Page 167 - CA Final PARAM Digital Book.

Part III – Case Discussion
➢ In the instant case, AKY Ltd., a listed company engaged in the business of software and its contracts
with its various customers are also quite complicated and different. Further, the audit team spends
significant time on audit of revenue and efforts towards audit of revenue also involve
significant involvement of senior members of the audit team including audit partner during
audit. This matter was also discussed with management at various stages. After completion of audit,
the audit partner communicated the management regarding inclusion of paragraph on revenue
recognition as key audit matter in his audit report.
Part IV – Conclusion
➢ In view of SA 701, the assessment of the auditor is valid as above matter qualifies to be a key audit
matter in the opinion of auditor. Hence, it should be reported accordingly by the auditor in his audit
report.

QNO Determining Key Audit Matters New Course – (SM23)
112.125 TITANIUM CNO-- SA 701.100
"Below is draft extract of audit report of a listed company. Para (A) below reflects certain matter stated
in audit report communicated with CFO of company and Para (B) is in nature of auditor’s response to said
matter.

(A) The Company recognizes revenues when the control of goods is transferred to the customer at the net
consideration which the Company expects to receive for those goods from customers in accordance with
contracts terms and conditions.

The terms of sales arrangements based on the terms and conditions of relevant contract and nature of
discount and rebates create complexities that require judgment in determining revenues.

(B) We read the Company’s revenue recognition policy and assessed its compliance in terms of Ind AS 115
“Revenue from contracts with customers”.

We assessed design and tested the operating effectiveness of internal controls related to sales and
rebates/discounts.

We tested on a sample basis that revenue has been recognized in the proper period with reference to the
supporting documents including confirmations from customers.

From description given above, identify what auditors are trying to report and under what heading such
matter should be reflected in audit report of the company?"
Answer The above matter is in nature of Key audit matter and should be stated under heading “Key audit matters”
in audit report. 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.

SA 701 states that 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, 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 be taken into account.

The above described matter relates to revenue recognition and creation of complexities requiring judgment
in revenues. Further, the description also describes how the matter was addressed by auditors by performing
various audit procedures in accordance with SA 701.

www.auditguru.in PARAM 7.7 | P a g e