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Communicating Key Audit Matters in the Independent Auditor’s Report

Introduction

Scope of this SA
  1. This Standard on Auditing (SA) deals with the auditor’s responsibility to communicate key audit matters in the auditor’s report. It is intended to address both the auditor’s judgment as to what to communicate in the auditor’s report and the form and content of such communication.
  2. The purpose of communicating key audit matters is to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed. Communicating key audit matters provides additional information to intended users of the financial statements (“intended users”) to assist them in understanding those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Communicating key audit matters may also assist intended users in understanding the entity and areas of significant management judgment in the audited financial statements. (Ref: Para. A1–A4)
  3. The communication of key audit matters in the auditor’s report may also provide intended users a basis to further engage with management and those charged with governance about certain matters relating to the entity, the audited financial statements, or the audit that was performed.
  4. Communicating key audit matters in the auditor’s report is in the context of the auditor having formed an opinion on the financial statements as a whole. Communicating key audit matters in the auditor’s report is not:
  1. 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;
  2. A substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised);1
  3. A substitute for reporting in accordance with SA 570 (Revised)2 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; or
  4. A separate opinion on individual matters. (Ref: Para. A5–A8)
  1. This SA applies to audits of complete sets of general purpose financial statements of listed entities and circumstances when the auditor otherwise

1 SA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report.

2 SA 570 (Revised), Going Concern, paragraphs 22–23.

decides to communicate key audit matters in the auditor’s report. This SA also applies when the auditor is required by law or regulation to communicate key audit matters in the auditor’s report.3 However, SA 705 (Revised) prohibits the auditor from communicating key audit matters when the auditor disclaims an opinion on the financial statements, unless such reporting is required by law or regulation.4

Effective Date
  1. This SA is effective for audits of financial statements for periods beginning on or after April 1, 2018.
Objectives
  1. The objectives of the auditor are to determine key audit matters and, having formed an opinion on the financial statements, communicate those matters by describing them in the auditor’s report.
Definition
  1. For purposes of the SAs, the following term has the meaning attributed below:

Key audit matters – 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.

Requirements
Determining Key Audit Matters
  1. The auditor shall determine, from the matters communicated with those charged with governance, those matters that required significant auditor attention in performing the audit. In making this determination, the auditor shall take into account the following: (Ref: Para. A9–A18)
  1. Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with SA 315.5 (Ref: Para. A19–A22)
  2. Significant auditor judgments relating to areas in the financial statements

3 SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, paragraphs 30– 31.

4 SA 705 (Revised), paragraph 29.

5 SA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.

that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty. (Ref: Para. A23–A24)

  1. The effect on the audit of significant events or transactions that occurred during the period. (Ref: Para. A25–A26)
    1. The auditor shall determine which of the matters determined in accordance with paragraph 9 were of most significance in the audit of the financial statements of the current period and therefore are the key audit matters. (Ref: Para. A9–A11, A27–A30)
Communicating Key Audit Matters
  1. 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,” unless the circumstances in paragraphs 14 or 15 apply. The introductory language in this section of the auditor’s report shall state that:
  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]; and
  2. 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. (Ref: Para. A31–A33)
Key Audit Matters Not a Substitute for Expressing a Modified Opinion

The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when the auditor would be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter. (Ref: Para. A5)

Descriptions of Individual Key Audit Matters
  1. The description of each key audit matter in the Key Audit Matters section of the auditor’s report shall include a reference to the related disclosure(s), if any, in the financial statements and shall address: (Ref: Para. A34–A41)
  1. Why the matter was considered to be one of most significance in the audit and therefore determined to be a key audit matter; and (Ref: Para. A42– A45)
  2. How the matter was addressed in the audit. (Ref: Para. A46–A51)
Circumstances in Which a Matter Determined to Be a Key Audit Matter is Not Communicated in the Auditor’s Report
  1. The auditor shall describe each key audit matter in the auditor’s report unless: (Ref: Para. A53– A56)
  1. Law or regulation precludes public disclosure about the matter; or (Ref: Para. A52)
  2. 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.
Interaction between Descriptions of Key Audit Matters and Other Elements Required to Be Included in the Auditor’s Report
  1. A matter giving rise to a modified opinion in accordance with SA 705 (Revised), or a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with SA 570 (Revised), are by their nature key audit matters. However, in such circumstances, these matters shall not be described in the Key Audit Matters section of the auditor’s report and the requirements in paragraphs 13–14 do not apply. Rather, the auditor shall:
  1. Report on these matter(s) in accordance with the applicable SA(s); and
  2. Include a reference to the Basis for Qualified (Adverse) Opinion or the Material Uncertainty Related to Going Concern section(s) in the Key Audit Matters section. (Ref: Para. A6–A7)
Form and Content of the Key Audit Matters Section in Other Circumstances

If the auditor determines, depending on the facts and circumstances of the entity and the audit, that there are no key audit matters to communicate or that the only key audit matters communicated are those matters addressed by paragraph 15, the auditor shall include a statement to this effect in a separate section of the auditor’s report under the heading “Key Audit Matters.” (Ref: Para. A57– A59)

Communication with Those Charged with Governance
  1. The auditor shall communicate with those charged with governance:
  1. Those matters the auditor has determined to be the key audit matters; or
  2. If applicable, depending on the facts and circumstances of the entity and the audit, the auditor’s determination that there are no key audit matters to communicate in the auditor’s report. (Ref: Para. A60–A63)
Documentation
  1. The auditor shall include in the audit documentation:6 (Ref: Para. A64)
  1. The matters that required significant auditor attention as determined in accordance with paragraph 9, and the rationale for the auditor’s determination as to whether or not each of these matters is a key audit matter in accordance with paragraph 10;
  2. Where applicable, the rationale for the auditor’s determination that there are no key audit matters to communicate in the auditor’s report or that the only key audit matters to communicate are those matters addressed by paragraph 15; and
  3. 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.
Application and Other Explanatory Material
Scope of this SA (Ref: Para. 2)

A1. Significance can be described as the relative importance of a matter, taken in context. The significance of a matter is judged by the auditor in the context in which it is being considered. Significance can be considered in the context of quantitative and qualitative factors, such as relative magnitude, the nature and effect on the subject matter and the expressed interests of intended users or recipients. This involves an objective analysis of the facts and circumstances, including the nature and extent of communication with those charged with governance.

A2. Users of financial statements have expressed an interest in those matters about which the auditor had the most robust dialogue with those charged with governance as part of the two-way communication required by SA 260 (Revised)7 and have called for additional transparency about those communications. For example, users have expressed particular interest in understanding significant judgments made by the auditor in forming the opinion on the financial statements as a whole, because they are often related to the areas of significant management judgment in preparing the financial statements.

A3. Requiring auditors to communicate key audit matters in the auditor’s report may also enhance communications between the auditor and those charged with governance about those matters, and may increase attention by management and those charged with governance to the disclosures in the financial statements

6 SA 230, Audit Documentation, paragraphs 8–11 and A6.

7 SA 260 (Revised), Communication with Those Charged with Governance.

to which reference is made in the auditor’s report.

A4. SA 3208 explains that it is reasonable for the auditor to assume that users of the financial statements:

  1. Have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial statements with reasonable diligence;
  2. Understand that the financial statements are prepared, presented and audited to levels of materiality;
  3. Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and the consideration of future events; and
  4. Make reasonable economic decisions on the basis of the information in the financial statements.

Because the auditor’s report accompanies the audited financial statements, the users of the auditor’s report are considered to be the same as the intended users of the financial statements.

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