Key Audit Matters are not a catalogue of every audit risk. Under ICAI's SA 701, Communicating Key Audit Matters in the Independent Auditor's Report, KAMs are the matters that, in the auditor's professional judgment, were of most significance in the audit of the current-period financial statements. They are selected from matters communicated with those charged with governance (TCWG). The purpose is to make the auditor's report more informative by giving users insight into areas that demanded especially significant audit attention.
When does SA 701 apply?
SA 701 applies to audits of complete sets of general purpose financial statements of listed entities. It also applies when law or regulation requires KAM reporting or when an auditor decides to communicate KAMs voluntarily. ICAI's standard states that KAM communication does not replace management's required financial-statement disclosures, a modified opinion under SA 705, going-concern reporting under SA 570, or a separate opinion on individual matters.
The standard is effective for audits of financial statements for periods beginning on or after 1 April 2018. Before finalising a report, auditors should consult ICAI's current Auditing, Review and Other Standards index together with the engagement's applicable reporting requirements.
A practical three-step funnel for identifying KAMs
Step 1: Start with matters communicated with TCWG
A matter cannot become a KAM simply because it looks important in isolation. The starting population is the matters communicated with TCWG. That keeps KAM selection connected to the governance communication process and to the actual audit.
Step 2: Identify matters that required significant auditor attention
From that population, the auditor determines which matters required significant auditor attention. SA 701 specifically directs attention to three areas:
- areas of higher assessed risk of material misstatement or significant risks identified in accordance with SA 315;
- significant auditor judgments relating to areas involving significant management judgment, including accounting estimates identified as having high estimation uncertainty; and
- the effect on the audit of significant events or transactions that occurred during the period.
Every significant risk does not automatically become a KAM; these areas are inputs to the significant-attention assessment.
Step 3: Select the matters of most significance
The final KAMs are selected from matters that required significant auditor attention. ICAI's application guidance describes this as selecting a smaller number from matters communicated with TCWG. The test is relative: the question is not merely whether a matter was difficult, but whether it stood out as one of the most significant matters in that audit.
How should a KAM be written in the auditor's report?
Each KAM is ordinarily described separately under a Key Audit Matters section. SA 701 requires the introductory language to explain that KAMs were the matters of most significance in the audit and that they were addressed in the context of the audit as a whole; the auditor does not provide a separate opinion on each KAM.
For each KAM, the description should refer to the related financial-statement disclosure, if any, and address two questions:
- Why was the matter considered significant? Explain the features that caused it to require significant auditor attention and why it became one of the matters of most significance.
- How was the matter addressed in the audit? Describe the audit response at a useful level, reflecting the work actually performed rather than generic boilerplate.
ICAI also publishes an Implementation Guide to SA 701 that practitioners can use alongside the standard when considering presentation and reporting judgments.
Worked example: a judgment-heavy revenue estimate
Assume a listed company has a material revenue stream where year-end recognition depends on complex contractual terms and significant estimates. The audit team assesses the area as a significant risk, involves senior team members, performs extensive contract testing, challenges key estimates and discusses the matter in detail with the audit committee.
That fact pattern may place the matter in the significant-attention population. It becomes a KAM only if the auditor concludes it was among the matters of most significance. The description could explain that materiality, contractual complexity and estimation judgment drove the significance, then summarise relevant responses such as testing selected contracts, evaluating key assumptions, checking cut-off and assessing related disclosures. The procedures described must match the work actually performed.
KAM is not a substitute for a modified opinion or going-concern section
This distinction is critical. A matter that gives rise to a modified opinion under SA 705, or a material uncertainty related to going concern under SA 570, is by its nature a key audit matter. However, SA 701 says such a matter is not described as an ordinary KAM. Instead, the auditor reports it in the applicable Basis for Qualified Opinion, Basis for Adverse Opinion, or Material Uncertainty Related to Going Concern section and refers to that section from the Key Audit Matters section.
Similarly, KAM wording cannot repair inadequate financial-statement disclosure. Management remains responsible for the disclosures required by the applicable financial-reporting framework.
Can an auditor have no KAMs to communicate?
Yes. After applying the standard, the auditor may determine that there are no KAMs to communicate, or that the only matters that would otherwise qualify are matters required to be reported elsewhere because they caused a modified opinion or a material uncertainty related to going concern. In that situation, SA 701 requires an appropriate statement under the Key Audit Matters heading.
An otherwise qualifying KAM may also be withheld if law or regulation prohibits disclosure or, in extremely rare circumstances, when the standard's conditions for adverse consequences outweighing public-interest benefits are met.
Documentation checklist for the audit file
- List the matters that required significant auditor attention.
- For each such matter, document the rationale for whether it is or is not a KAM.
- If no KAMs are identified, document the basis for that conclusion.
- If a KAM is not communicated because of the exceptional circumstances permitted by SA 701, document the rationale.
- Ensure the final KAM wording is consistent with the audit evidence, TCWG communications and the related financial-statement disclosures.
- Cross-check whether any matter belongs instead in a modified-opinion or going-concern section.
Common mistakes to avoid
- Turning every significant risk into a KAM without applying the 'most significance' filter.
- Using generic language that could be copied into any company's auditor's report.
- Explaining why a matter was significant but not how the audit addressed it, or vice versa.
- Using KAMs as a replacement for a qualification, adverse opinion or material-uncertainty section.
- Failing to connect the KAM to the relevant financial-statement disclosure where one exists.
- Leaving the selection rationale undocumented in the audit file.
Practical takeaway
A strong SA 701 process is a funnel, not a checklist of risks: start with matters communicated to TCWG, identify those requiring significant auditor attention, then select the smaller set that were of most significance in the audit. Draft each KAM to explain why it mattered and how the audit addressed it, while keeping modified-opinion and going-concern reporting in their proper sections. Before signing, recheck the current ICAI standard, implementation guidance and the engagement-specific facts rather than relying on prior-year wording.
