Auditor Reporting –Illustrative Key Audit Matters

1 Auditor Reporting illustrative Key Audit Matters April 22, 2015. This publication has been prepared by the Auditor Reporting Implementation Working Group. It does not constitute an authoritative pronouncement of the International Auditing and Assurance Standards Board (IAASB), nor does it amend or override the International Standards on Auditing (ISAs ). Further, this publication is not meant to be exhaustive and reading this publication is not a substitute for reading the ISAs. This publication has been developed to illustrate how the concept of Key Audit Matters (KAM) may be applied in practice in accordance with ISA 701, Communicating Key Audit Matters in the Independent Auditor 's Report.

2 It builds upon Matters highlighted in the January 2015 publication Auditor Reporting Key Audit Matters . The KAM examples contained herein are presented for illustrative purposes. ISA 701. requires the description of a KAM to be tailored to the facts and circumstances of the individual Audit engagement and the entity in order to provide relevant and meaningful information to investors and other users of the Auditor 's report. It is expected that KAM will vary in terms of the number and selection of topics addressed and the nature in which they may be described. The IAASB recognizes the importance of the concept of KAM evolving over time to respond to investors'.

3 Needs. The KAM examples included in this publication are based on Auditor 's reports issued in the Netherlands, where a national auditing standard incorporating concepts similar to ISA 701 is in effect, and the United Kingdom, where extended Auditor Reporting is now in its second year, 1 as well as the illustrative examples in the IAASB's July 2013 Exposure Draft, Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (ISAs). Contextual Information Required to Be Included in the Auditor 's Report in Relation to KAM. Unless law or regulation prescribes otherwise, when KAM are communicated, auditors are required to include the following introductory language under the heading Key Audit Matters in a separate section of the Auditor 's report: 2.

4 Key Audit Matters Key Audit Matters are those Matters that, in our professional judgment, were of most significance in our Audit of the financial statements of the current period. These Matters were addressed in the context of our Audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these Matters . Although standardized in nature, this language is intended to provide an appropriate context for users of the Auditor 's report to understand the new concept of KAM in particular that the communication of KAM: Is not intended to imply that the matter has not been appropriately resolved by the Auditor in forming the opinion on the financial statements; and Is not intended to represent or imply discrete opinions on separate elements of the financial statements (a piecemeal opinion ).

5 1. In March 2015, the UK Financial Reporting Council published a survey Extended Auditor 's reports: A review of experience in the first year . The Survey explores both whether the new requirements appear to have been complied with and areas of innovation. 2. See paragraph 11 of ISA 701. In addition, the Auditor 's Responsibilities for the Audit of the Financial Statements section of the Auditor 's report will include the following description in relation to KAM: 3. From the Matters communicated with those charged with governance, we determine those Matters that were of most significance in the Audit of the financial statements of the current period and are therefore the key Audit Matters .

6 We describe these Matters in our Auditor 's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication . Determining KAM, Including the Number of KAM for a Particular Engagement KAM should be specific to the entity and the Audit that was performed in order to provide relevant and meaningful information to users. Therefore, ISA 701 includes a judgment-based decision-making framework to help auditors determine which Matters , from those communicated with those charged with governance, are KAM.

7 4 This decision-making framework was developed to focus auditors on areas about which investors and other users have expressed interest in particular, areas of the financial statements that involved the most significant or complex judgments by management and areas of Auditor focus in accordance with the risk-based approach in the ISAs. The number of KAM that will be communicated in the Auditor 's report may be affected by the complexity of the entity, the nature of the entity's business and environment, and the facts and circumstances of the Audit engagement. It is envisaged that there will be at least one KAM for an Audit of a listed entity.

8 Required Elements in the Description of a KAM. The description of a KAM is always required to include a reference to the related disclosures, if any, in the financial statements and address: Why the matter was considered to be one of most significance in the Audit and therefore determined to be a KAM; and How the matter was addressed in the Audit . 5. 3. See paragraphs 40 41 of ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements. Paragraph 40 requires this statement only for audits of financial statements of listed entities and any other entities for which KAM are communicated in accordance with ISA 701.

9 Paragraph 41 of ISA 700 (Revised) permits the Auditor to include this language within an appendix to the Auditor 's report, in which case the Auditor 's report shall include a reference to the location of the appendix, or by a specific reference within the Auditor 's report to the location of such a description on a website of an appropriate authority, where law, regulation or national auditing standards expressly permit the Auditor to do so. 4. See paragraphs 9 10 and A9 A30 of ISA 701. ISA 260 (Revised), communication with those charged with Governance, and other ISAs set out requirements for auditors to communicate with those charged with governance about specific Matters , including significant Audit findings.

10 5. See ISA 701, paragraphs 13 and A34 A51. 2. The requirement in ISA 701 relating to the description of a KAM is intended to provide a succinct and Entity-specific information balanced explanation about the matter . However, the included in a KAM that relates to level of detail in the description of each KAM is a matter a matter disclosed in the financial of professional judgment, and may vary depending on statements is intended to be the specific facts and circumstances of the particular consistent with those disclosures engagement. The IAASB was of the view that this and should not result in the flexibility is important to enable auditors to be as entity- Auditor inappropriately providing specific and Audit -specific as possible in the description original information about the of a KAM, in order to mitigate concerns from investors matter or the entity.