Page 168 - CA Final PARAM Digital Book.

QNO Whether Key Audit Matter Required - Case Study Old Course – (N21R)
112.150 TITANIUM CNO— SA701.100
Mr. Hemant Ramsey was appointed as the engagement partner for conducting the audit of Kshetra Lap
Ltd. for F.Y. 2020-21, on behalf of Ramsey & Associates. Mr. Vishay Tyagi was appointed as the
engagement quality control reviewer by the firm for the said audit.
During F.Y. 2020-21, there was an implementation of ERP system in a phased manner, in Kshetra Lap
Ltd. due to which some of its business processes got automated. As a result of the implementation of
such a system, there was a significant effect on the auditor’s overall audit strategy. Mr. Hemant discussed
the implementation of such a system with Mr. Vishay and also told him that such a matter may be a key
audit matter to be reported in the audit report.
Mr. Vishay considered the significance of such matter but however he was of the opinion that such a
matter did not appear to link with the matters disclosed in the financial statements and so there
was no need to disclose such matter as a key audit matter.
Whether the contention of Mr. Vishay is proper with respect to the matters to be communicated as a key
audit matter?
Answer 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:
(i) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315.

(ii) 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.

(iii) The effect on the audit of significant events or transactions that occurred during the period.

The auditor shall determine which of the aforesaid matters considered were of most significance in
the audit of the financial statements of the current period and therefore are the key audit matters.

These aforesaid considerations focus on the nature of matters communicated with those charged with
governance. Such matters are often linked to matters disclosed in the financial statements and are intended
to reflect areas of the audit of the financial statements that may be of particular interest to intended
users.

The fact that these considerations are required is not intended to imply that matters related to them are
always key audit matters; rather, matters related to such specific considerations are key audit matters
only if they are determined to be of most significance in the audit.

In addition to matters that relate to the specific required considerations, there may be other matters
communicated with those charged with governance that required significant auditor attention and that
therefore may be determined to be key audit matters. Such matters may include, for example, matters
relevant to the audit that was performed that may not be required to be disclosed in the financial
statements. For example, the implementation of a new IT system (or significant changes to an existing IT
system) during the period may be an area of significant auditor attention, in particular if such a change
had a significant effect on the auditor’s overall audit strategy or related to a significant risk
(e.g., changes to a system affecting revenue recognition).

In the given case, there was implementation of ERP system in the company due to which some of its
business processes got automated and which had a significant effect on the auditor’s overall audit
strategy during the period.

Accordingly, such a matter can be considered as a key audit matter if according to Mr. Hemant, such a
matter required significant attention that had affected his overall audit strategy.

www.auditguru.in PARAM 7.8 | P a g e