Isa 701 Smart Notes
Isa 701 Smart Notes
Isa 701 Smart Notes
T h o s e m a tt e r s th at in auditor ’s professional
j u d g e m e n t were of m o s t s i g n i fi c a n c e in the audit
WHAT IS of FS of C u r re nt period ( e v e n if c o m p a r a ti v e FS
K E Y AU D I T M AT T E R S ? a r e p re s e n te d ) . K e y a u d i t m a tt e r s a r e s e l e c te d
f ro m m a tt e r s c o m m u n i c a t e d to t h o s e c h a r g e d
with g o v e r n a n c e .
M a n u fa c t u r i n g
Audit B a n k Audit
Advances
Inventory
I nve st m e nt
PPE Borrowing
Deposits
The nature and extent of communication with those charged with governance provides an indication of which matters are of
most significance. Other consideration in determining the relative significance of a matter include
Impor t a n d s a l e LNG
S i g n i fi ca nt Auditor ’s
att enti on
C o m p a n y ’s F i n a n c i a l S t a t e m e n t
P&L
YES (Key Audit Matter)
Revenue Diffi cult to verify
NO
Free re p a i r a n d m a i n t a i n a n c e for 1 y e a r s
Free S e r v i c e for 5 y e a r s
E sti m ate s , eff orts a n d ti m e not invo l ve d E sti m ate s , eff orts a n d ti m e not invo l ve d
ISA 701 KEY AUDIT MATTERS
Substantive Procedure
P&L
Purchases
OCCURRENCE c h e c k GDN
COMPLETENESS c h e c k GDN
T h e s e a r e not KAM
ISA 701 KEY AUDIT MATTERS
BALANCE SHEET
Inventory I m p a i r m e n t - KAM
PPE I m p a i r m e n t - KAM
Re c e i va b l e I m p a i r m e n t - KAM
Paya b l e
C a s h bank
Bank loan
Pre p a y m e n t UNILEVER Audit O G D C L Audit
K e y Audit Matt er
I m p a i r m e n t of inventory
W h y this m a tt e r w a s c o n s i d e r e d to b e o n e of the m o s t
s i g n i fi c a nt in the a u d i t of the fi n a n c i a l s t a t e m e n t ?
W h a t a r e the ke y a u d i t p r o c e d u r e a n d h o w t h ey a r e
addressed ?
ISA 701 KEY AUDIT MATTERS
I m p a i r m e n t of inventory
Refer to note 4 of t h e s e fi n a n c i a l s t a t e m e n t s
Include a w h e re inventory h a d b e e n r e c o r d e d a t a n
refernce
to a related a m o u n t of Rs. 4 0 0 M or i m p a i r m e n t of
disclosure,if any ! inventory h a d b e e n r e c o r d e d a t a n a m o u n t
of Rs. 400M.
I m p a i r m e n t of inventory
O b ta i n the u n d e r s t a n d i n g of the
m a n a g e m e n t p r o c e s s to r e c o rd i m p a i r m e nt ,
What are the key
audit procedure test the controls over the r e c o rd i n g of
and how they are i m p a i r m e n t , c h e c k whether the a s s u m p ti o n s
addressed ?
used by m a n a g e m e n t are reasonable a n d
p e r fo r m s u b s t a n ti v e procedure.
ISA 701 KEY AUDIT MATTERS
Provision for wa r ra nt y
Provision for wa r ra nt y
Obtain the u n d e rs t a n d i n g of the
m a n a g e m e n t p r o c e s s of provision for
What are the key warranty, test the controls, c h e c k whether the
audit procedure a s s u m p ti o n s , n u m b e r of c l a i m s , nat ure of
and how they are
addressed ? c l a i m s , c o s t of c l a i m s u s e d b y m a n a g e m e n t
a r e r e a s o n a b l e a n d perform s u b s e q u e n t event
procedure.
ISA 701 KEY AUDIT MATTERS
PLANNING
Materiality
Judgements
Esti mates
Substanti ve
procedure
ISA 701 KEY AUDIT MATTERS
W h y this m a tt e r w a s c o n s i d e r e d to b e o n e of the m o s t
s i g n i fi c a nt in the a u d i t of the fi n a n c i a l s t a t e m e n t ?
W h a t a r e the ke y a u d i t p r o c e d u r e a n d h o w t h ey a r e
addressed ?
ISA 701 KEY AUDIT MATTERS
K e y Audit Matt er a p p l i e s to a u d i t of c o m p l e t e s et of
g e n e ra l p u r p o s e fi n a n c i a l s t a t e m e n t s of listed enti ti es.
