SA 701 — Communicating Key Audit Matters in the Auditor's Report

Standard on Auditing (SA) 701, issued by the ICAI, became applicable to audits of listed entities for periods beginning on or after April 1, 2018. The standard requires the auditor to identify, communicate and report on Key Audit Matters (KAM) — those matters that, in the auditor's professional judgement, were of most significance in the audit of the financial statements of the current period.

Scope and applicability

SA 701 currently applies to:

• Audits of complete sets of general purpose financial statements of listed entities, and
• Other circumstances when the auditor decides to communicate KAM in the auditor's report (voluntary application).

The standard is closely aligned with International Standard on Auditing 701 issued by the IAASB.

Identifying Key Audit Matters

The auditor's identification of KAM is a three-step filtering process:

1. From matters communicated with those charged with governance (TCWG) under SA 260
2. Filtered to areas of higher assessed risk of material misstatement, or significant risks identified under SA 315
3. Further filtered to those that, in the auditor's judgement, were of most significance in the audit

Common categories of KAM

Practical KAM categories observed in Indian listed-company audits include:

• Revenue recognition — particularly under Ind AS 115 with respect to performance obligations and variable consideration
• Impairment of goodwill and intangibles under Ind AS 36 — judgements around CGU identification, growth assumptions and discount rates
• Expected credit loss under Ind AS 109 — model assumptions and forward-looking information
• Tax positions — uncertain tax treatments, MAT/AMT computations, and contingent tax exposures
• Litigation provisions — recognition and measurement under Ind AS 37
• Related-party transactions — completeness, arm's-length determination and disclosure

Reporting format

For each KAM, the auditor's report typically describes:

• The matter and why it was considered most significant
• Reference to where the matter is addressed in the financial statements
• How the matter was addressed in the audit (the audit response)

The KAM section is presented in the auditor's report, typically before the section on Other Information.

Documentation

SA 701 documentation requirements operate alongside SA 230. The auditor's working papers should record:

• Matters that required significant auditor attention and the rationale for inclusion or exclusion as a KAM
• Communication with TCWG, including any KAMs that were communicated but not reported on (rare and limited circumstances)
• The audit response and conclusions for each KAM

Practical drafting considerations

KAM descriptions should be specific to the entity and the engagement. Boilerplate language across years or entities reduces the standard's value to readers. Each KAM should communicate (a) what was done, not just how, and (b) the auditor's perspective, not management's.

Drafting is an iterative process — KAM descriptions are typically reviewed multiple times before finalisation, with input from the engagement quality reviewer.