Writing Key Audit Matters (KAMs): ISA 701 Examples

Read five audit reports from the same industry. Count how many KAM paragraphs you could swap between reports without anyone noticing. If the answer is more than one, you've found the problem ISA 701 was supposed to solve but hasn't yet. Research by Seebeck (2024) confirms what inspectors have been saying for years: KAM disclosures are becoming boilerplate over time, with auditors exhibiting herd behaviour in how they write them.

A key audit matter (KAM) under ISA 701.8 is a matter that, in the auditor's professional judgement, was of most significance in the audit of the financial statements of the current period, selected from matters communicated with those charged with governance and requiring significant auditor attention.

Who must report KAMs and when

ISA 701 applies to audits of complete sets of general purpose financial statements of listed entities. That's the mandatory scope. But the standard also applies when law or regulation requires KAM reporting for non-listed entities, and when the auditor voluntarily decides to report KAMs.

In the Netherlands, the Dutch Civil Code (Boek 2 BW) and the Wet toezicht accountantsorganisaties (Wta) require KAM reporting for public interest entities (OOBs), which includes listed companies, banks, and insurers. In Germany, KAM reporting follows the EU Audit Regulation (537/2014) for PIEs. In the UK, ISA (UK) 701 mandates KAMs for all PIE audits and for all entities applying the UK Corporate Governance Code.

Non-PIE firms can report KAMs voluntarily. If you're auditing a mid-market entity and the audit committee or shareholders have asked for more transparency in the audit report, ISA 701 gives you the framework. Voluntary reporting follows the same requirements as mandatory reporting. There's no reduced version of a KAM.

One important boundary: if a matter gives rise to a modified opinion under ISA 705, or if a material uncertainty related to going concern exists under ISA 570, those matters go in their own sections of the report. They are not reported as KAMs (ISA 701.15). But the KAM section header still appears, and you state that there are no additional KAMs beyond what's already reported in the Basis for Qualified Opinion or Material Uncertainty sections. ISA 701.A58 provides the illustrative wording for this situation.

Selecting KAMs: the ISA 701.9 filter

The selection process has two stages, and teams that skip the first stage end up with KAMs that don't fit.

Stage one (ISA 701.9): identify matters that required significant auditor attention. The standard directs you to consider areas of higher assessed risk of material misstatement (or significant risks under ISA 315), areas involving significant management judgement (including accounting estimates with high estimation uncertainty), and the effect of significant events or transactions on the audit. These are your candidates, not your final KAMs.

Stage two (ISA 701.10): from the candidates, determine which were of most significance in the audit of the current period's financial statements. This is a ranking exercise. Not every significant risk becomes a KAM. Not every complex estimate becomes a KAM. You're selecting the matters that consumed the most auditor attention, required the most difficult judgements, or had the greatest potential impact on the financial statements.

Most audit files at non-Big 4 firms report two to four KAMs. The FRC's snapshot analysis of UK reports found the average number of KAMs ranges from 4–5 for FTSE 100 companies down to 2 for smaller listed entities. There is no minimum or maximum. If your audit genuinely had one matter of overwhelming significance and nothing else came close, one KAM is acceptable. If you're reporting six KAMs for a straightforward manufacturing client, ask whether you're confusing "risks identified" with "matters of most significance." The significance assessment ties directly to your materiality calculation and your risk assessment under ISA 315.

The most frequently reported KAM categories across European jurisdictions are revenue recognition, goodwill and intangible asset impairment, expected credit losses, going concern, and inventory valuation. But frequency across the market is irrelevant to your engagement. Revenue recognition is not automatically a KAM just because every other auditor reports it. ISA 701.A29 notes that the complexity of the accounting standard can influence the selection, but the test remains: was this matter of most significance in your audit?

The anatomy of a well-written KAM

ISA 701.13 requires every KAM to include two elements: why the matter was considered to be of most significance in the audit (and therefore determined to be a KAM), and how the matter was addressed in the audit.

The "why" section

The "why" section must be entity-specific. A statement like "revenue recognition was identified as a KAM due to the significant judgement involved" could appear in any audit report for any company. It tells the reader nothing about this entity. A better version: "Van Beek Transport B.V. earns €44M from freight forwarding contracts that span multiple performance obligations under IFRS 15.27. Management allocates the transaction price between haulage, warehousing, and customs clearance using an estimated standalone selling price for each component. The allocation directly affects the timing and amount of revenue recognised in each period, and a 5% shift in the customs clearance allocation would move €2.2M of revenue between reporting periods." That tells the reader exactly why this matters for this client.

