a p p ro p r i ate
( d o e s not intend to liq u idate )
Material u n c e rtain ity exist
A d e q u a te l y d i s c l o s e d in F.S
ISA 570 Concept of Going Concern
Yes Going Concern Assessment No S c o p e Limitati on
Going Concern Material Material + Pe r va s i ve

A s s u m p ti o n Appropriate
Qualifi ed Op inion Disclaimer
Ye s No AB + AD U n m o d i fi e d Opinion ?
A B + AD A d v e r s e Opinion
Material Alternate B a s i s ( A B ) Material

Qualifi ed
+ Op i n i o n
U n c e r ta i nt y Exist Adequately Disclosed A B + AD Material Adverse
+
(AD) Per va s i ve Op i n i o n
A d v e r s e Opinion
No ? A B + AD
U nmodifi ed MURTGC
Ye s
Material + Pe r va s i ve
Ye s A d v e r s e Opinion
A d e q u a te l y
Disclosed M is state m e nt Material
No
Qualifi ed Opinion
Matt ers c o m m u n i c a t e d with

t h o s e c h a r g e d with YES !
governance ?
Matt ers t h at required

s i g n i fi ca nt auditor
att enti on ? YES !
KAM ?
YES !
Going concern
ISA 570 ISA 701
How to c o m m u n i c a t e g o i n g c o n c e r n in KAM?
Material Uncertainty
Ke y Audit Matt er VS Relati ng to G o i n g C o n c e r n
Opinion
B a s i s for Opinion
Material U n certainty relati ng to G o i n g C o n c e r n

(if a p p l i c a b l e )
Ke y Audit Matt ers
TInh teroaduudcittoorryshPaalrl adgersacprihb:e e a c h ke y a u d i t matt er,

u s i n g a n a p p ro p r i a te s u b h e a d i n g , in a s e p a r a t e s e c ti o n of the
auditor ’s report u n d e r the h e a d i n g “ Key Audit Matt ers,” Th e
introductory l a n g u a g e in this s e c ti o n of the auditor ’s report
s h a l l state that

pro fe ssio na l j u d g m e n t , were of m o s t s i g n i fi c a n c e in the
a u d i t of the fi n a n c i a l s t a t e m e n t s [ o f the cur re nt per io d];
T h e s e m a tt e r s were a d d r e s s e d in the context of the a u d i t of

the fi n a n c i a l s t a t e m e n t s a s a whole, a n d i nfo r m i n g the
auditor ’s opinion thereon, a n d the a udito r d o e s not prov ide
a s e p a r a t e opinion o n t h e s e matt ers.
PPE
INVENTORY
RECEIVABLE
Introductory
paragraph
In a d d i ti o n to m a tt e r a s d e s c r i b e d in m a te r i a l u n c e r ta i n i t y relati ng
to g o i n g c o n c e r n secti on, following a r e the ke y a u d i t matt ers .
I m p a i r m e n t of PPE I m p a i r m e n t of inventory I m p a i r m e n t of re c e i va b l e
Listed c o m p a n y aud i t
I m p a i r m e n t of I m p a i r m e n t of I m p a i r m e n t of
PPE Inventory Re c e i va b l e
M a n a g e m e n t h a s not re c o rd e d
i m p a i r m e n t of inventory
ISA 701 ISA 7 0 5
KAM M i s state m e n t
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
E xc ept for inventory, t he s e

F i n a n c i a l S t a t e m e n t s a re T h e s e F i na nc i a l Statements
a r e NOT p r e p a r e d in
p r e p a r e d in a c c o r d a n c e a c c o r d a n c e with IFRS
with IFRS
ISA 701
(KAM)
Impairment VS
of Inventory
ISA 705
(MODIFIED OPINION)
Opinion ( m o d i fi e d )
Except for inventory t h e s e fi n a n c i a l s t a t e m e n t s

a r e p r e p a r e d in a c c o r d a n c e with IFRS.
Ke y Audit Matt ers

Introductory Pa ra g ra p h :
T h e auditor s h a l l d e s c r i b e e a c h ke y a u d i t matt er, u s i n g a n
a p p ro p r i a te s u b h e a d i n g , in a s e p a r a t e s e c ti o n of the auditor ’s
report u n d e r the h e a d i n g “ Key Audit Matt ers,” Th e
pro fe ssio na l j u d g m e n t , were of m o s t s i g n i fi c a n c e in the
a u d i t of the fi n a n c i a l s t a t e m e n t s [ o f the cur re nt per io d];

the fi n a n c i a l s t a t e m e n t s a s a whole, a n d i nfo r m i n g the
auditor ’s opinion thereon, a n d the a udito r d o e s not prov ide
In a d d i ti o n to the m a tt e r a s d e s c r i b e d in b a s i s of qualifi ed
opinion secti on , following a r e the ke y a u d i t matt ers .
I m p a i r m e n t of PPE I m p a i r m e n t of re c e i va b l e I m p a i r m e n t of inventory
If inventory is mate r i al or pe r vas i ve

