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In-Depth Study Complete
HKSA 701 - Key Audit Matters (Condensed)
๐ PDF โ HKICPA Handbook Vol III
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| Section | Key Concept | Brief Description |
|---|---|---|
| Scope & Purpose | Communicate KAMs to enhance audit transparency | Applies to listed entities; KAMs are not a substitute for disclosures, modified opinions, or going concern reporting. |
| Objectives & Definition | Determine and communicate matters of most significance | KAMs are selected from matters communicated with TCWG, based on professional judgment. |
| Determination Process | Two-step: identify significant attention matters, then select most significant | Consider higher risks, significant management judgment, and significant events/transactions. |
| Communication Requirements | Separate section with specific content | Include reference to disclosures, why it's a KAM, and how it was addressed; cannot replace modified opinions or going concern reporting. |
| Exceptions & Special Cases | Non-communication and no-KAM scenarios | Only in extremely rare cases or when law precludes; if no KAMs, state that in a separate section. |
| Governance Communication & Documentation | Communicate KAMs to TCWG and document rationale | Must document matters requiring significant attention and rationale for KAM determination. |
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Scope and Purpose
Scope
HKSA 701 deals with the auditor's responsibility to communicate key audit matters (KAMs) in the auditor's report. It addresses both the auditor's judgment on what to communicate and the form/content of such communication.
Purpose (Paragraph 2)
- Enhance communicative value of the auditor's report by providing greater transparency about the audit performed
- Provide additional information to intended users to assist them in understanding matters of most significance in the audit
- Help users understand the entity and areas of significant management judgment
Important: KAM communication is NOT a substitute for financial statement disclosures, modified opinions, or going concern reporting (Paragraph 4).
Applicability (Paragraph 5)
| Applies to | Exception |
|---|---|
| Audits of complete sets of general purpose financial statements of listed entities | HKSA 705 prohibits communicating KAMs when the auditor disclaims an opinion, unless required by law/regulation |
| When the auditor otherwise decides to communicate KAMs | |
| When required by law or regulation |
Effective Date: Periods ending on or after 15 December 2016 (Paragraph 6).
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Objectives and Definition
Objectives (Paragraph 7)
- Determine key audit matters
- Having formed an opinion on the financial statements, communicate those matters by describing them in the auditor's report
Definition (Paragraph 8)
Key audit matters โ 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.
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Determining Key Audit Matters
Step 1: Identify Matters Requiring Significant Auditor Attention (Paragraph 9)
The auditor shall determine, from matters communicated with TCWG, those that required significant auditor attention, considering:
| Consideration | Description |
|---|---|
| (a) Areas of higher assessed risk or significant risks | Significant risks are identified risks where inherent risk is close to the upper end of the spectrum. Note: Not all significant risks require significant auditor attention (e.g., presumed fraud risk in revenue recognition may not always require it). |
| (b) Significant auditor judgments relating to areas involving significant management judgment | Includes accounting estimates with high estimation uncertainty and accounting policies with significant effect on the financial statements. |
| (c) Effect of significant events or transactions during the period | Examples: significant related party transactions, transactions outside normal course of business, significant economic or regulatory developments. |
Step 2: Determine Which Matters Were of Most Significance (Paragraph 10)
The auditor shall determine which of the matters identified in Step 1 were of most significance in the audit of the current period and therefore are the key audit matters.
Key Point: The number of KAMs is a matter of professional judgment. Lengthy lists may be contrary to the notion of 'most significance.'
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Communicating Key Audit Matters
Separate Section in Auditor's Report (Paragraph 11)
The auditor shall describe each KAM in a separate section under the heading "Key Audit Matters", unless circumstances in paragraphs 14 or 15 apply.
Introductory language must state:
- KAMs are those matters of most significance in the audit of the current period
- These matters were addressed in the context of the audit as a whole, and the auditor does not provide a separate opinion on them
KAMs Not a Substitute for Modified Opinion (Paragraph 12)
Critical Rule: The auditor shall not communicate a matter in the Key Audit Matters section when the auditor would be required to modify the opinion as a result of the matter.
Descriptions of Individual KAMs (Paragraph 13)
Each description shall include:
- A reference to related disclosures, if any, in the financial statements
- Why the matter was considered one of most significance
- How the matter was addressed in the audit
Circumstances When a KAM is Not Communicated (Paragraph 14)
The auditor shall describe each KAM unless:
- (a) Law or regulation precludes public disclosure
- (b) In extremely rare circumstances, adverse consequences would reasonably be expected to outweigh public interest benefits (not applicable if entity has publicly disclosed information)
Interaction with Other Report Elements (Paragraph 15)
Matters giving rise to a modified opinion or material uncertainty related to going concern are by nature KAMs, but shall not be described in the Key Audit Matters section. Instead, include a reference to the relevant section.
