Welcome to the next generation of exciting times of Audit reporting where Audit reports would be “speaking in nature” rather than a “template”, which most complain as boring and not adding value to the stakeholder. SA 706 on EOM and OM and now SA 701 on KAM, together make it really exciting for preparers in preparing Financial statements as per applicable GAAP, Auditors in expressing opinion and present an interesting professional challenge in communication to various stakeholders in an era of high expectation( most often unreasonable expectation) that Audits give absolute assurance when they are intended to and can give only reasonable assurance on true and fair view of the outcome of Financial Statements prepared in accordance with a GAAP. This is true world over, as the Standards of Auditing in India are nearly the same. SA 701, Key Audit Matters is mandatory from FY 18-19 for audits of listed companies and optional for audits of other entities. This standard is a very powerful communication tool for Auditors and Auditee, in particular for Auditors. Given that it is new, it is important that SA 701 is intended only for communication of highly important ( KEY) matters considered in the course of forming an audit opinion. I strongly recommend all Auditors and Auditees to discuss a model KAM report, for the past year say FY 17-18 so that both have good understanding on the how the standard is applied, the Board of Directors are updated well in advance and if any clarification required, expertise could be sourced from the implementation experience in most parts of the world in the last 2 years. The ICAI has issued an FAQ on implementing SA 701 or Implementation Guide (https://resource.cdn.icai.org/48820aasb-icai-igsa701.pdf ). Attached is a simple slide deck on SA 701, model reporting , international experience and some examples from international experience. Audit firms may like to train their staff on the standard and Auditees to train the finance organization now as KAM reporting will be exhaustively discussed at the time of conclusion of Audit and forming an Audit opinion. Happy reading.

1. M P Vijay Kumar
Standard on Auditing (SA) 701,
Communicating Key Audit Matters
in the Independent Auditor’s Report
M P Vijay Kumar, FCA, ACMA,FCS

2. M P Vijay Kumar
INSURANCE !!
The views expressed are those of the presenter and,
therefore, do not necessarily represent the views of
either the Council or any Committee(s)/Board(s) of
the Council of the Institute of Chartered Accountants
of India (ICAI).
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3. M P Vijay Kumar
INTRODUCTION
CONTEXT …..
( accounting is accountability )
( accounting is base for tax, governance, credit, investment, sustenance)
(opinion on FS is a communication: should be ONLY truthful and complete)
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4. M P Vijay Kumar
Acronyms used in the Presentation
KAM Key Audit Matters
FS Financial Statements
AR Auditor’s Report
TCWG Those Charged with Governance
PJ Professional Judgement
Mgt. Management
RMM Risk of Material Misstatements
FRF Financial Reporting Framework
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5. M P Vijay Kumar
Need for ISA 701
Based on the indications of Academic Researches, Public
Outreach programmes IAASB issued ISA 701 Considering:
• Increasing Expectation of User’s of FS to have insight of
an audit.
• Need to enhance Quality of Audit & Relevance of Audit
• Increasing Complexities in Financial Reporting Framework
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6. M P Vijay Kumar
Benefits of ISA 701
Increased
transparency
Provide a basis for users
to further engage with
management and those
charged with governance
Increased
attention to
disclosure
Renew auditor
focus
Enhance communicative
value of auditor’s report
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Statistics
Source: www. Accaglobal.com
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Types of KAM reported, by country
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Numbers of KAMs on an industry-by-industry basis
The average number of KAMs ranged from 1.9 in the industrials sector up to 3.9 in telecommunications. Within
telecommunications, the most common KAMs included revenue recognition, tax and goodwill impairment.
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10. M P Vijay Kumar
Average number of KAMs per company, in the sample countries
The number of KAMs per audit ranges from 1.9 in Nigeria to 4.1 in the UK, with most within a range of
two to three KAMs per audit.
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11. M P Vijay Kumar
Subject matter covered by KAMs
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KAM
PRINCIPLES
M P Vijay Kumar FCA, ACMA,FCS

