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Revisiting key audit matters: an analysis of reporting trends

In an environment where accounting irregularities and auditing failures are in the spotlight, the pressure remains on auditors to enhance communication between them and investors, as well as those charged with governance, and to increase the confidence of the users of the financial statements in the auditor’s reports. A question remains, however, whether the users of the financial statements are aware of what an auditor is expected to report on in their auditor’s report on the financial statements, and communicate as required by the International Standards on Auditing (ISAs), in accordance with the auditor’s findings.

By Pieter Cloete and Sanele Sikhakhane

In 2015, the International Auditing and Assurance Standards Board (IAASB) issued the new and revised Auditor Reporting Standards to address the shortcomings identified in audit reports and enhance the understandability and usefulness of such reports. One significant change with the Auditor Reporting Standards was the introduction of ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report.

This ISA deals with the auditor’s responsibility to communicate key audit matters (KAM) in the auditor’s report, and the form and content of such communication. KAM are defined in ISA 701 as ‘those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period’. This standard further states that ‘key audit matters are selected from matters communicated with those charged with governance’.

ISA 701 applies both to audits of financial statements of listed entities and when the auditor decides to communicate KAM in the auditor’s report. This ISA also applies when the auditor is required by law or regulation to communicate KAM, making it also relevant to different sized entities and all practitioners, including small- and medium-sized practices.

In this article, we revisit KAM to determine the following:

  • The progress made by auditors, since the effective date of ISA 701 (effective for audits of financial statements for periods ending on or after 15 December 2016), in communicating KAM in their audit reports
  • The categories of KAM reported by auditors in South Africa;
  • The shortcomings or key findings in the audit reports noted by the Independent Regulatory Board for Auditors’ (IRBA) Inspections Department
  • To highlight important ISA 701 requirements

IRBA’s pre-implementation inspections

In 2016, the IRBA had the opportunity to collaborate with firms to conduct pro forma inspections, with the focus on the form and content of the new auditor’s report prepared in terms of the new and revised Auditor Reporting Standards. Some of the findings from the pro forma inspections performed included the following:

  • The descriptions of KAM communicated in the auditor’s report were:
  • Misaligned to the disclosure in the financial statements
    • Found to omit reference to the relevant disclosure in the financial statements
    • Not comprehensive and clear enough for users with limited financial background to easily understand the KAM and make informed decisions
    • Found to contain ‘boilerplate’ language
    • Misaligned to the information disclosed in the Audit Committee Report
  • There was insufficient evidence or poor linkages in working papers of the process followed in determining KAM.
  • Working papers did not fully reflect all the changes arising from the full suite of new and revised Auditor Reporting Standards.
  • Several elements of the format of the illustrative reports contained in the South African Auditing Practice Statement (SAAPS) 3 (Revised 2015), Illustrative Reports, were found not to be followed, or were completely omitted.

Below, we look at where we are currently with the communication of KAM by auditors in the auditor’s reports.

July 2019 analysis of reporting trends

In July 2019, the most recent audit reports of the top 40 JSE-listed companies (based on market capitalisation) were analysed for the presence of KAM; the trends of KAM reported on different companies; whether there were any ‘new’ KAM communicated by auditors; and whether KAM were comprehensive and clear enough for users with limited financial background to easily understand them. It was noted that in the 40 audit reports, 119 KAM were disclosed, with an average of three KAM disclosed per auditor’s report.

The analysis indicated that the top five reported categories of KAM were:

  • Valuations
  • Taxation
  • Impairments
  • Provisions
  • Revenue recognition

Although the above were the top five reported categories, the analysis also indicated that auditors were reporting KAM on, for example the ‘new’ accounting standards, that is, International Financial Reporting Standard (IFRS) 9, Financial Instruments; IFRS 15, Revenue from Contracts with Customers, and IFRS 16, Leases.

The IRBA Inspections Department, during its 2018/19 inspections, noted that most firms generally approach KAM reporting seriously and have invested in relevant training and processes. It has also noted that inspection findings on the auditors’ communication of KAM are becoming less frequent, with isolated findings reported. Also, the accuracy of the description of audit responses to address the risk and the completeness of matters considered to be KAM were sufficiently documented. However, the IRBA Inspections Department has noted the following findings:

  • Going concern modifications are inappropriately substituted by KAM, raising questions about the auditors’ understanding of auditing standards, their independence and level of professional scepticism. This is specifically prohibited in ISA 701, which states that matter giving rise to a modified opinion in accordance with ISA 705 (Revised),or a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with ISA 570 (Revised), are by their nature key audit matters. However, in such circumstances, these matters shall not be described in the Key Audit Matters section of the auditor’s report. Rather, the auditor shall:
  • Report on these matter(s) in accordance with the applicable ISA(s), and
    • Include a reference to the Basis for Qualified (Adverse) Opinion or the Material Uncertainty Related to Going Concern section(s) in the Key Audit Matters section
  • KAM are not always representative of the areas to which the auditor has given significant attention and audit effort. This is inconsistent with the definition of a KAM in ISA 701.
  • There are no documented reasons on the engagement file as to why the auditor chose not to report a KAM. This is a requirement of ISA 701, which states that if the auditor determines, depending on the facts and circumstances of the entity and the audit, that there are no key audit matters to communicate, the auditor shall include a statement to this effect in a separate section of the auditor’s report under the heading ‘Key Audit Matters’.[7]
  • Boilerplate or template language is encountered for KAM. ISA 701 emphasises that in order for intended users to understand the significance of a key audit matter in the context of the audit of the financial statements as a whole, as well as the relationship between key audit matters and other elements of the auditor’s report, including the auditor’s opinion, care may be necessary so that language used in the description of a key audit matter relates the matter directly to the specific circumstances of the entity, while avoiding generic or standardised language.

Key audit matters not a substitute for expression a modified audit options

A common ‘pitfall’ noted is that auditors use KAM as a substitute for expressing a modified opinion. ISA 701 states that the auditor shall not communicate a matter in the KAM section of the auditor’s report when the auditor would be required to modify the opinion in accordance with ISA 705 (Revised) as a result of the matter.

The importance of documentation

As part of audit evidence, auditors are required to document:

  • The matters that required significant auditor attention, and the rationale for the auditor’s determination as to whether or not each of these matters is a KAM
  • Where applicable, the rationale for the auditor’s determination that there are no KAM to communicate in the auditor’s report, and
  • Where applicable, the rationale for the auditor’s determination not to communicate in the auditor’s report a matter determined to be a KAM.

In addition to these documentation requirements, paragraphs 8−11 of ISA 230 contain additional documentation requirements for the registered auditor to adhere to in compiling the audit file.


Based on both the findings raised by the IRBA Inspections Department and the observations from the auditor’s reports of top 40 JSE listed companies, it is concluded that improvements have been made on the quality and content of KAM communicated in the auditor’s reports. However, to ensure that KAM are communicated in line with ISA 701, auditors still have areas on which they need to improve, and the IRBA inspections Department will continue to monitor compliance with the new and revised Auditor Reporting Standards.

The communication of KAM, as per the requirements of ISA 701, will ensure greater transparency about the audit performed. In addition, this will assist users of the financial statements to benefit more from the information reported in the audit reports.

Pieter Cloete CA (SA), RA, Senior Professional Manager: Inspections at the IRBA; and Sanele Sikhakhane CA (SA), Technical Assistant: Standards at the IRBA.

This article was originally published in ASA.