SA 701 requires the auditor, for listed entities, to communicate key audit matters in the auditor's report — the matters that, in the auditor's professional judgment, were of most significance in the audit of the current period. The standard sets out an explicit three-step narrowing process: starting from matters already communicated to those charged with governance, identifying which of those required significant auditor attention, and then determining which of those were of MOST significance — meaning not every significant risk identified during planning automatically becomes a KAM, and a report naming everything as a key matter has likely skipped the final narrowing step.
The three-step process
- 01Start from matters communicated to those charged with governanceA KAM must come from this set — it's not a separate list compiled only for the report, it draws on the governance communication the audit already required.
- 02Identify which required significant auditor attentionAreas with higher assessed risk of material misstatement, areas involving significant auditor judgment (particularly accounting estimates with high estimation uncertainty), and the effect of significant events or transactions during the period are the standard's named starting factors.
- 03Determine which were of most significanceThe final, genuinely judgmental narrowing — typically resulting in a small number of matters, not a restated risk register.
A KAM section listing every area that received audit attention, rather than a focused handful of matters of MOST significance, has not actually applied SA 701's narrowing requirement — it has substituted a general risk summary for the specific judgment the standard asks for.
What each KAM description must contain
- Why the matter was considered one of most significance in the audit, framed with reference to this specific entity's circumstances, not a generic description applicable to any company.
- How the matter was addressed in the audit — a description specific enough to be meaningful, without disclosing information the entity itself hasn't disclosed, and without the description itself becoming an opinion on the matter.
- Where relevant, a reference to the related disclosure in the financial statements, so a reader can connect the KAM to the entity's own reporting on it.
What a KAM is explicitly not
| Mistake | What SA 701 actually says |
|---|---|
| Treating KAM disclosure as a form of modified opinion | A KAM is communicated within an unmodified opinion — it highlights a matter of significance, it does not express reservation about it the way a qualification would |
| Using a KAM to disclose something the entity itself should have disclosed but didn't | The auditor's original disclosure obligation if a required disclosure is missing is addressed elsewhere (as a potential modification), not solved by writing about it in the KAM section instead |
| Treating the absence of KAMs as unusual | An audit with no matters rising to "most significant" can validly have no KAMs — though SA 701 expects this to be rare in practice for a listed entity of any real complexity |
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Audit workflow & automationSA 700: forming an opinion, and what "true and fair" actually requires concluding onFinishing every planned procedure isn't the same as forming an opinion. SA 700 is the step that happens after the checklist, not instead of it.
- Audit workflow & automationSA 315: identifying and assessing the risks of material misstatementA risk assessment that doesn't name a specific assertion isn't a risk assessment under SA 315 — it's a general impression written down.
- Audit workflow & automationSA 706: emphasis of matter and other matter paragraphs, and when each appliesBoth paragraphs sit inside an unmodified opinion. The difference is what they're pointing at — something already in the financial statements, or something outside them.
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