The "how" section

The "how" section describes your audit response. ISA 701.A46–A51 provides guidance: you should describe procedures performed, key observations, and the outcome of those procedures. The trap here is listing your audit programme. "We tested a sample of revenue transactions, performed cut-off testing, and reviewed management's IFRS 15 analysis" is a procedure list. It doesn't tell the reader what you found, what challenged you, or what judgement you applied.

Better: "We tested 42 freight forwarding contracts (covering 68% of reported revenue) for accuracy of the performance obligation split by comparing management's standalone selling price estimates to independently obtained market rates from two logistics industry benchmarking sources. We found that management's estimated standalone selling price for customs clearance services was 12% higher than the market median. We evaluated management's justification (a premium service level agreement with guaranteed clearance times) and concluded the premium was supportable based on the contractual terms and actual service delivery records."

That version tells the reader something. It tells them the sample size, the coverage, the specific finding (12% premium), the source of the auditor's independent data, and the conclusion. It passes the FRC's test of whether the KAM adds information beyond what a reader could infer from the financial statements alone.

Two full KAM examples

KAM example 1: revenue recognition (freight forwarding)

Revenue recognition on multi-element freight forwarding contracts (note 4.2)

Van Beek Transport B.V. recognises revenue from freight forwarding contracts that include haulage, warehousing, and customs clearance services. Under IFRS 15.27, management identifies each service as a separate performance obligation and allocates the transaction price based on estimated standalone selling prices. Revenue for the year was €44.2M (2024: €41.8M).

We identified this as a key audit matter because the allocation of the transaction price between performance obligations involves significant estimation by management and directly affects the timing of revenue recognition. A 5% change in the allocation to customs clearance services would shift approximately €2.2M of revenue between reporting periods.

Our audit procedures included testing 42 contracts (representing 68% of total revenue) for the accuracy of the performance obligation split. We compared management's standalone selling price estimates for each service to independently obtained market rates from two logistics industry benchmarking sources. For the customs clearance component, we evaluated management's 12% premium above the market median against the contractual service level agreements and actual clearance time data. We performed cut-off testing on contracts in progress at year-end by inspecting delivery confirmations and warehousing acceptance records for 18 contracts straddling the reporting date. We also reviewed the IFRS 15 disclosure in note 4.2 for consistency with the applied methodology.

We found no material misstatements in revenue recognition. Management's standalone selling price estimates, including the customs clearance premium, were within an acceptable range given the contractual terms.

KAM example 2: goodwill impairment (manufacturing CGU)

Impairment assessment of goodwill allocated to the precision engineering CGU (note 12)

Müller Fertigung GmbH carries €3.3M of goodwill allocated to the precision engineering cash-generating unit following the acquisition of Brandt Präzision GmbH in January 2022. Under IAS 36.10, management performs an annual impairment test using a discounted cash flow model to determine the CGU's recoverable amount.

We identified this as a key audit matter because the impairment test relies on forward-looking assumptions, including a revenue growth rate of 4.8% per annum, a terminal growth rate of 1.5%, and a pre-tax discount rate of 9.2%. The CGU's headroom (recoverable amount minus carrying amount) was €1.1M, which is sensitive to changes in these assumptions. A 1.2 percentage-point increase in the discount rate would eliminate the headroom entirely.

We evaluated the methodology of management's discounted cash flow model against the requirements of IAS 36.30–36.57. We tested the revenue growth assumption against the CGU's order book, historical growth rates (2.1% average over the prior four years), and independent industry forecasts from VDMA (the German Mechanical Engineering Industry Association). We engaged our internal valuation specialist to assess the discount rate and terminal growth rate against observable market inputs. We tested the mathematical accuracy of the model by rebuilding the calculation independently. We also performed a sensitivity analysis on all key assumptions and evaluated the adequacy of the sensitivity disclosure in note 12.

We concluded that management's assumptions were within an acceptable range, though we note that the revenue growth rate of 4.8% exceeds historical performance and is dependent on two specific contracts in the order book that are signed but not yet in production. The related disclosure in note 12 describes the key assumptions and sensitivity analysis.

The boilerplate problem and how to fix it

The Seebeck (2024) study in the International Journal of Auditing found that KAM disclosures become increasingly similar over time, both within firms and across the market. Auditors copy language from prior years, from template libraries, and from other firms' published reports. The result is KAMs that technically satisfy ISA 701 but communicate nothing entity-specific to the reader.

