Transparency of financial statements, especially for public entities, is very important for its users. The financial statements are not only used to assess the financial performance and cash flows of the entity within a certain period of time, but are also used as considerations in making strategic decisions for its users.
International Standards on Auditing (ISA) 701 regarding “Communicating Key Audit Matters in the Independent Auditor’s Report”, was adopted into SA 701. SA 701 is a form of increasing transparency in the entity’s financial statements from the side of the audit to be carried out, as well as increasing the communicative value of the independent auditor’s report. especially for entities that have become issuers.
Key Audit Matters (KAM) is one or several matters which in the auditor’s professional judgment are significant issues in the audit process of the financial statements for the period. Pursuant to ISA 701, the auditor is responsible for communicating to users of financial statements regarding major audit matters in the independent auditor’s report (his audit opinion). KAM communications will help users understand the entity and matters relating to significant management judgments in the audited financial statements.
SA 701 brings changes to the contents of the independent auditor’s report, where through this adoption the auditor is required to make disclosures regarding KAM in a separate section. There is no limit regarding the extent of KAM disclosures that need to be communicated in the independent auditor’s report.
Even though different entities are in the same industry, they can have different KAMs from one another. This is because the determination of KAM is strongly influenced by the professional judgment of the auditor and the specific conditions of the entity concerned.
The determination of KAM to be disclosed in the independent auditor’s report is a crucial matter. KAM must be selected from matters that have been communicated to the Persons Responsible for Governance or Those Charge With Governance (TCWG) of the entity. From these matters, the auditor must select matters of significant concern in the auditor’s professional judgment.
In making a determination, there are several factors that can influence the judgment of the auditor, namely,
- Items or areas that have a high and significant risk,
- Matters relating to management’s judgments, where those judgments indicate uncertainty, and
- The effect of significant events that occurred during the audit period.
After that, the auditor identifies the most significant matters to be disclosed in the independent auditor’s report.
Based on ISA 701, there are several examples of KAM that could be significant in the auditor’s professional judgment such as,
- asset impairment issues,
- accounting estimates for provisions,
- accounting estimates for financial instruments,
- valuation of accounts receivable and
- specific accounting for a particular industry
Therefore, it can be concluded that KAM is significantly affected by its size, area and complexity, nature and business environment, as well as facts and circumstances encountered by the auditor during the audit process.
In addition to providing transparency for users of financial statements, the application of SA 701 also provides other benefits that are beneficial for both the entity and the TCWG. These benefits include, among others, an incentive to provide information regarding the assumptions used in relation to accounting estimates and management’s judgments on certain accounting practices in order to increase public confidence in the entity.
The adoption of SA 701 as the latest auditor reporting standard on KAM communication in the independent auditor’s report was ratified in July 2021. This SA 701 will be effective for audits of financial statements for the period beginning on or after January 1, 2022. Disclosure of KAM in this independent auditor’s report is expected to improve the quality of disclosure of financial statements, especially for public entities.
(Source : SA 701, Web IAPI)