Page 166 - CA Final PARAM Digital Book.

also communicated to the management that he plans to include revenue recognition as key audit
matter in his audit report. The management did not agree with revenue recognition to be shown as
key audit matter in the audit report. Comment.
OR
“The auditor shall determine, from the matters communicated with those charged with governance, those
matters that required significant auditor attention in performing the audit. In making this determination,
the auditor shall take into account the key factors”.

You are required to briefly discuss the factors determining the key audit matters.
Answer Part I -- Relevant Standards & Laws
▪ SA 701 – Communicating Key Audit Matters In The Independent Auditor’s Report

Part II -- Requirements of Relevant Standards & Laws
Step 1 Step 2 Step 3 Step 4
2. Determining Make list of matters Identify matters which need Identify items of Current Period
KAM items ? Communicated to Significant Auditor Most Significance Item
TCWG Attentsion

List given in SA 260 Indepth, frequent,
robust interactions ,
efforts, time , resources
etc

Significant
Significant Risk or High Management Significant Event or
RMM Judgement Transactions

Eg Philips
Eg Mondi Ltd (Netherland)
Eg Dominos UK AR (South Africa)
Separation of Health Tech &
Revenue Recognition Cut Off Because of huge expansion Lighting Business as 2 sperate
is Highlighted as High RMM capitalisation of fixed asset companies from across group
hence KAM needs significant judgement companies is Significant Event or
hence KAM
Transaction Hence KAM

➢ Determining Key Audit Matters:
SA 701, “Communicating Key Audit Matters in the Independent Auditor’s Report”, deals with the
auditor’s responsibility to communicate key audit matters in the auditor’s report. It is intended to
address both the auditor’s judgment as to what to communicate in the auditor’s report and the form
and content of such communication.

➢ Factors determining Key Audit Matters:
As per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report”, the auditor
shall determine, from the matters communicated with those charged with governance, those matters
that required significant auditor attention in performing the audit. In making this determination, the
auditor shall take into account the following:
• Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment.
• 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.
• The effect on the audit of significant events or transactions that occurred during the period.

The auditor shall determine which of the matters determined in accordance with above were of most
significance in the audit of the financial statements of the current period and therefore are the key audit
matters.

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