CO M PA N Y
I m p a i r m e n t of inventory not re c o rd e d
Modifi ed opinion K e y a u d i t m a tt e r
X
Not the substi tute of
Qualifi ed A d v e rs e modifi ed opinion
CO M PA N Y
Do not p rov i d e d i s c l o s u re
C a s e / liti gati on a g a i n s t c o m p a n y
D i s c l o s e in KAM
COMPANY
C o m m u n i c a t e in KAM Management
Unm o di fi e d opinion
Qualifi ed opinion d u e to
m a te r i a l m i s s t a t e m e n t
Qualifi ed opinion d u e to
s c o p e limitati on
A d v e r s e d opinion
Disclaimer
C o m p a n y Audit
Events or co n d i ti o n s t ri g ge re d
G o i n g c o n c e r n a s s u m p ti o n is a p p ro p r i ate
( d o e s not intend to liq u idate )
A d e q u a te l y d i s c l o s e d in F.S
ISA 570 Concept of Going Concern
Ye s No AB + AD U n m o d i fi e d Opinion ?
A B + AD A d v e r s e Opinion
A d v e r s e Opinion
No ? A B + AD
U nmodifi ed MURTGC
Ye s
Material + Pe r va s i ve
Ye s A d v e r s e Opinion
A d e q u a te l y
Disclosed M is state m e nt Material
No
Qualifi ed Opinion
ISA 701 KEY AUDIT MATTERS
KAM ?
YES !
ISA 701 KEY AUDIT MATTERS
Going concern
How to c o m m u n i c a t e g o i n g c o n c e r n in KAM?
Material Uncertainty
Ke y Audit Matt er VS Relati ng to G o i n g C o n c e r n
ISA 701 KEY AUDIT MATTERS
Opinion
B a s i s for Opinion
PPE
INVENTORY
RECEIVABLE
Introductory
paragraph
In a d d i ti o n to m a tt e r a s d e s c r i b e d in m a te r i a l u n c e r ta i n i t y relati ng
to g o i n g c o n c e r n secti on, following a r e the ke y a u d i t matt ers .
I m p a i r m e n t of PPE I m p a i r m e n t of inventory I m p a i r m e n t of re c e i va b l e
ISA 701 KEY AUDIT MATTERS
Listed c o m p a n y aud i t
I m p a i r m e n t of I m p a i r m e n t of I m p a i r m e n t of
PPE Inventory Re c e i va b l e
M a n a g e m e n t h a s not re c o rd e d
i m p a i r m e n t of inventory
KAM M i s state m e n t
ISA 701 KEY AUDIT MATTERS
FINANCIAL
STATEMENTS = IFRS
ON ACCOUNT OF
SELECTION OF APPLICATION OF
ACCOUNTING ACCOUNTING DISCLOSURE
POLICY POLICY
MATERIAL
MATERIAL +
PERVASIVE
YES YES
Qualified Opinion Adverse Opinion
ISA 701
(KAM)
Impairment VS
of Inventory
ISA 705
(MODIFIED OPINION)
Opinion ( m o d i fi e d )
In a d d i ti o n to the m a tt e r a s d e s c r i b e d in b a s i s of qualifi ed
opinion secti on , following a r e the ke y a u d i t matt ers .
I m p a i r m e n t of PPE I m p a i r m e n t of re c e i va b l e I m p a i r m e n t of inventory
ISA 701 KEY AUDIT MATTERS
A s s e t = Rs.100
YES NO
ISA 701 KEY AUDIT MATTERS
C O M PA N Y
G o i n g c o n c e r n d i s c l o s u r e is not a d e q u a t e
AUDIT
A d v e r s e d opinion
KAM F.S
Inventory
IFRS
Re c e i va b l e
PPE
ISA 701 KEY AUDIT MATTERS
In a d d i ti o n to the m a tt e r a s d e s c r i b e d in b a s i s for a d v e r s e
opinion secti on , following a r e ke y a u d i t matt ers .
I m p a i r m e n t of PPE I m p a i r m e n t of inventory I m p a i r m e n t of re c e i va b l e
ISA 701 KEY AUDIT MATTERS
A d v e r s e opinion
T h e s e F inancial S t a te m e n t s a r e not p re p a re d in a c c o r d a n c e
with IFRS.
