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SA 701: Communicating Key Audit Matters in the Independent Auditor’s Report

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SA 701: Communicating Key Audit Matters in the Independent Auditor’s Report

Mar 22, 2024

15 Mins

SA 701: Communicating Key Audit Matters in the Independent Auditor’s Report

SA 701 addresses the responsibilities of auditors to communicate key audit matters in their audit reports.

Introduction

SA 701 aims to improve the transparency of auditors' reports by providing additional information about the audit process. It helps users of financial statements understand the issues that auditors consider to be critical in the audit and the areas of significant management judgment in the audited financial statements.

Communicating key audit matters should not be seen as a substitute for the disclosures required by the relevant financial reporting framework. It also does not replace an auditor's modified opinion when circumstances require it, as outlined in SA 705 (Revised). Furthermore, it is not a substitute for reporting on material uncertainties affecting the entity's ability to continue as a going concern, as required by SA 570 (Revised). Lastly, it should be noted that communicating key audit matters does not represent individual opinions on each matter.

Determining Key Audit Matters

To determine the key audit matters, auditors should consider areas with a higher risk of material misstatement or substantial risks identified in accordance with SA 315. They should also consider significant management judgments, including accounting estimates with high uncertainty, and the impact of substantial transactions or events during the relevant period. From these considerations, auditors can identify the most significant matters that should be communicated as key audit matters.

Communicating Key Audit Matters

In the audit report, auditors should include a separate section titled "Key Audit Matters" where each matter is described under a suitable subheading.

A. Key Audit Matters Not a Substitute for a Modified Opinion

If an auditor needs to modify their opinion in accordance with SA 705 (Revised) due to a specific matter, that matter should not be communicated as a key audit matter.

B. Descriptions of Individual Key Audit Matters

Each key audit matter description should provide reasons for its significance in the audit and explain how it was addressed.

C. Exceptions for Not Communicating A Key Audit Matter

Auditors should describe each key audit matter, unless prohibited by law or regulation, or in exceptional cases where the adverse consequences of disclosure outweigh the public interest.

D. Form and Content of Key Audit Matters Section in Other Circumstances

If, based on the audit and entity, auditors determine that there are no key audit matters to communicate, they should state this separately in their report under "Key Audit Matters."

Communication with Governance

Auditors should communicate the key audit matters to the person(s) charged with governance. If there are no key audit matters to communicate, auditors should also inform them accordingly based on the circumstances and facts of the entity and the audit.

Documentation

Auditors should document the significant matters that required their attention and the basis for determining whether they are key audit matters. They should also document the rationale for determining that there are no key audit matters to communicate, if applicable. Additionally, if auditors choose not to communicate a matter considered to be a key audit matter in their report, they should document the reasons for this decision.

SA 701: Communicating Key Audit Matters in the Independent Auditor’s Report

SA 701 addresses the responsibilities of auditors to communicate key audit matters in their audit reports.

Introduction

Determining Key Audit Matters

Communicating Key Audit Matters

In the audit report, auditors should include a separate section titled "Key Audit Matters" where each matter is described under a suitable subheading.

A. Key Audit Matters Not a Substitute for a Modified Opinion

If an auditor needs to modify their opinion in accordance with SA 705 (Revised) due to a specific matter, that matter should not be communicated as a key audit matter.

B. Descriptions of Individual Key Audit Matters

Each key audit matter description should provide reasons for its significance in the audit and explain how it was addressed.

C. Exceptions for Not Communicating A Key Audit Matter

Auditors should describe each key audit matter, unless prohibited by law or regulation, or in exceptional cases where the adverse consequences of disclosure outweigh the public interest.

D. Form and Content of Key Audit Matters Section in Other Circumstances

If, based on the audit and entity, auditors determine that there are no key audit matters to communicate, they should state this separately in their report under "Key Audit Matters."

Communication with Governance

Documentation