CO M PA N Y
A s s e t = Rs.100
Inventory = Rs.90 Misstatement of 70 to 8 0
S i g n i fi ca nt porti on of F.S KAM of Rs. 10?
ISA 705 Matt ers o n w h i c h a d v e r s e d opinion w a s g i v e n
Is there a n y other KAM?
YES NO
C O M PA N Y
G o i n g c o n c e r n d i s c l o s u r e is not a d e q u a t e
AUDIT
Material + Pe r va s i ve Material uncertati nity
A d v e r s e d opinion
KAM F.S
Inventory
IFRS
Re c e i va b l e
PPE
K e y Audit Matt ers
I Tnhtreoda ucdtitoorry sPhaarlal gdreaspchri:be e a c h ke y audit matt er,

u s i n g a n a p p ropriate s u b h e a d i n g , in a s e p a ra t e s ecti on of the
auditor ’s report u n d e r the h e a d i n g “Key Audit Matt ers,” The
introductory l a n g u a g e in this s ecti on of the auditor ’s report
shall state that

profession al j u d g m e n t , were of m o s t s i g n i fi c a n c e in the
a u d i t of the fi nanci al s t a t e m e n t s [of the cur rent period];

the fi nanci al s t a t e m e n t s a s a whole, a n d i nfor m i n g the
auditor ’s opinion thereon, a n d the auditor d o e s not provide
In a d d i ti o n to the m a tt e r a s d e s c r i b e d in b a s i s for a d v e r s e
opinion secti on , following a r e ke y a u d i t matt ers .
I m p a i r m e n t of PPE I m p a i r m e n t of inventory I m p a i r m e n t of re c e i va b l e
A d v e r s e opinion
T h e s e F inancial S t a te m e n t s a r e not p re p a re d in a c c o r d a n c e
with IFRS.
Introductory Pa ra g ra p h :
T h e auditor s h a l l d e s c r i b e e a c h ke y a u d i t matt er, u s i n g a n
a p p ro p r i a te s u b h e a d i n g , in a s e p a r a t e s e c ti o n of the auditor ’s
report u n d e r the h e a d i n g “ Key Audit Matt ers,” Th e
In additi on to the m att e r a s d e s c r i b e d in b a s i s for a d v e r s e

opinion secti on, there a r e n o other ke y audit m att e r to
communicate.
Provisions a n d conti ngent liabiliti es

Extract from Audit Report of Financial S t a te m e nt 2016
A re a of Fo c u s
Refer to the Report of the Audit C o m m i tt e e , note 14(d) - Working

c a p i ta l ( p ro v i s i o n s ) a n d note 18- C o nti n ge nt liabiliti es a n d l ega l
proceedings .
T h e g r o u p f a c e s a n u m b e r of threatened a n d a c t u a l l e ga l a n d
regulator y c a s e s . There is a h i g h level of j u d g e m e n t required in
e sti m ati n g the level of provisioning a n d /o r the level of disclosure
required.
How our audit a d d r e s s e d the a r e a of focu s
We e va l u a te d the d e s i g n a n d i m p l e m e ntati o n of controls in re s p e c t of
liti gati on a n d regulatory procedures, w h i c h we fo und to b e sati sfa ctor y for the
p u r p o s e s of our audit.
Our p ro c e d u re s i n c l u d e d the following:
B a s e d o n the e v i d e n c e obtained, whilst no ti ng the Inherent uncertainty

