Concept of the key audit matter (KAM)

The concept of a KAM was borne out of investor demand for more detail on the audit process: more contextual information to help investors differentiate between the large number of companies that receive 'clean' audit reports. The KAM requires the auditor to set out, in a separately identified section of the audit report, those matters that:

'…in the auditor's professional judgement, were of most significance in the audit of the financial statements of the current period…selected from matters communicated with those charged with governance'

This requirement, mandatory for listed companies only, was included within a new auditing standard, ISA 701.

Interview quote from auditor in Cyprus Interview quote from auditor in Cyprus

Hidden benefits of KAMs

One year on and we see that KAMs can go beyond the initial justification of useful information for investors. There are additional benefits:

  1. KAMs encourage better conversations between the auditor and those charged with governance; this in turn contributes to better governance
  2. KAMs help the auditor to focus on the areas of the audit requiring the most careful judgement; this in turn contributes to higher audit quality
  3. KAMs give preparers incentives to revisit financial reporting and disclosures in areas related to those KAMs; this in turn contributes to higher quality financial reporting. 

ACCA calls for a balanced view 

ACCA's research identified some varied practice in relation to the number of KAMs reported and the ways in which emphases of matter were reported. However, regulators must reflect on the benefits of KAMs when enforcing auditing standards.

There is a risk that focusing too heavily on the precise requirements of auditing standards may lead to a 'tick box approach' to KAMs by some auditors, thus losing the opportunity to communicate more effectively with audit committees and to stimulate better reporting.

Participant views

Across five roundtables in the study, we also heard the following views:

  • Audit reports now contain much more useful information, but reports are much longer 
  • There are concerns about the complexity of language in KAMs
  • Some users may have been left behind 
  • There is some interest in KAMs from large unlisted companies.
Further reading