Must Key Audit Matters change from year to year?

Not necessarily. If the same matter continues to be of most significance year after year (e.g., goodwill impairment for an entity with significant goodwill), it may remain a KAM. However, the description should be updated to reflect the current year's circumstances and audit response. Recycling identical text from prior years is a deficiency.

ISA 701: Key Audit Matters in the Auditor's Report

The AFM’s 2024 thematic review of listed entity reports concluded that boilerplate language in Key Audit Matters remains the single most common finding, with goodwill impairment and revenue recognition descriptions often nearly identical across entities in the same industry. In our experience the misread is that teams treat KAM as a disclosure exercise. They aren’t. ISA 701 doesn’t ask what you want to tell the reader. It asks what required the most significant auditor attention during the audit and why. The difference matters because KAMs that read like disclosure summaries get flagged by regulators, while those that explain what the auditor actually did build the credibility the standard was designed to create.

Under ISA 701, Key Audit Matters (KAMs) are matters that, in the auditor’s professional judgment, were of most significance in the audit of the current period financial statements (FS), selected from matters communicated with those charged with governance and required for audits of listed entities.

Key Takeaways

ISA 701 introduced the concept of Key Audit Matters (KAM): matters that, in the auditor’s professional judgment, were of most significance in the audit of the current period’s financial statements. KAM are selected from matters communicated with those charged with governance.
The standard is mandatory for listed entities. It also applies when law or regulation requires KAM disclosure or when the auditor voluntarily decides to communicate KAM.
The determination of KAM follows a funnel process: start with all matters communicated to those charged with governance → narrow to those requiring significant auditor attention → narrow further to those of most significance in the audit.
Three required considerations guide the determination: (1) areas of higher assessed risk or significant risks, (2) significant auditor judgments relating to areas involving significant management judgment (including high estimation uncertainty), and (3) the effect of significant events or transactions during the period.
Each KAM description must include: why the matter was considered most significant (the “what and why”), how the matter was addressed in the audit (the audit response), and a reference to related disclosures in the financial statements.
KAM descriptions must be entity-specific and audit-specific. Boilerplate or generic descriptions defeat the purpose of the standard. The auditor should avoid providing original information about the entity that management has not already disclosed.
When the auditor expresses a disclaimer of opinion, KAM must not be communicated (unless required by law), because doing so could suggest the audit provided more assurance than it actually did.

Table of contents

What is ISA 701?
The KAM determination process
Communicating KAM in the report
Relationship with other reporting standards
Common examples of KAM in practice
ISA 701 in your jurisdiction
Frequently asked questions
Further reading and source references

What is ISA 701?

ISA 701, titled “Communicating Key Audit Matters in the Independent Auditor’s Report,” was introduced in 2015 as part of the IAASB’s auditor reporting reforms. It responded to widespread calls from investors and other stakeholders for a more informative auditor’s report, one that goes beyond a binary pass/fail opinion and provides insight into the audit itself.

Before ISA 701, auditor’s reports for different entities were largely indistinguishable: the same boilerplate text with only the opinion varying. KAMs provide a window into what the auditor focused on, what was complex or risky, and how the auditor responded. The result is a report that is entity-specific and decision-useful.

The KAM determination process

Matters communicated with those charged with governance

The starting pool for KAMs is all matters communicated with those charged with governance under ISA 260 (Revised). This includes significant findings from the audit, significant difficulties encountered, other matters arising from the audit that the auditor considers significant, and any matters required by other ISAs.

Matters requiring significant auditor attention

From this pool, the auditor identifies matters that required significant auditor attention. ISA 701.9 requires three specific considerations.

Areas of higher assessed risk or significant risks (ISA 315)

These are, by definition, areas requiring more attention. They often involve complex or unusual transactions, fraud risks, areas of significant estimation uncertainty, or first-year accounting policy adoptions.

Significant auditor judgments

These relate to areas involving significant management judgment, including accounting estimates with high estimation uncertainty. When management had to exercise significant judgment (for instance in determining fair values or impairment assessments), the auditor typically also had to exercise significant judgment in evaluating that work.

The effect on the audit of significant events or transactions

This covers mergers, disposals, restructurings, regulatory changes, or other events during the period that fundamentally affected the audit approach.

Matters of most significance

From the matters requiring significant attention, the auditor determines which were of most significance (the KAMs). This is a further filtering step that ensures only the truly important matters are communicated, avoiding information overload.

Communicating KAM in the report

Structure

KAMs are presented in a dedicated section headed “Key Audit Matters” with introductory language explaining that KAMs are matters of most significance in the current period’s audit. Each KAM uses an appropriate subheading and includes three elements.

Why the matter is a KAM

Explain why it was considered one of most significance, referencing the specific circumstances, the risks involved, the complexity, or the judgments required.

How the matter was addressed

Describe the audit response: the procedures performed or the outcome of the procedures. This may include specific audit approaches (for example, involvement of specialists or specific analytical procedures).

Reference to disclosures

Include a cross-reference to the related note(s) in the FS.

What good KAM descriptions look like

Good KAM descriptions are entity-specific, concise, and avoid highly technical auditing jargon. They help users understand what the auditor focused on and why, without providing a separate opinion on individual matters or replacing disclosures that management should make. Nobody enjoys drafting KAMs that aren’t going to be read, but the alternative is drafting ones that regulators read very carefully for the wrong reasons.