with s u c h l e ga l a n d regulatory matt ers, we dete r m i ne d that the level of
provisioning a t 3 0 J u n e 2016 to b e appropriate.
We a s s e s s e d the a p p ro p r i ate n e s s of the related di s cl o s ure s in note
14(d) a n d
note 18 of the g r o u p fi nancial state m e nt s , a n d believed t he se to b e
Evaluati on of controls
Inquiry with the m a n a g e m e n t
S e n d external confi rmati on to law yer
Evaluati on of a d e q u a c y of dis clos ure NO
Qualified opinion
KAM V S Material Uncertainity Related To G o i n g C o n c e r n
KAM V S Modefi ed Opinion
Disclaimer
Disclaimer
Unless required b y law or regulati on,when the auditor d i s c l a i m s
a n opinion o n the fi nancial statements , the auditor ’s report shall
not i ncl ud e KAM s ecti on in a c c o r d a n c e with ISA 701.
No KAM
Startup
Listed
c ompany Operati ons
not sta rte d Ke y Audit Matt ers
We h a v e n o t h i n g to report in this
Dormant regaerd.There a re n o KAM in this
company c o m p a n y.
EXCEPTION TO COMMUNICATE KEY AUDIT MATTER
T h e auditor s h a l l d e s c r i b e e a c h ke y a u d i t m a tt e r
in the auditor ’s report unless:
L aw or regulati o n p r e c l u d e s p u b l i c d i s c l o s u re a b o u t the matt er; or
In extremely rare c i r c u m s t a n c e s
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.
KEY AUDIT MATTERS
Defi niti on
How to identi fy?
How to c o m m u n i c a t e ?
KAM V S Other e l e m e n t s
KAM is not substi tute
Applicability
Excepti on
T h e m a tt e r s t hat required s i g n i fi ca nt
audito r ’s att enti on a n d the rati onale
for the a udito r ’s d ete r m i n ati o n a s to
whet he r or not e a c h of t h e s e m a tt e r s
is a ke y a u d i t matt er.
W h e re a p p l i c a b l e , the rati o na le for

the a udito r ’s d ete r m i n ati o n that
DOCUMENTATION there a r e n o ke y a u d i t m a tt e r s to
c o m m u n i c a t e in the a udito r ’s report.
W h e re a p p l i c a b l e , the rati o na le for

the a udito r ’s d ete r m i n ati o n not to
c o m m u n i c a t e in the a udito r ’s report a
m a tt e r d e t e r m i n e d to b e a ke y
a u d i t matt er.
ISA KEY AUDIT MATTERS PRACTICE
701 QUESTIONS
Those matters that in auditor’s professional

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

?
701 QUESTIONS
Question: (Spring 2019, Q2, 9 marks)

Respond to the following independent situations in the light of
International Standards on Auditing:
(a) Risk of overstatement in revenue was considered as significant risk and was also
communicated to those charged with governance. Discuss whether it should be included in
the key audit matters section.
(b) No such matter arose during the audit which needs to be reported as key audit matter.
Discuss whether the auditor still needs to include key audit matters section in audit report.
(c) A qualified opinion has been expressed. The details of the qualification are also mentioned in
the key audit matters section. Is it appropriate to do so?
701 QUESTIONS
Matters communicated
(a) withthose charged
Areas of higher assessed risk of
material misstatement, or significant
with risks.
governance Significant auditor judgments relating
Matters that
to areas in the financial statements
significant
required that involved significant management
auditor judgment, including accounting
attention estimates identified as having high
estimation uncertainty.
KA
Effect on the audit of significant
M 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
extent of accounting policy or materiality of
applying audit any control users’ understanding
complexity or corrected and
audit effort procedures or deficiencies of the financial subjectivity in
needed. to statements as a uncorrected
obtaining relevant related to the management’s misstatements
address and reliable audit matter. whole, in particular its selection of an
materiality to the related to the
the matter. evidence. appropriate matter.
financial statements. accounting policy.
701 QUESTIONS
(a)
Company’s Financial
Statement
Matters that required Most significant
Matters discussed with
significant auditor matter (KAM)
BOD
attention
• Revenue • Revenue • Revenue
• Bank loans • Bank loans • Bank loans
• Issued shares • Issued shares • Issued shares
• PPE impairment • PPE impairment • PPE impairment
• Inventory impairment • Inventory impairment • Inventory impairment
• Receivable • Receivable • Receivable

impairment impairment impairment
• Transactions • Transactions • Transactions
with related with related with related
701 QUESTIONS
(b)
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.
Key Audit Matters

We have nothing to report in this regard.There are no
KAM in this company.
701 QUESTIONS
(c)
ISA
701
Impairmen V (KAM)
t of S
Inventory ISA 705
( MODIFIED
OPINION)
Opinion
(modIfied)
Except for inventory these financial
statements are prepared in accordance with
IFRS.
In addition to the matter as described in basis of

qualified
opinion section, following are the key audit matters.
701 QUESTIONS
Summer 2018
During the audit of a listed client Pixel Limited (PL), you became aware that a legal action has
been instituted against PL by a competitor, on account of infringement of company's lawyer was
not able to give any estimate patent rights. The company's lawyer was not able to give any
estimate about the outcome of the case.
No provision was made in the financial statements for the possible loss as a result of the
claims (which are considered to be material), although details of those legal claims were fully
disclosed in the notes.
Required:
Draft how the above matter would be reported in the key audit matter section of the
audit report. (You may assume necessary details)
701 QUESTIONS
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 701KEY AUDIT MATTERS PRACTICE
QUESTIONS
Include a reference to a related disclosure, if any !
Refer to note 4 of this FS where the Contingent liability

amounting Rs.400 has been disclosed in the financial
statement.

