March 6, 2020
KAM: A Key Change to Auditor’s Reports
After years of very few changes, the AICPA issued a suite of new auditing standards; the most significant one is Statement on Auditing Standards (SAS) No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements. SAS 134 transformed the independent auditor’s report by rearranging the content and making it more descriptive. Additionally, the standard established AU-C 701, Communicating Key Audit Matters in the Independent Auditor’s Report. Key Audit Matters (KAMs) are defined as:
“Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.”
Fortunately, KAM reporting in the auditor’s report is optional and at the discretion of the entity being audited. The concept of KAMs is not new. It was first introduced by the International Auditing and Assurance Standards Board (IAASB). Similar to the AICPA requirements, IAASB KAMs are tailored to the individual entity and are selected from matters communicated to those charged with governance. IAASB audits of listed entities have included KAM reporting for several years providing helpful guidance for KAM reporting. The PCAOB adopted a similar, but less broad, version known as Critical Audit Matters.
KAMs may include areas of significant audit risk, areas requiring significant estimation and judgment by management, or other major events the entity experienced during the current period under audit.
Examples of KAMs include:
- Significant estimates
- Significant unusual transactions
- Income taxes
- Implementation of new IT systems that have a significant impact on financial reporting
- Areas with audit adjustments and/or internal control deficiencies
Once engaged to report on KAMs, auditors are responsible for identifying and communicating KAMs. The auditor must describe the KAM, why it was deemed one of the most significant matters and how it was addressed during the audit. The auditor is required to discuss KAMs with those charged with governance and should do so throughout the audit.
When determining whether to engage the auditor to report on KAMs, an entity is encouraged to consider the needs of the intended users of its financial statements and the entity’s view about sharing the information communicated in KAMs to such users.
The suite of auditing standards are effective for audits of financial statements for periods ending on or after December 15, 2020. As KAMs reporting is optional, entities will need to decide whether to elect KAM reporting. As organizations change over time, an entity that does not elect KAM reporting now may add the reporting in a future period.