What is the difference between Key Audit Matters under SA 701 and an Emphasis of Matter paragraph under SA 706?
GradeHunt_TeamGradeHunt Team · · CA Final
In CA Final Audit I keep mixing up KAM and Emphasis of Matter. Both seem to point the reader to something important in the audit report. When do I report a matter as KAM and when as EOM? Can the same matter be both?
sa 701sa 706key audit mattersemphasis of matteraudit report
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Both draw attention to a matter without changing the opinion, but they answer different questions.
Key Audit Matters (SA 701)
- What: matters that, in the auditor's judgment, were of most significance in the audit of the current period's financial statements.
- Picked from: matters communicated with those charged with governance, narrowed to those that needed significant auditor attention. SA 701 asks the auditor to consider higher assessed risks or significant risks, areas of significant management judgment and estimates with high uncertainty, and the effect of significant events or transactions in the period.
- Applies to: audits of complete sets of general purpose financial statements of listed entities, and where the auditor decides to report KAM or law or regulation requires it.
- Focus: the audit, meaning what was hard to audit and how the auditor dealt with it.
Emphasis of Matter paragraph (SA 706)
- What: a matter already properly presented or disclosed in the financial statements that is so important it is fundamental to users' understanding of them.
- Conditions: the matter must not need a modified opinion under SA 705, and where SA 701 applies, it must not have been determined to be a KAM.
- Focus: the financial statements, meaning a disclosure the reader must not miss.
Can the same matter be both? No. If a matter is a KAM, it goes in the KAM section, and the auditor can show its importance there (for example by listing it first). An EOM is not a substitute for describing KAMs.
Example for a listed company:
- Revenue on long-term contracts recognised using management's estimates of costs to complete. High estimation uncertainty and heavy audit effort make this a KAM.
- A fire destroys a plant two weeks after the year end. The company discloses it as a non-adjusting event. It took little audit effort, so it is not a KAM, but readers must know about it, so it goes in an EOM paragraph.
Also remember: neither KAM nor EOM replaces a modified opinion, and a material uncertainty about going concern is reported in its own section under SA 570, not as an EOM.
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