statement ?
The amount is material to the financial statement and it

involves significant estimates and judgements.Therefore we
determine this matter as key audit matter.
QUESTIONS
What are the key audit procedures and how they
are addressed ?
PROCEDURES
Inquiry of management including in
house legal counsel
TECHNIQUES
Reviewing minutes of the meeting of
TCWG
Correspondence between entity and

ISA 501 its external legal counsel
LITIGATIONS
AND
CLAIMS Reviewing legal expense
account
Send confirmation to external

lawyer
Obtain written representation from

management that they had disclosed to
the auditor and accounted for and
disclosed in accordance with IFRS
701 QUESTIONS
Winter 2017
You have recently completed the audit of the financial statements of Rose Limited (RL), a listed
company having a net profit of Rs. 1,500 million. You have identified following matters which
will be reported as key audit matters in the audit report:
(i)RL has pending tax litigation in which tax department has raised demand aggregating Rs. 175 million. The
demand has been challenged by RL and the decision in respect of this matter is currently
pending. The amount is disclosed as a contingent liability in the financial statements.
(ii) RL makes significant purchases from related parties and also incurs significant advertising
expenses through related parties. These transactions are properly disclosed as related party
transactions in the financial statements.
(iii) RL has decided to sell a manufacturing facility located in Faisalabad having a carrying value
of Rs. 300 million and would replace it with another facility in Gujranwala. The manufacturing
facility has been classified as non-current assets held for sale.
Required:
Draft the key audit matters section to be included in the audit report of RL relating
to the above matters. (You may assume necessary details where required)
ISA 701 KEY AUDIT MATTERS PRACTICE
QUESTIONS
(i) Include a reference to a related disclosure, if
any !
Refer to note 4 of this FS where the Contingent liability related

to tax amounting Rs.175M has been disclosed in the financial
statement.

statement ?
The amount is material to the financial statement and it

involves significant estimates and judgements.Therefore we
determine this matter as key audit matter.
QUESTIONS
What are the key audit procedure and how they
are addressed ?
PROCEDURES
Inquiry of management including in
house Tax counsel
TECHNIQUES
Reviewing minutes of the meeting of
TCWG
ISA 501 Correspondence between company and

LITIGATIONS its external tax counsel
AND
CLAIMS
Send confirmation to external tax
lawyer
Obtain written representation from

management that they had disclosed to
the auditor and accounted for and
disclosed in accordance with IFRS
701 QUESTIONS
(ii) PLANNING COMPLETENESS OF ALL RP As disclosed in note 4 of this FS the company has entered
IR + SHR + MOM of BOD into a significant transaction with its related party which
DIRECTOR’S CONFLICT
RIS IDENTIFY
STATEMENT INVOLVE + LEGAL involves certain transactions which are outside the normal
ASSES
K S
} CONFIRMATION
OUTSIDE THE
course of business and are material to the FS therefore we
determine this matter as a key audit matter.
RISK ASSESSMENT
& NORMAL COURSE OF
BUSINESS
PROCEDURES INSPECT THE
AGREEMENT TO
EVALUATE
INQUIRY WITH
MANAGEMENT Business rationale.
Terms & conditions are
consistent with management
Related Party explanation.
Transaction is
name Relationship appropriately
RELA TED PARTY accounted
for & disclosed.
Transaction TRANSACTION MAY NOT
Transaction is
BE DISCLOSED
appropriately authorized &
INTERNAL CONTROL Confirmation
approved. with related party.
Confirm with intermediaries such