13. M P Vijay Kumar
Main Principles of SA 701

14. M P Vijay Kumar
Applicability of Standard
• Applicable in case of audits of complete sets of general purpose FS.
Accordingly, the FS should be:
• general purpose FS and
• complete set of FS.
• Standard mandatorily applicable in case of audits of listed entities
effective 1.4.2018.
• Standard also applicable in case of audits of unlisted entities in
following situations:
• Where auditor decides to communicate KAM (auditor may communicate KAM
voluntarily or at the request of TCWG/Mgt.)
• Where auditor is required by law or regulation to communicate KAM
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15. M P Vijay Kumar
What are KAMs ?
•Those matters that, in the auditor’s PJ, were of
most significance in the audit of FS of the
current period
• KAM are selected from the matters
communicated with TCWG
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16. M P Vijay Kumar
Process to Determine KAM
Matters communicated with TCWG
Matters that required significant auditor attention
Matters of most significance
KAM
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17. M P Vijay Kumar
Selection of KAM- Funnel Approach
KAM
Matters
communicated
with TCWG
Matters
communicated
with TCWG
Matters
communicated
with TCWG
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18. M P Vijay Kumar
Matters that required significant auditor
attention – Factors to Consider
Areas of higher
RMM assessed or
significant risks
identified as per SA
315
Significant auditor
judgments relating to
areas that involved
significant
management
judgment
Effect of significant
events/ transactions
on audit
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19. M P Vijay Kumar
Matters of Most Significance in Audit –
Factors to consider
• Nature & extent of communication about the matter with
TCWG.
• Importance of the matter to users’ understanding of FS.
• Nature of underlying accounting policy – its
complexity/subjectivity.
• Nature and materiality of corrected and accumulated
uncorrected misstatements due to fraud / error related to
the matter.
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20. M P Vijay Kumar
Matters of Most Significance in Audit –
Factors to consider
• Nature & extent of audit effort needed to address the matter
• Nature & severity of difficulties faced by auditor in applying
audit procedures, evaluating results of those procedures, and
obtaining relevant and reliable evidence
• Severity of any control deficiency identified relevant to the
matter
• Whether matter involved no. of separate but related audit
considerations.
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21. M P Vijay Kumar
Communicating KAM in
Auditor’s Report – Important Points