When No KAMs (Paragraph 16)
If the auditor determines there are no KAMs to communicate, or the only KAMs are those addressed by paragraph 15, include a statement to this effect in a separate section under the heading "Key Audit Matters."
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Communication with Those Charged with Governance and Documentation
Communication with TCWG (Paragraph 17)
The auditor shall communicate with TCWG:
- (a) Those matters the auditor has determined to be the KAMs
- (b) If applicable, the auditor's determination that there are no KAMs to communicate
Documentation (Paragraph 18)
The auditor shall include in audit documentation:
| Requirement | Description |
|---|---|
| (a) Matters requiring significant auditor attention | Per paragraph 9, and rationale for determining whether or not each is a KAM (per paragraph 10) |
| (b) No KAMs or only paragraph 15 KAMs | Rationale for determining that there are no KAMs or that the only KAMs are those addressed by paragraph 15 |
| (c) Non-communication of a KAM | Rationale for not communicating a matter determined to be a KAM |
Note: HKSA 701 does not require documenting why other matters communicated with TCWG were not matters requiring significant auditor attention.
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Application and Explanatory Material: Scope and Relationship (Ref: Para. 2, 4, 12, 15)
Application and Explanatory Material: Scope and Relationship
Significance (A1-A4)
- Significance is the relative importance of a matter, taken in context, judged by considering quantitative and qualitative factors
- Users are interested in matters about which the auditor had the most robust dialogue with TCWG
- Users have reasonable knowledge of business, economic activities, and accounting
Relationship between KAMs, Auditor's Opinion, and Other Elements (A5-A8)
| Element | Key Points |
|---|---|
| Modified opinions (A5-A7) | Matter giving rise to modification is presented in Basis for Qualified (Adverse) Opinion section; other KAMs may still be relevant; descriptions must not imply financial statements are more credible than appropriate given adverse opinion |
| Emphasis of Matter and Other Matter paragraphs (A8) | Presented separately from Key Audit Matters section; not a substitute for the description required by paragraph 13 |
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Application and Explanatory Material: Determining KAMs (Ref: Para. 9-10)
Application and Explanatory Material: Determining KAMs
Decision-Making Process (A9-A11)
- Designed to select a smaller number of matters from those communicated with TCWG
- Limited to matters of most significance in the audit of the current period
- Even when comparative financial statements are presented, KAMs relate only to the current period
Matters That Required Significant Auditor Attention (A12-A15)
An audit is risk-based; areas of significant auditor attention often relate to complexity and significant management judgment. These areas may affect overall audit strategy, resource allocation, and extent of audit effort.
Considerations in Determining Matters (A16-A18)
The three considerations in paragraph 9 are interrelated. Other matters beyond those in paragraph 9 may also be KAMs (e.g., implementation of a new IT system).
Matters of Most Significance (A27-A30)
Other considerations for determining relative significance include:
- Importance to intended users' understanding of the financial statements
- Nature of underlying accounting policy or complexity/subjectivity involved
- Nature and materiality of corrected and uncorrected misstatements
- Nature and extent of audit effort needed
- Nature and severity of difficulties in applying audit procedures
- Severity of control deficiencies
- Whether the matter involved multiple related auditing considerations
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Application and Explanatory Material: Communicating KAMs (Ref: Para. 11-16)
Application and Explanatory Material: Communicating KAMs
Descriptions of Individual KAMs (A34-A51)
| Aspect | Guidance |
|---|---|
| Adequacy of description (A34-A39) | Description should be succinct and balanced; limit use of highly technical auditing terms; avoid providing original information about the entity |
| Reference to where the matter is disclosed (A40-A41) | Description is not a mere reiteration of financial statement disclosures; reference to related disclosures enables users to understand how management addressed the matter |
| Why the matter was considered one of most significance (A42-A45) | Description should provide insight; relate the matter directly to specific circumstances of the entity to minimize standardization; for recurring KAMs, highlight aspects specific to the current period |
| How the matter was addressed in the audit (A46-A51) | May describe aspects of auditor's response, brief overview of procedures, indication of outcome, or key observations; avoid implying the matter was not appropriately resolved; do not contain or imply discrete opinions on separate elements |
Circumstances When a KAM is Not Communicated (A52-A56)
Extremely Rare: It will be extremely rare for a KAM not to be communicated. The judgment is appropriate only when adverse consequences would reasonably be expected to outweigh public interest benefits.
Form and Content When No KAMs (A57-A59)
Applies in three circumstances: (1) no KAMs determined per paragraph 10, (2) a KAM is not communicated per paragraph 14 and no other KAMs exist, (3) the only KAMs are those addressed by paragraph 15. It may be rare for a listed entity to have no KAMs, but possible in limited circumstances (e.g., very limited operations).
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