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The auditor’s decision‑making process in determining key audit matters is designed to select a smaller number of matters from the matters communicated with those charged with governance, based on the auditor’s judgement about which matters were of most significance in the audit of the financial report of the current period.
The auditor’s determination of key audit matters is limited to those matters of most significance in the audit of the financial report of the current period, even when the comparative financial report is presented (i.e., even when the auditor’s opinion refers to each period for which the financial report is presented).[15]
Notwithstanding that the auditor’s determination of key audit matters is for the audit of the financial report of the current period and this Auditing Standard does not require the auditor to update key audit matters included in the prior period’s auditor’s report, it may nevertheless be useful for the auditor to consider whether a matter that was a key audit matter in the audit of the financial report of the prior period continues to be a key audit matter in the audit of the financial report of the current period.
Matters that Required Significant Auditor Attention (Ref: Para. 9)
The concept of significant auditor attention recognises that an audit is risk‑based and focuses on identifying and assessing the risks of material misstatement of the financial report, designing and performing audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for the auditor’s opinion. For a particular account balance, class of transactions or disclosure, the higher an assessed risk of material misstatement at the assertion level, the more judgement is often involved in planning and performing the audit procedures and evaluating the results thereof. In designing further audit procedures, the auditor is required to obtain more persuasive audit evidence the higher the auditor’s assessment of risk.[16] When obtaining more persuasive audit evidence because of a higher assessment of risk, the auditor may increase the quantity of the evidence, or obtain evidence that is more relevant or reliable, for example, by placing more emphasis on obtaining third party evidence or by obtaining corroborating evidence from a number of independent sources.[17]
Accordingly, matters that pose challenges to the auditor in obtaining sufficient appropriate audit evidence or pose challenges to the auditor in forming an opinion on the financial report may be particularly relevant in the auditor’s determination of key audit matters.
Areas of significant auditor attention often relate to areas of complexity and significant management judgement in the financial report, and therefore often involve difficult or complex auditor judgements. In turn, this often affects the auditor’s overall audit strategy, the allocation of resources and extent of audit effort in relation to such matters. These effects may include, for example, the extent of involvement of senior personnel on the audit engagement or the involvement of an auditor’s expert or individuals with expertise in a specialised area of accounting or auditing, whether engaged or employed by the firm to address these areas.
Various Australian Auditing Standards require specific communications with those charged with governance and others that may relate to areas of significant auditor attention. For example:
ASA 260 requires the auditor to communicate significant difficulties, if any, encountered during the audit with those charged with governance.[18] The Australian Auditing Standards acknowledge potential difficulties in relation to, for example:
Related party transactions,[19] in particular limitations on the auditor’s ability to obtain audit evidence that all other aspects of a related party transaction (other than price) are equivalent to those of a similar arm’s length transaction.
Limitations on the group audit, for example, where access to information or people may have been restricted.[20]
ASA 220 establishes requirements for the engagement partner in relation to undertaking appropriate consultation on difficult or contentious matters, matters on which the firm’s policies or procedures require consultation,[21] and other matters that in the engagement partner’s professional judgement, require consultation. For example, the auditor may have consulted with others within the firm or outside the firm on a significant technical matter, which may be an indicator that it is a key audit matter. The engagement partner is also required to discuss, among other things, significant matters and significant judgements arising during the audit engagement with the engagement quality reviewer.[22]
Considerations in Determining Those Matters that Required Significant Auditor Attention (Ref: Para. 9)
The auditor may develop a preliminary view at the planning stage about matters that are likely to be areas of significant auditor attention in the audit and therefore may be key audit matters. The auditor may communicate this with those charged with governance when discussing the planned scope and timing of the audit in accordance with ASA 260. However, the auditor’s determination of key audit matters is based on the results of the audit or evidence obtained throughout the audit.
Paragraph 9 includes specific required considerations in the auditor’s determination of those matters that required significant auditor attention. These considerations focus on the nature of matters communicated with those charged with governance that are often linked to matters disclosed in the financial report, and are intended to reflect areas of the audit of the financial report 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 accordance with paragraph 10. As the considerations may be interrelated (e.g., matters relating to the circumstances described in paragraphs 9(b)(c) may also be identified as significant risks), the applicability of more than one of the considerations to a particular matter communicated with those charged with governance may increase the likelihood of the auditor identifying that matter as a key audit matter.
In addition to matters that relate to the specific required considerations in paragraph 9, 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 in accordance with paragraph 10. 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 report. 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).
Areas of Higher Assessed Risk of Material Misstatement, or Significant Risks Identified in Accordance with ASA 315 (Ref: Para. 9(a))
ASA 260 requires the auditor to communicate with those charged with governance about the significant risks identified by the auditor.[23] Paragraph A13 of ASA 260 explains that the auditor may also communicate with those charged with governance about how the auditor plans to address areas of higher assessed risks of material misstatement.
ASA 315 defines a significant risk as an identified risk of material misstatement for which the assessment of inherent risk is close to the upper end of the spectrum of inherent risk due to the degree to which the inherent risk factors affect the combination of the likelihood of a misstatement occurring and the magnitude of the potential misstatement should that misstatement occur.[24] Areas of significant management judgement and significant unusual transactions may often be identified as significant risks. Significant risks are therefore often areas that require significant auditor attention.
