Key audit matters and additional paragraphs

Decide what additional communication achieves

Additional sections serve different purposes. An area may require extensive audit effort without resulting in misstatement. A disclosed event may be fundamental to understanding the statements without being one of the audit's most significant matters. A reporting arrangement may need explanation outside the financial statement disclosures.

Use the communication's purpose to determine its location. First settle the opinion consequences, then consider other reporting requirements. An issue sounding serious does not by itself justify an additional paragraph.

Select key audit matters using current-audit significance

Key audit matters (KAMs) are selected from matters communicated with those charged with governance. The auditor identifies matters requiring significant attention, then judges which were most significant in the current audit. This is a relative assessment grounded in what the audit actually involved. It is not a list of every business risk, every large balance or every point raised with the audit committee.

Consider higher assessed risks, significant auditor judgement in areas requiring significant management judgement, and the audit effect of significant events or transactions. A difficult estimate may require specialist input and sustained partner attention. A major transaction may require unusual procedures. These features help explain significance, but no single feature automatically establishes a KAM.

Concept sources: ASA 701, December 2023, paragraphs 8–10 and A9–A30 — current-period selection and the judgement about significant attention.

Under the historical standard, KAM reporting applies to listed entities' general purpose audits, when required by law or regulation, and when the auditor elects to communicate KAMs. Australian condensed interim financial reports have a specific exception. Where KAM reporting applies, having no matters to communicate requires an appropriate statement; it is not a reason silently to remove the section.

Concept sources: ASA 701, December 2023, paragraphs 5, Aus 5.1 and 16 — scope and the treatment of no KAMs.

Write an explanation that connects significance to the audit

Each KAM description needs an appropriate subheading, a reference to relevant financial statement disclosures where they exist, an explanation of why the matter was significant and a description of how the audit addressed it. Those elements should form one coherent explanation. Listing several generic procedures adds little if the reader cannot see why those procedures mattered.

KAM reporting concerns the audit of the statements as a whole. It gives no separate opinion on the selected balance. Avoid wording that implies a guarantee about the estimate, a forecast of its eventual outcome or assurance beyond the financial statement audit. Explain the audit response in terms a reader can understand without reproducing a work programme.

Concept sources: ASA 701, December 2023, paragraphs 11 and 13, A34–A51 — content, context and communication of individual KAMs.

Communicate selected matters, or the conclusion that none are reportable, to governance. Document significant-attention matters, selection reasoning and exclusions. Governance discussion informs the process without transferring the auditor's selection responsibility.

Concept sources: ASA 701, December 2023, paragraphs 17–18 — governance communication and documentation.

Recognise the narrow exclusions

A KAM may be withheld where public disclosure is prohibited by law or regulation. In extremely rare circumstances, the expected adverse consequences of communication may outweigh its public-interest benefits. The latter exception is unavailable when the entity has already publicly disclosed information about the matter. Ordinary sensitivity, embarrassment or a preference for a shorter report is not the test.

Record the basis for any exclusion and consider the appropriate governance communication. Do not confuse an excluded KAM with a material misstatement that needs a modified opinion: KAM communication cannot replace a required modification or repair management's inadequate disclosure.

Concept sources: ASA 701, December 2023, paragraphs 4, 12, 14 and 18(c), A52–A56 — limits, exceptions and documentation.

Distinguish Emphasis of Matter from Other Matter

An Emphasis of Matter paragraph highlights a matter already appropriately presented or disclosed in the financial statements because it is fundamental to understanding them. It points readers to the relevant disclosure and makes clear that the opinion is not modified for that matter. It supplies emphasis, rather than missing financial information.

An Other Matter paragraph addresses something outside the statements that is relevant to understanding the audit, the auditor's responsibilities or the auditor's report. It is presented separately, with an appropriate heading, and must be legally permissible. It is not a place to publish information management should have put in the statements.

Concept sources: ASA 706, June 2020, paragraphs 7–11 and A1–A3, A15 — definitions, eligibility and separate presentation.

Possible emphasis circumstances include exceptional litigation uncertainty, a significant subsequent event or permitted early application of an accounting standard with a material effect. None automatically triggers emphasis. Evaluate significance and the applicable reporting requirements. Repeated use for ordinary matters weakens the distinction that emphasis is intended to create. Discuss the expected inclusion and wording of either additional paragraph with governance.

Concept sources: ASA 706, June 2020, paragraph 12 and A5–A6, A9–A18 — circumstances, communication and placement.

Keep opinion modifications and going concern prominent

A matter causing a qualified or adverse opinion is described in the corresponding Basis section. When KAM reporting applies, the KAM section cross-refers to that section rather than repeating the matter as an ordinary KAM. Other KAMs may still need communication. An adverse opinion requires particular care that their descriptions do not imply unwarranted confidence in the statements.

An adequately disclosed material uncertainty, where the going concern basis remains appropriate, receives a separate Material Uncertainty Related to Going Concern section. The KAM section, where applicable, cross-refers to that section. It does not become an Emphasis of Matter paragraph. Inadequate disclosure leads to a qualified or adverse opinion, as appropriate; using the going concern basis when inappropriate requires an adverse opinion. Significant going concern work without a material uncertainty may still qualify as a KAM when the selection criteria are met.

Concept sources: ASA 570, January 2023, paragraphs 20–23 and A1 — going concern reporting outcomes; ASA 701, December 2023, paragraphs 4 and 15, A6–A7 — cross-references and the relationship with other KAMs.

A disclaimer normally has neither a KAM section nor an Other Information section, unless law or regulation requires them. This avoids suggesting that selected audit descriptions compensate for the inability to express an overall opinion. An Emphasis of Matter paragraph can coexist with a qualified opinion concerning a different matter, but must clearly avoid implying that the qualification has disappeared.

Concept sources: ASA 705, December 2023, paragraph 29 and A26 — disclaimer restrictions; ASA 706, June 2020, paragraphs 8–9 — emphasis does not modify the opinion for the highlighted matter.

Sources and further reading

• ASA 701, December 2023 — Communicating Key Audit Matters in the Independent Auditor's Report: selection, content, exceptions and interaction with other sections.
• ASA 706, June 2020 — Emphasis of Matter Paragraphs and Other Matter Paragraphs: separate purposes, eligibility, presentation and communication.
• ASA 570, January 2023 — Going Concern: paragraphs 20–24 for the historical reporting outcomes.
• ASA 705, December 2023 — Modifications to the Opinion: paragraph 29 for the restrictions accompanying a disclaimer.