22. M P Vijay Kumar
How to Communicate the KAM?
Using an appropriate sub-heading “KAM” the
auditor shall describe each KAM with reference to
the related disclosures and explain:
•Why the matter was considered to be one of
the most significant; and
•How the matters was addressed in the audit
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23. M P Vijay Kumar
Separate Section for reporting on KAM
• To be placed immediately below “Basis for Opinion” Section.
• To include preamble language
• If “Material Uncertainty Related to Going Concern” Section required as
per revised SA 570, then immediately below that Section.
• In this auditor needs to describe each KAM under appropriate sub-
heading so that individual KAM are differentiated.
• If there is no KAM to communicate, KAM Section is still required
where the auditor needs to include a statement to that effect.
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Use of Auditor’s PJ in Presentation of KAM
• Order of presentation of individual KAM.
• Order of Individual KAM:
• relative importance of each KAM.
• based on auditor’s judgment.
• corresponding to the manner in which such matters are disclosed in FS.
• Number of KAM (No Ceiling By Standard)
• complexity of the entity
• nature of entity’s business and environment
• facts and circumstances of the audit engagement.
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25. M P Vijay Kumar
Description of individual KAM
• Adequacy of description of a KAM is matter of PJ.
• Description of each KAM should cover following 3 aspects:
• Reference to the related disclosures (if any) in FS.
• Why matter was considered to be one of most significance in audit and
therefore determined as KAM.
• How the matter was addressed in the audit.
• In description of How the matter was addressed, auditor may
cover following aspects:
• Auditor’s response or approach to address the matter
• A brief overview of procedures performed
• An indication of the outcome of the auditor’s procedures
• Auditor’s Key observations with respect to the matter
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26. M P Vijay Kumar
Circumstances where a KAM should
not be communicated
There are 2 situations
• Law or regulation precludes public disclosure about that
matter; or
• In extremely rare circumstances, the auditor determines that
the matter should not be communicated because the adverse
consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.
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27. M P Vijay Kumar
Circumstances where KAM Section required but no KAM
will be communicated/described thereunder
There are 3 situations
• Auditor determines there is no KAM.
• Auditor determines that a KAM should not be communicated due
to restrictions in Para 14 of SA 701 and no other KAM determined
by him.
• The only KAM determined is a matter giving rise to modified
opinion or a material uncertainty related to going concern.
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28. M P Vijay Kumar
Interrelationship of KAM with Other
Elements of Auditor’s Report
KAM vs Modified Opinion
• Auditor should not communicate a matter as KAM if that matter requires
modification of auditor’s opinion.
• Matters giving rise to modified opinion are by their nature KAM. However,
these should be reported as per revised SA 705 and not under KAM.
• KAM section should not be given in case of disclaimer of opinion unless
required by law or regulation.
• KAM section should be given in case of qualified opinion and adverse opinion.
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29. M P Vijay Kumar
Interrelationship of KAM with Other
Elements of Auditor’s Report
KAM vs EOM / OM Paragraph
• Concepts of EOM and OM still exist in accordance with revised SA 706.
• EOM/OM paragraph cannot be used as a substitute for KAM. Para 8 and 10 of
revised SA 706 expressly prohibit including under EOM / OM paragraph, a
matter that has been determined as KAM.
• Sometimes, a matter determined as KAM may also be, in auditor’s judgment,
fundamental to users’ understanding of FS. In such cases, auditor may highlight
such matter by presenting it more prominently than other matters in KAM
section (e.g., as the first matter) or by including additional information in its
description to indicate its importance to users’ understanding of FS.
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30. M P Vijay Kumar
Interrelationship of KAM with Other Elements
of Auditor’s Report
KAM vs Going Concern
“A Material Uncertainty related to Going Concern” is by its
nature KAM. However, it should be reported as per revised
SA 570 and not under KAM.
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31. M P Vijay Kumar
Communicating KAM not a substitute for
• Disclosures required in the FS as per the applicable financial
reporting framework.
• Disclosures necessary to achieve fair presentation of the FS.
• Requirement of expressing modified opinion in accordance
with revised SA 705.
• Requirement of reporting about material uncertainty relating
to going concern in accordance with revised SA 570.
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32. M P Vijay Kumar
Illustrative Formats of Auditor’s Reports
having KAM Section
Reference may be made to following illustrative formats
having KAM Section given in revised SAs 700, 705, 706
and 570:
• Illustrations no. 1 and 2 in revised SA 700.
• Illustrations no. 1, 2 and 3 in revised SA 705.
• Appendix no. 3 in revised SA 706.
• Illustrations no. 1 and 2 in revised SA 570.
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33. M P Vijay Kumar
Communication with TCWG
Auditor needs to communicate with TCWG the
following aspects:
• Matters determined as KAM by the auditor, or
• If applicable, the auditor’s determination that
there are no KAM to communicate.
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34. M P Vijay Kumar
Documentation
The auditor needs to document the following aspects:
• The matters that required significant auditor attention as
determined in accordance with paragraph 9, and the rationale for
auditor’s determination as to whether or not each of these matters
is a KAM in accordance with paragraph 10.
• Where applicable, the rationale for auditor’s determination that
there are no KAM to communicate or that the only KAM to
communicate are those matters addressed by paragraph 15.
• Where applicable, the rationale for auditor’s determination not to
communicate a matter determined to be a KAM.
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35. M P Vijay Kumar
Examples:
KAM
Reporting
Source:
www. Accaglobal.com
www.pwc.nl 35

36. M P Vijay Kumar
ISA HOLDINGS LIMITED (SOUTH AFRICA)
The company had experienced turnover of its senior finance team during the year, which affected its ability to
prepare the financial statements. The auditor referred to this issue in its Key Audit Matters section. In addition,
although not required by ISA 701, the auditor disclosed the findings arising from its audit procedures.
MATTER AUDIT RESPONSE
Change in Financial Directors and Financial Managers
During the 2017 financial year, the financial director of ISA
Holdings Limited resigned as at 31 May 2016. The financial
manager of ISA Holdings Limited had also resigned during the
period. A new financial manager has been appointed. Based on
the fact that key financial staff members had left the company
there is an increased risk of misstatement due to the potential
impact of this on the functioning of the controls and record
keeping of the company. During the current financial year, the
entity did not have a full time appointed executive financial
director. The entity however, engaged in consultation with the JSE
regarding the employment of a part time executive financial
director and his was permitted in terms of Section 3.84 (g) of the
JSE Listing Requirements which does allow the financial director
to be employed on a part time basis in special circumstances. The
entity had also employed a suitably qualified financial manager
within a reasonable time frame.
Our procedures in relation to the changes of staff in the financial
department included:
– The testing of controls around the Revenue, Purchases and
Payroll cycles. Based on the testing we had performed there were
no exceptions or changes identified within the control functions
other than a change in personnel performing such controls. We
focused our testing on ensuring that there were mitigating
controls in place to accommodate the change in personnel.
– We specifically instructed staff to apply a higher level of
professional scepticism and placed more reliance on substantive
work. We confirmed substantively that the company had
complied with the JSE Listing Requirements through the
appointment of a part time financial director within a reasonable
time frame following approval by the JSE.
(Excerpt from the ISA Holdings Limited 2017 annual report) 36

