Briefing notes to: Audit Staff
From: Audit Partner

Subject: Key Audit Matter

Introduction
This briefing notes will address the meaning of key audit matter and scope of entities in which ISA 701 is applicable as adopted by the ICAG. Also, factors to be considered in determining key audit matters shall also be considered. Finally, the interaction between KAMs, ISA 570 Going Concern and ISA 705 Emphasis of Matter paragraph and other matter paragraph will be duly considered too.

a) 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. Key audit matters are selected from matters communicated with those charged with governance.
Key audit matters (KAMs) must be communicated:

• In the auditor’s report of all Public Interest Entities (PIEs); and
• When the auditor is required by law or regulation to communicate key audit matters in the auditor’s report.
  (3 marks)

Entities in which ISA 701 is applicable
In Ghana, the following entities meet the definition of Public Interest Entities for the purpose of complying with the communication of KAMs:

• Companies that have made invitations to the public for shares, whether listed or unlisted;
• Mutual Funds licensed by the Securities and Exchange Commission (SEC);
• Investment Advisors licensed by SEC who are also Fund Managers;
• Unit Trusts licensed by SEC;
• Companies operating the Basic National Social Security Scheme (Tier 1);
• Trust Companies licensed by the National Pensions Regulatory Authority (NPRA) and charged with the responsibility of administering private pension schemes under Tier 2 and Tier 3;
• Private pension schemes registered by NPRA under the Tier 2 and Tier 3 pension schemes;
• Deposit-taking institutions regulated by the Bank of Ghana such as:
  • Banks,
  • Savings and Loans Companies,
  • Finance Houses,
  • Rural and Community Banks, and
  • Deposit–taking Microfinance Institutions;
  • Life Insurance Companies;
  • Non-Life Insurance Companies;
  • Re-insurance Companies; and
  • State-owned enterprises regulated by State Enterprises Commission.
    (Any 2 points @ 1 mark each = 2 marks)

b) Factors to be considered in determining key audit matters
ISA 701 explains that in determining KAMs, the auditor shall take into account:

• Areas of higher assessed risk of material misstatement, or significant risks;
• Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty; and
• The effect of significant events or transactions that occurred during the period.
  The auditor determines which of the above matters were most significant in the audit, and hence are the key audit matters.
  (3 points @ 1 mark each = 3 marks)

c) Interaction between
i) KAMs and ISA 705
Matters giving rise to a modified opinion in accordance with ISA 705 are by their nature key audit matters. However, in such circumstances, these matters shall not be described in the KAM section of the auditor’s report.
KAMs are not a substitute for expressing a modified opinion in accordance with ISA 705. Any matter that requires a modified opinion shall be explained in the basis for modification paragraph rather than as a KAM. Also, KAMs are not presented when the auditor disclaims an opinion under ISA 705.
(3 marks)

ii) KAMs and ISA 570
Matters giving rise to a material uncertainty related to going concern in accordance with ISA 570 are by their nature key audit matters.
Where a material uncertainty related to going concern exists, the auditor shall insert a separate paragraph into the auditor’s report entitled ‘Material uncertainty in relation to going concern’ and describe the material uncertainty where the auditor concludes that management has adequately disclosed the material uncertainty in the financial statements. Once there is no adequate disclosure, this will result in the modification of the auditor report under ISA 705 which is outside the scope of KAM.
(3 marks)

iii) KAMs and Emphasis of Matter
The objective of an emphasis of matter paragraph is to draw attention to matters included (and adequately presented) in the financial statements and related disclosures, which, in the auditor’s judgement, are fundamental to users’ understanding of the financial statements (e.g. a subsequent event).
ISA 706 has been revised to reflect the fact that matters needing highlighting as fundamental to the users’ understanding may now be determined as KAMs. The auditor may wish to highlight or draw further attention to their relative importance by listing them as the first KAM, or by including additional information in the KAM description.
An emphasis of matter paragraph shall only be used to highlight matters that are not considered to be KAMs (and hence are not described/highlighted in the KAM section of the auditor’s report).
(3 marks)

iv) KAMs and Other Matters
Other matters as defined by ISA 706 relate to matters other than those presented or disclosed in the financial statements e.g. the fact that prior year financial statements were audited by a predecessor auditor. Given that KAMs are always drawn from matters relating to the presented and disclosed financial statements there shall be no overlap between ‘other matters’ and KAMs.
(3 marks)

Conclusion
KAMs are defined with reference to the auditor, NOT the user – i.e. the areas that required significant auditor attention in performing the audit. KAMs are a standard element of all unmodified auditor’s reports for Public Interest Entities. KAMs therefore DO NOT represent a modification to the auditor’s report and must not be confused with modified audit opinion, emphasis of matter, or other matters, all of which are determined with reference to the USER, not the auditor.
(Total: 20 marks)