Introductory Pa ra g ra p h :
T h e auditor s h a l l d e s c r i b e e a c h ke y a u d i t matt er, u s i n g a n
a p p ro p r i a te s u b h e a d i n g , in a s e p a r a t e s e c ti o n of the auditor ’s
report u n d e r the h e a d i n g “ Key Audit Matt ers,” Th e
introductory l a n g u a g e in this s e c ti o n of the auditor ’s report
s h a l l state that
A re a of Fo c u s
Evaluati on of controls
Inquiry with the m a n a g e m e n t
S e n d external confi rmati on to law yer
Evaluati on of a d e q u a c y of dis clos ure NO
Qualified opinion
Disclaimer
ISA 701 KEY AUDIT MATTERS
Disclaimer
Unless required b y law or regulati on,when the auditor d i s c l a i m s
a n opinion o n the fi nancial statements , the auditor ’s report shall
not i ncl ud e KAM s ecti on in a c c o r d a n c e with ISA 701.
No KAM
Startup
Listed
c ompany Operati ons
not sta rte d Ke y Audit Matt ers
We h a v e n o t h i n g to report in this
Dormant regaerd.There a re n o KAM in this
company c o m p a n y.
ISA 701 KEY AUDIT MATTERS
T h e auditor s h a l l d e s c r i b e e a c h ke y a u d i t m a tt e r
in the auditor ’s report unless:
In extremely rare c i r c u m s t a n c e s
The auditor determines that the matter should not be communicated in the auditor’s
report because the adverse consequences of doing so would reasonably be expected
to outweigh the public interest benefits of such communication. This shall not apply
if the entity has publicly disclosed information about the matter.
ISA 701 KEY AUDIT MATTERS
Defi niti on
How to identi fy?
How to c o m m u n i c a t e ?
KAM V S Other e l e m e n t s
KAM is not substi tute
Applicability
Excepti on
ISA 701 KEY AUDIT MATTERS
T h e m a tt e r s t hat required s i g n i fi ca nt
audito r ’s att enti on a n d the rati onale
for the a udito r ’s d ete r m i n ati o n a s to
whet he r or not e a c h of t h e s e m a tt e r s
is a ke y a u d i t matt er.
The nature and extent of communication with those charged with governance provides an indication of
which matters are of most significance. Other consideration in determining the relative significance of a
matter include
Nature of the
Nature and severity Importance of the
Nature and underlying Nature and
of difficulties in Severity of matter to intended
extent of accounting policy or materiality of
applying audit any control users’ understanding
complexity or corrected and
audit effort procedures or deficiencies of the financial subjectivity in
needed. to statements as a uncorrected
obtaining relevant related to the management’s misstatements
address and reliable audit matter. whole, in particular its selection of an
materiality to the related to the
the matter. evidence. appropriate matter.
financial statements. accounting policy.
ISA KEY AUDIT MATTERS PRACTICE
701 QUESTIONS
(a)
Company’s Financial
Statement
Matters that required Most significant
Matters discussed with
significant auditor matter (KAM)
BOD
attention
Disclaimer
Unless required by law or regulation,when the auditor
disclaims an opinion on the financial statements, the auditor’s
report shall not include KAM section in accordance with ISA
701.
Required:
Draft how the above matter would be reported in the key audit matter section of the
audit report. (You may assume necessary details)
ISA KEY AUDIT MATTERS PRACTICE
701 QUESTIONS
PROCEDURES
Inquiry of management including in
house legal counsel
TECHNIQUES
Reviewing minutes of the meeting of
TCWG
(i)RL has pending tax litigation in which tax department has raised demand aggregating Rs. 175 million. The
demand has been challenged by RL and the decision in respect of this matter is currently
pending. The amount is disclosed as a contingent liability in the financial statements.
(ii) RL makes significant purchases from related parties and also incurs significant advertising
expenses through related parties. These transactions are properly disclosed as related party
transactions in the financial statements.
(iii) RL has decided to sell a manufacturing facility located in Faisalabad having a carrying value
of Rs. 300 million and would replace it with another facility in Gujranwala. The manufacturing
facility has been classified as non-current assets held for sale.
Required:
Draft the key audit matters section to be included in the audit report of RL relating
to the above matters. (You may assume necessary details where required)
ISA 701 KEY AUDIT MATTERS PRACTICE
QUESTIONS
(i) Include a reference to a related disclosure, if
any !
PROCEDURES
Inquiry of management including in
house Tax counsel
TECHNIQUES
Reviewing minutes of the meeting of
TCWG
Required:
Adverse opinion
These Financial Statements are not prepared in
accordance with IFRS.
ISA KEY AUDIT MATTERS PRACTICE
701 QUESTIONS
(b)
(c)