37. M P Vijay Kumar
Vopak
Significant IT migration for the Netherlands business
In 2013, the Netherlands business has migrated to a new IT system for its main financial reporting
processes. We have focused on this migration due to the inherent risk of error and the impact such
an error may have on the control environment of the Group’s largest operating segment.
In this context we involved our IT specialists and assessed, amongst other things, the quality controls
governing the implementation of the new IT system, the configuration within the new system’s
modules, the interaction between the modules, the segregation of duties and the configuration of
expected automated application controls. We also tested the migration of general ledger data from
the legacy IT system to the new IT system.
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38. M P Vijay Kumar
SBM Offshore
Revenue recognition on construction contracts involves significant judgement
The engineering and construction of Floating Production Storage and Offloading systems (FPSOs) is complex and
exposes the Company to various business and financial reporting risks. Revenue arising from construction contracts, in
its Turnkey segment, represent more than 75% of the Group’s total revenue. The recognition of revenue and the
estimation of the outcome of construction contracts requires significant management judgement, in particular with
respect to estimation of the cost to complete and the amounts of variation orders to be recognised. In addition,
significant management judgement is required to assess the consequences of various legal proceedings in respect of
construction contracts. Reference is made to 4.2.6 Notes to the Consolidated Financial Statements, Accounting
principles, C. Critical accounting policies, (e) Revenue: Construction contracts.
We identified revenue from construction contracts as a significant risk, requiring special audit consideration. Our audit
procedures included an evaluation of the significant judgements made by management, amongst others based on an
examination of the associated project documentation and discussion on the status of projects under construction with
finance and technical staff of the Company. We also tested the controls that the Company has put in place over its
process to record contract costs and contract revenues and the calculation of the stage of completion. In addition we
visited two projects under construction. Furthermore, we discussed the status of legal proceedings in respect of
construction contracts, examined various documents in this respect and obtained lawyers’ letters.
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39. M P Vijay Kumar
OLYMPIA CAPITAL HOLDINGS LIMITED (SOUTH AFRICA)
The group auditor identified as a KAM the existence of a high concentration of group profit in one
component. As a result, there was a heightened risk that the component auditor may have failed to
detect misstatements. In response, the group auditor issued specific instructions to the component
auditor and performed additional procedures centrally.
Significant Component – Kalahari Floor Tiles (KFT)
A concentration risk exists as 62% of Group profit is from KFT and 77% of the consolidated profits are from 2
component audited subsidiaries. There is a risk that the component auditor may not detect misstatements in
the financial information. How our audit addressed the key audit matter: We reviewed the account balances,
classes of transactions and disclosures affected by the likely significant risks and requested the subsidiary’s
component auditor to perform an audit of only those account balances, classes of transactions and disclosures
that are likely to have a significant risk of material misstatement of the group financial statements. Among
other balances we identified inventory as a balance (Kshs. 182 million) that can have a significant risk of
inventory obsolescence. To check on potentially obsolete inventory, we requested the component auditor to
perform specified audit procedures on the valuation of inventory at KFT that holds a large volume.
Excerpt from the Olympia Capital Holdings Limited 2017 annual report
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40. M P Vijay Kumar
ANGLO AMERICAN PLC (SOUTH AFRICA LISTING, UK AUDITOR)
The auditor included ‘special items and remeasurements’ as a KAM, on the grounds that
management considers these items important for understanding the group’s underlying financial
performance. This KAM is interesting, as it shows that auditors can perform audit procedures over
non-GAAP measures in the financial statements.
Special items and remeasurements
The assessment of the appropriateness of items disclosed within ‘special items and remeasurements’ is a key
judgement because of their impact upon the reporting of the underlying financial performance achieved by
the Group. In the context of our review of the overall income statement and with reference to the recently
published guidance from the European Securities and Market Authority (ESMA) we considered and challenged
each item disclosed within ‘special items and remeasurements’ as defined in note 6 to the financial
statements. We determined whether such categorisation is appropriate and consistent with the Group’s stated
policy and past practice for recognition of such items, and whether, taken as a whole, the income statement is
fair and balanced in its presentation. We are satisfied that all items included within ‘special items and
remeasurements’ display no indication of management bias in the categorisation and that where relevant the
categorisation was consistent with prior practice. We consider that the related disclosures are also appropriate.
Excerpt from the Anglo American plc 2016 annual report
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