RP IDENTIFY as banks.
ONCO
A/C FOR & AUTHORIZE If applicable, inspect the
B & audited financial statments of
DISCLOSED APPROVE related party.
AUTHORIZE
SHARING RP & FRAUD
APPROVE
INFORMATION TO Inquiry with MGT, TCWG, and RP.
ENGAGEMENT TEAM Inspection of significant
contracts.
ISA 701 KEY AUDIT MATTERS PRACTICE
QUESTIONS
Question: (winter 2016, 11 marks)
You are a partner in a firm of Chartered Accountants. Annual audits of various clients are at
finalization stage and since this is the first time that ISA related to Key Audit Matters is to be
applied, several issues have been referred to you for guidance. These include:
(a) An adverse report is being issued in the case of Muneer Limited. The draft report also
contains certain matters as Key Audit Matters.
A
(b)qualified report has been drafted by the audit manager of Nadir Limited as the company has
failed to make adequate provision of contingency. The details of qualification are
mentioned in the Key Audit Matters section.
(c) The Key Audit Matters section of audit report of Zia Limited includes details of Key Audit
Matters of only the current period. However, the opinion has been expressed on current as
well as prior year.
(d) At one of the listed clients, investigation by a Government agency against some of its staff members is in
progress. Due to sensitivity of the matter the management has requested you to not to
include such information in the Key Audit Matters section.
Required:
Advise the concerned partners/managers with respect to the above

matters.
701 QUESTIONS
(a)
In addition to the matter as described in basis for adverse

opinion section, following are the additional key audit
matters.
Adverse opinion
These Financial Statements are not prepared in
accordance with IFRS.
701 QUESTIONS
(b)
In addition to the matter as described in basis of qualified

opinion section, following are the additional key audit
matters.
(c)
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]
701 QUESTIONS
(d) 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.

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ISA 701 KEY AUDIT MATTERS

How to d e te r m i n e K e y Audit Matt ers ?

How to c o m m u n i c a t e K e y Audit Matt ers ?

Matt ers c o m m u n i c a t e d with Areas of higher assessed risk of materi- al

KAM Effect on the audit of significant events or

Nature of the underlying

ISA 701 KEY AUDIT MATTERS S i g n i fi ca nt Event

Matt ers t h at required Most s i g n i fi ca nt m a tt e r

IQ school of finance PAK Suzuki

Revenue Not KAM Revenue KAM

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

EXPENSES c h e c k uti lity, rent, a g r e e m e n t

Share capital inventory inventory

K e y a u d i t m a tt e r s a r e t h o s e m a tt e r s that, in the auditor ’s

T h e s e m a tt e rs were a d d r e s s e d in the context of the a u d i t of

How to c o m m u n i c a t e K e y Audit Matt ers ?

I n c l u d e a refernce to a related dis clos ure, if a n y !

How to c o m m u n i c a t e K e y Audit Matt ers ?

Why this matter T h e i m p a i r m e n t of inventory is m a te r i a l to

How to c o m m u n i c a t e K e y Audit Matt ers ?

How to c o m m u n i c a t e K e y Audit Matt ers ?

Include a Refer to note 4 of t h e s e fi n a n c i a l s t a t e m e n t s

Why this matter T h e a m o u n t is m a te r i a l to t h a fi nancia l

How to c o m m u n i c a t e K e y Audit Matt ers ?

How to c o m m u n i c a t e K e y Audit Matt ers ?

Key audit matter = ISA 315 + ISA 500

Signifi cant risk

How to c o m m u n i c a t e K e y Audit Matt ers ?

I n c l u d e a refernce to a related dis clos ure, if a n y !

APPLICABILITY OF KEY AUDIT MATTER

C i r c u m s t a n c e s w h e n the auditor other wise d e c i d e s to

W h e n the auditor is required b y l aw or re g u l ati o n to

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

A substi tute for the a udito r e x p r e s s i n g a m o d i fi e d opinion w h e n required

A substi tute for d i s c l o s u re s in the fi n a n c i a l s t a t e m e n t s t hat the a p p l i c a b l e

A substi tute for repor ti ng in a c c o r d a n c e with ISA 5 7 0 ( R e v i s e d ) w h e n a

A s e p a r a t e opinion o n individual matt ers.

ISA 705 U nm o di fi e d opinion

Not the substi tute of

KAM is not the substi tute of a

Material uncertainity exist

Don’t i n c l u d e in m ate rial

KAM is not the substi tute

ELEMENTS OF KEY AUDIT

Material uncer tainit y relati ng

K e y Audit Matt er V S Material Uncertainty Re l ati n g to G o i n g C o n c e r n

Doubts on goin g concerns

Management assessed going concern

Material u n c e rtain ity exist

Yes Going Concern Assessment No S c o p e Limitati on

Going Concern Material Material + Pe r va s i ve

Material Alternate B a s i s ( A B ) Material

Matt ers c o m m u n i c a t e d with

Matt ers t h at required

ISA 570 ISA 701

Material U n certainty relati ng to G o i n g C o n c e r n

Ke y Audit Matt ers

TInh teroaduudcittoorryshPaalrl adgersacprihb:e e a c h ke y a u d i t matt er,