However, this may not be the case for all significant risks. For example, ASA 240 presumes that there are risks of fraud in revenue recognition and requires the auditor to treat those assessed risks of material misstatement due to fraud as significant risks.[25] In addition, ASA 240 indicates that, due to the unpredictable way in which management override of controls could occur, it is a risk of material misstatement due to fraud and thus a significant risk.[26] Depending on their nature, these risks may not require significant auditor attention, and therefore would not be considered in the auditor’s determination of key audit matters in accordance with paragraph 10.
ASA 315 explains that the auditor’s assessment of the risks of material misstatement at the assertion level may change during the course of the audit as additional audit evidence is obtained.[27] Revision to the auditor’s risk assessment and re‑evaluation of the planned audit procedures with respect to a particular area of the financial report (i.e., a significant change in the audit approach, for example, if the auditor’s risk assessment was based on an expectation that certain controls were operating effectively and the auditor has obtained audit evidence that they were not operating effectively throughout the audit period, particularly in an area with higher assessed risk of material misstatement) may result in an area being determined as one requiring significant auditor attention.
Significant Auditor Judgements Relating to Areas in the Financial Report that Involved Significant Management Judgement, Including Accounting Estimates that Are Subject to a High Degree of Estimation Uncertainty (Ref: Para. 9(b))
ASA 260 requires the auditor to communicate with those charged with governance the auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures.[28] In many cases, this relates to critical accounting estimates and related disclosures, which are likely to be areas of significant auditor attention, and also may be identified as significant risks.
However, users of the financial report have highlighted their interest in accounting estimates that are subject to a high degree of estimation uncertainty (see ASA 540[29]) that may have not been determined to be significant risks. Among other things, such estimates are highly dependent on management judgement and are often the most complex areas of the financial report, and may require the involvement of both a management’s expert and an auditor’s expert. Users have also highlighted that accounting policies that have a significant effect on the financial report (and significant changes to those policies) are relevant to their understanding of the financial report, especially in circumstances where an entity’s practices are not consistent with others in its industry.
The Effect on the Audit of Significant Events or Transactions that Occurred during the Period (Ref: Para. 9(c))
Events or transactions that had a significant effect on the financial report or the audit may be areas of significant auditor attention and may be identified as significant risks. For example, the auditor may have had extensive discussions with management and those charged with governance at various stages throughout the audit about the effect on the financial report of significant transactions with related parties or significant transactions that are outside the normal course of business for the entity or that otherwise appear to be unusual.[30] Management may have made difficult or complex judgements in relation to recognition, measurement, presentation or disclosure of such transactions, which may have had a significant effect on the auditor’s overall strategy.
Significant economic, accounting, regulatory, industry, or other developments that affected management’s assumptions or judgements may also affect the auditor’s overall approach to the audit and result in a matter requiring significant auditor attention.
Matters of Most Significance (Ref: Para. 10)
Matters that required significant auditor attention also may have resulted in significant interaction with those charged with governance. The nature and extent of communication about such matters with those charged with governance often provides an indication of which matters are of most significance in the audit. For example, the auditor may have had more in‑depth, frequent or robust interactions with those charged with governance on more difficult and complex matters, such as the application of significant accounting policies that were the subject of significant auditor or management judgement.
The concept of matters of most significance is applicable in the context of the entity and the audit that was performed. As such, the auditor’s determination and communication of key audit matters is intended to identify matters specific to the audit and to involve making a judgement about their importance relative to other matters in the audit.
Other considerations that may be relevant to determining the relative significance of a matter communicated with those charged with governance and whether such a matter is a key audit matter include:
The importance of the matter to intended users’ understanding of the financial report as a whole, in particular, its materiality to the financial report.
The nature of the underlying accounting policy relating to the matter or the complexity or subjectivity involved in management’s selection of an appropriate policy compared to other entities within its industry.
The nature and materiality, quantitatively or qualitatively, of corrected and accumulated uncorrected misstatements due to fraud or error related to the matter, if any.
The nature and extent of audit effort needed to address the matter, including:
The extent of specialised skill or knowledge needed to apply audit procedures to address the matter or evaluate the results of those procedures, if any.
The nature of consultations outside the engagement team regarding the matter.
The nature and severity of difficulties in applying audit procedures, evaluating the results of those procedures, and obtaining relevant and reliable evidence on which to base the auditor’s opinion, in particular as the auditor’s judgements become more subjective.
The severity of any control deficiencies identified relevant to the matter.
Whether the matter involved a number of separate, but related, auditing considerations. For example, longterm contracts may involve significant auditor attention with respect to revenue recognition, litigation or other contingencies, and may have an effect on other accounting estimates.
Determining which, and how many, of those matters that required significant auditor attention were of most significance in the audit of the financial report of the current period is a matter of professional judgement. The number of key audit matters to be included in the auditor’s report may be affected by the size and complexity of the entity, the nature of its business and environment, and the facts and circumstances of the audit engagement. In general, the greater the number of matters initially determined to be key audit matters, the more the auditor may need to reconsider whether each of these matters meets the definition of a key audit matter. Lengthy lists of key audit matters may be contrary to the notion of such matters being those of most significance in the audit.
Section Determining Key Audit Matters (Ref: Para - ASA 701 - Communicating Key Audit Matters in the Independent Auditor’s Report - December 2015 - Determining Key Audit Matters (Ref: Para. 9—10) | Zoe