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Implementing key audit matters in the auditor’s report

Auditors need a process for communicating key audit matters in the auditor’s report. Learn about this requirement and access free guidance materials featuring lessons learned from auditors who have begun implementing this new reporting standard.

Increasing the value of the auditor's report

The auditor’s report is the key deliverable that communicates the overall results of the audit performed for the current period. For some time now, investors and other financial statement users have asked the auditor to move away from the typical binary pass/fail auditor’s opinion to something a little more informative and transparent.

Since 2017, the Auditing and Assurance Standards Board (AASB) has been working to increase the communicative value of the auditor’s report by providing further transparency about the audit performed. The AASB believes enhanced transparency is critical to the perceived value of the financial statement audit.

The revised auditor reporting standards include some key changes to the standard auditor’s report. For example, the auditor’s opinion is now presented at the beginning of the report, statements relating to management and the auditor’s responsibilities are enhanced, and for listed entities, the name of the engagement partner is disclosed. These changes took place for audits of financial statements for periods ending on or after December 15, 2018.

However, the biggest change of all is the new section of the report communicating Key Audit Matters (KAMs). The AASB decided to implement the communication of KAMs as set out in CAS 701, Communicating Key Audit Matters in the Independent Auditor’s Report, using a staggered approach to the effective date.

The AASB is supporting the implementation of this key change with some new resources to help audit firms develop strong processes for a successful implementation. These are particularly important for small and medium-sized firms that audit entities listed on stock exchanges other than the Toronto Stock Exchange (TSX).

What are KAMs?

KAMs are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the entity’s financial statements of the current period. The starting point for identifying KAMs is the entire population of matters communicated to those charged with governance related to the audit of the current period.

KAMs are described in a separate section of the auditor’s report under the subheading “Key Audit Matters.” Each KAM has its own description. The description includes why the matter was of significance in the current period audit and therefore determined to be a KAM and the relevant audit procedures the auditor performed to address the matter. The description of the KAM is to be specific to each entity and written in a way that is useful to users, while avoiding boilerplate language and auditor jargon.

It is important to note that just because these matters have been highlighted in the auditor’s report, the auditor is not providing a separate opinion on them. KAMs are addressed in the context of the audit of the financial statements as a whole.

Effective date for KAM reporting in Canada

The AASB agreed to a staggered implementation of the KAM requirements, requiring TSX listed entities to communicate KAMs in the auditor’s report first, followed by other listed entities.

CAS 701 is effective for:

  • entities listed on the TSX, excluding those required to comply with National Instrument (NI) 81-106, Investment Fund Continuous Disclosure, for audits of financial statements for periods ending on or after December 15, 2020
  • other listed entities, excluding those required to comply with NI 81-106, for audits of financial statements for periods ending on or after December 15, 2022

It also applies to entities for periods ending on or after December 15, 2018, when:

  • the auditor decides to communicate KAMs in the auditor’s report; or
  • the auditor is required by law or regulation to communicate KAMs in the auditor’s report.

Canada vs. others

KAM reporting has been in effect in jurisdictions around the world for some time now. In fact, Australia and New Zealand are entering their fourth year of communicating KAMs in the auditor’s report.

Canada is catching up to other jurisdictions in communicating KAMs in the auditor’s report. At the same time as the International Auditing and Assurance Standards Board undertook a project to enhance its auditor reporting standards, the Public Company Accounting Oversight Board (PCAOB) in the United States did so as well. The PCAOB adopted a similar standard requiring auditors to communicate Critical Audit Matters (CAMs) in the auditor’s report. The AASB felt it appropriate to delay KAM reporting in Canada until the PCAOB finalized its auditor reporting standards, given the close integration of the capital markets in Canada and the United States. The PCAOB required CAMs to be communicated in the auditor’s reports for large, accelerated files with fiscal years ending June 30, 2019 and onwards. The effective date for all other filers for which the CAM requirements are applicable is for fiscal years ending on or after December 15, 2020.

Gaining hands-on experience through practice runs

Over the past year and a half, audit firms of TSX listed entities have been developing processes to support the effective communication of KAMs in the auditor’s report.

AASB staff interviewed representatives from some audit firms to understand the nature of the processes they implemented relating to identifying and communicating KAMs, and how well these processes worked. The objective of the interview was for AASB staff to understand the challenges encountered when implementing the requirements, where auditors may need further guidance, and the lessons learned.

Audit firms indicated that an important part of the process was to undertake “practice runs” with their clients. This meant taking the prior year’s audited financial statements as a base, identifying and drafting KAMs, and applying the communication requirements as if it was the live setting. The firms told the AASB that it was a useful and beneficial experience in preparing for 2020 year-end audits. It allowed firms to gather initial feedback on firm tools and guidance that were developed to implement KAM reporting. Management and the audit committee also benefited from the exercise as it helped them understand what to expect in the upcoming year.

Some of the insights noted include:

  • Starting early. The earlier, the better. Plan accordingly. Identify KAMs early. Draft KAMs early. Discuss them with management and the audit committee early.
  • Setting up appropriate processes for training senior staff, conventions for identifying and describing KAMs on engagements, as well as review and consultation processes. These processes can promote consistent approaches across the firm that can help auditors comply with the requirements of the standard and strengthen the communication value of the KAM for intended users.

The most important insight of all is that identifying, drafting, and communicating KAMs in the auditor’s report is a continuous learning process. While Canada has had the opportunity to learn from the experiences of other countries around the world, the first year of implementation will be the most challenging. As Canadian auditors move forward, it is important to remain committed to the enhanced auditor reporting standards through the development of meaningful and relevant KAMs for the intended users of the auditor’s report.

KAM implementation guidance

AASB staff leveraged the insights learned from the audit firm interviews and developed three pieces of implementation guidance that it hopes will assist auditors in successfully implementing the communication of KAMs in the auditor’s report:

  1. Key Audit Matters: Lessons Learned by Firms Implementing KAM Communications on Audits of TSX Listed Entities
    Identifying and Communicating KAMs in the Auditor’s Report — This guidance provides considerations for a practitioner when identifying and communicating KAMs in the auditor’s report, including lessons learned in describing KAMs in the auditor’s report.
  2. Key Audit Matters: Lessons Learned by Firms Implementing KAM Communications on Audits of TSX Listed Entities
    Roadmap to Developing a Successful KAM Implementation Process — This guidance explores a timeline and roadmap for small and medium sized audit firms to follow in developing a successful KAM implementation process. It addresses what types of processes to establish and considerations for practice runs.
  3. Key Audit Matters: Insights for Stakeholders
    Frequently Asked Questions — This guidance is designed for users of the auditor’s report, including audit committee members, management, and other stakeholders who rely on the financial statements and the accompanying auditor’s report in their decision making. It answers frequently asked questions a stakeholder may have.

Keep the conversation going

Have you begun to implement CAS 701 in your firm? What questions do you have about the standard and its implementation? Post a comment below or email me directly.

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The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.