a) Definition of Key Audit Matters (KAM):
Key Audit Matters are defined in ISA 701 as those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. KAM are selected from matters communicated with those charged with governance.
(2 marks)

b) Objectives of ISA 701:

1. To determine those matters that are to be regarded as Key Audit Matters.
2. To communicate those matters in the auditor’s report.
   (2 marks)

c) Matters to Consider When Determining KAM:
When making a determination of KAM, ISA 701 requires the auditor to consider the following three areas:

1. Areas of Higher Risk of Material Misstatement: This includes areas that were identified as “significant risks” in accordance with ISA 315 (Revised), where material misstatements were more likely to occur.
2. Significant Auditor Judgments: These relate to areas of the financial statements that required significant judgment from management or involved complex estimates, where the auditor’s professional judgment was heavily relied upon.
3. Effect of Significant Events or Transactions: These include significant transactions or events that occurred during the audit period, which had an impact on the financial statements or required significant audit attention.
   (6 marks)

d) Communicating Key Audit Matters:
The auditor should communicate KAM in the auditor’s report by:

1. Describing the KAM: For each KAM, the auditor should provide a description of why the matter was determined to be of most significance in the audit.
2. Addressing the Matter: The auditor should describe how the KAM was addressed in the audit, including a brief overview of the procedures performed, their outcome, and any key observations related to the KAM.
3. Clarity and Transparency: The language used should be clear and concise, ensuring that the significance of the KAM is properly communicated to users of the financial statements.
   (5 marks)