Avoid boilerplate. Regulators are watching

Regulators across Europe have consistently criticised KAM descriptions that are generic or recycled year after year without meaningful change. The AFM (Netherlands), FRC (UK), and H3C (France) all examine whether KAM descriptions are truly entity-specific and audit-specific. Common deficiencies: describing the same KAM in identical language for different entities within the same industry; failing to explain why a specific matter was most significant for this entity; describing audit responses in vague terms (“we evaluated,” “we tested”) without explaining the nature or extent of the procedures; and omitting references to specific FS disclosures. When reviewers read a KAM that reads as “appears reasonable. Waive further pursuit,” they mark the file. The description should be specific enough that a reader could identify which entity and which audit year it relates to.

Relationship with other reporting standards

KAM and ISA 705 (modified opinions)

When the auditor modifies the opinion, the matter giving rise to the modification is described in the “Basis for...” section, not as a KAM. The auditor should cross-reference to the Basis for Opinion section rather than duplicating information. The auditor may still communicate other KAMs alongside a qualified or adverse opinion. When the auditor disclaims an opinion, no KAMs are communicated (unless required by law), as this could undermine the disclaimer.

KAM and ISA 706 (emphasis of matter / other matter)

A matter cannot be both a KAM and an Emphasis of Matter paragraph. If a matter has been determined as a KAM, the EOM paragraph is not a substitute. The KAM description under ISA 701 takes precedence. If the matter does not meet the KAM threshold but warrants emphasis, ISA 706 applies.

KAM and ISA 570 (going concern)

If a material uncertainty related to going concern exists, it is reported in a dedicated section under ISA 570, not as a KAM. The auditor may include a reference to that section in the KAM section. A “close call” going concern situation (where no material uncertainty exists after evaluation) may be a KAM.

Common examples of KAM in practice

Based on academic research and regulatory reviews, the most frequently reported KAM categories include: impairment of goodwill and intangible assets, revenue recognition (particularly for complex revenue arrangements), valuation of financial instruments, provisions and contingent liabilities, business combinations, tax provisions and uncertain tax positions, going concern (close call situations), and IT systems and controls (for complex IT environments).

The specific KAMs for any given audit depend entirely on the entity and the audit. The above is a list of commonly seen categories, not a prescribed list. At firms like ours, we see the same four or five categories dominate every reporting season, which is precisely why the description has to do the entity-specific work the category name won’t.

ISA 701 in your jurisdiction

Netherlands. COS 701 follows ISA 701. KAM disclosure is mandatory for OOBs (organisations of public interest) and is increasingly used voluntarily for other entities. The AFM’s thematic reviews of KAM quality have consistently pushed for more specificity and less boilerplate, particularly around revenue recognition KAMs and impairment KAMs.

Germany. IDW PS 401 adapts ISA 701. For PIEs in Germany, KAM requirements are supplemented by the EU Audit Regulation’s requirement to describe the most significant assessed risks of material misstatement (besonders wichtige Prüfungssachverhalte). The WPK has examined consistency between KAM descriptions and the detailed Prüfungsbericht.

United Kingdom. ISA (UK) 701 extends KAM requirements beyond listed entities, requiring KAMs for all entities that report under the UK Corporate Governance Code and certain other PIEs. The FRC’s annual reviews of audit quality have been influential in setting expectations for KAM quality, and the UK was among the first jurisdictions to implement extended auditor reporting (prior to ISA 701). Without that annual scrutiny, more KAMs would land as a tick box exercise.

France. The French justification des appréciations (justification of assessments) predates ISA 701 and applies to all statutory audits, not just listed entities. NEP 701 has been aligned with ISA 701 for listed entities, but the broader French requirement means that even SME audits include entity-specific justifications in the commissaire aux comptes’s report. This makes France unusually transparent across all entity sizes.

Frequently asked questions

How many KAMs should there be?

ISA 701 does not prescribe a number. It explicitly states that “lengthy lists of key audit matters may be contrary to the notion of such matters being those of most significance.” In practice, most listed entity audits report between two and five KAMs. The number depends on the complexity of the entity and the audit. A simple entity may have one or two, while a complex multinational may have more.

Must KAMs change from year to year?

Not necessarily. If the same matter continues to be of most significance year after year (for example, goodwill impairment for an entity with significant goodwill), it may remain a KAM. The description should still be updated to reflect the current year’s circumstances and audit response. Recycling identical text from PY is a deficiency.

Can KAMs reveal original information about the entity?

The auditor should not provide original information about the entity that management has not already disclosed. KAM descriptions are intended to provide transparency about the audit, not to disclose information that management should be disclosing in the FS. If the auditor identifies a matter that warrants disclosure but management has not disclosed it, that is an ISA 450/ISA 705 issue, not a KAM issue.

Is there a KAM for every significant risk?

Not necessarily. Significant risks are one consideration in determining KAMs, but not every significant risk will be a KAM. The auditor applies the “most significance” filter. Conversely, a matter that is not a significant risk could still be a KAM if it required significant auditor attention for other reasons.