Does Key Audit Matters?

For many years, investors have expressed a desire for audit reports to provide more information on the audit process. They believed that providing additional contextual information regarding the audit would aid investors in distinguishing between firms that had gotten "clean" audit reports. As a result, the Key Audit Matters (KAMs) idea was born.

The term “Key Audit Matters” (KAM) refers to “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 in charge of governance. This requirement, mandatory for listed companies only, was included within the new ISA 701.

New ISA 701 deals with the auditor’s responsibility to communicate Key Audit Matters (KAM) in the auditor’s report. The ISA covers audits of full sets of general purpose financial statements of listed entities. It also applies if the auditor is compelled by law or regulation to communicate KAM for other entities or if the auditor chooses to do so voluntarily.  ISA 701 is effective for audits of financial statements for periods ending on or after December 15, 2016. Meanwhile in Indonesia, the new requirements are expected to be effective for the audit of financial statements for the periods beginning on or after January 1, 2022 (starting with listed entities).

Introducing the new EAR with the implementation of Key Audit Matters.The following are the significant differences between the prior audit and the current EAR: the auditor’s report will begin with the audit opinion, auditors of listed companies must report KAM, a clearer statement about the auditor’s independence, enhanced description of management’s responsibilities and if material uncertainty related to going concern exists, auditors are required to include a paragraph disclosing in the EAR.

KAM helps better communication between the auditors and those charged with governance, which leads to better governance, opens up transparency on the audit process pertaining to the auditors professional judgment, improves audit quality, and contributes to higher quality financial reporting.

Most frequently reported KAMs are Impairment of Goodwill, Revenue Recognition, Valuation of PPE, Acquisition, Investment, Capitalization, and Investment Properties. Audit matters that are judgmental, involve estimates, uncertain or complex are the most often reported KAM.

KAM’s adoption has a significant impact on the financial reporting environment.. First, for the Audit Committee, they should support and cooperate with the dry-run, closely monitor financial reporting, engage in early and open communication with auditors, and also consider whether disclosures in the financial statements need to be refreshed. Second, the investors. They will be able to learn in detail on the issues discussed between auditors, management and those who are in charge, know the audit procedures and have access to information that was previously only available in the boardroom. Third, members of the management team. They need to support and engage in the dry-run and revisit the financial statement as KAM often directs users to note disclosures. Lastly, for the Regulators, they will have greater visibility, transparency, and independence about the audit that was performed.