The FRC has been direct about this. Inspection reports from 2022–2024 consistently flag KAMs where the "how we addressed the matter" section reads like a generic audit programme extract rather than a description of what actually happened on the engagement.

Four fixes that work:

1. Include at least one number that could only appear in this entity's KAM. The customs clearance premium of 12%, the headroom of €1.1M, the sensitivity threshold of 1.2 percentage points. These numbers anchor the KAM to this specific engagement. They cannot be copied into another report without being wrong.
2. State what you found, not just what you did. "We tested 42 contracts" is a procedure. "Management's estimate was 12% above the market median" is a finding. The finding is what the reader needs.
3. Identify the specific judgement. Every KAM exists because a judgement was required. Name it. "The key judgement was whether the 4.8% revenue growth rate was supportable given the CGU's historical growth of 2.1%." That sentence tells the reader exactly where the tension was.
4. Don't write the KAM until the audit work is complete. KAMs drafted at planning and never updated to reflect actual findings are the primary source of boilerplate. The KAM should be the last thing written, after you know what you found.

Worked example: Dijkstra Logistics B.V.

Dijkstra Logistics B.V. is a Dutch logistics company (€56M revenue, fiscal year ending 31 December 2025) listed on Euronext Amsterdam. The company completed a warehouse management system (WMS) implementation during the year, capitalising €4.8M of development costs under IAS 38. Revenue includes a new performance-based contract with a major retail client that represents 22% of total revenue. You're the engagement partner. You've communicated eight matters to those charged with governance. You need to select your KAMs.

1. Identify the candidates (ISA 701.9)

From the eight matters communicated to the audit committee, four required significant auditor attention:

• The capitalised WMS development costs (IAS 38.57 criteria assessment, high estimation uncertainty on future economic benefits).
• Revenue recognition on the performance-based retail contract (IFRS 15 variable consideration, significant management judgement).
• The going concern assessment (the WMS project was partly debt-financed and the entity's leverage ratio is at the covenant limit).
• Goodwill impairment on the domestic parcel delivery CGU (IAS 36, low headroom).

2. Rank and select (ISA 701.10)

Of the four candidates, the WMS capitalisation and the performance-based revenue contract were the two matters of most significance.

The WMS capitalisation consumed the most audit hours of any single area (42 hours of senior staff time). The IAS 38.57 criteria assessment required the engagement team to evaluate management's feasibility study, projected cost savings, and the technical completion timeline. The capitalised amount (€4.8M) is material relative to total assets (€31M).

The performance-based revenue contract required judgement on variable consideration under IFRS 15.56. The contract includes a volume-based rebate that reduces revenue by up to 8% depending on annual throughput. Management estimates the rebate using a most-likely-amount method. The contract represents 22% of revenue.

Going concern is not a KAM. Although the leverage ratio is near the covenant limit, the going concern assessment did not identify a material uncertainty. The covenant headroom was tested quickly and the bank confirmed a waiver through December 2026. Goodwill impairment had adequate headroom (€2.8M) and the assumptions were within historical ranges. Neither consumed significant auditor attention relative to the other two.

3. Draft the KAMs

You draft each KAM after completing the relevant audit work, not before. The WMS KAM includes the specific IAS 38.57 criterion that was most difficult to satisfy (demonstrating probable future economic benefits from a system not yet fully operational at year-end), the projected cost saving figure management used (€1.2M per annum), and your conclusion that the capitalisation criteria were met based on the pilot results showing 14% efficiency gains in the two warehouses where the system was live.

The revenue KAM includes the contract value (€12.3M gross), the rebate range (0–8%), management's estimate (4.2% based on the most-likely-amount method), and your conclusion after testing actual throughput data against the contractual tiers.

Practical checklist

1. Start the KAM identification process when you communicate with those charged with governance under ISA 260, not when you draft the audit report. The communication to governance is the universe from which KAMs are selected (ISA 701.8).
2. Document why each candidate matter did or did not make the final KAM list. ISA 701.A64 requires documentation of the auditor's determination of key audit matters. An inspector will ask why a matter that looks significant was excluded.
3. Write every KAM with at least one entity-specific number (a balance, a percentage, a sensitivity threshold) that could not appear in any other audit report.
4. In the "how we addressed the matter" section, include your finding or observation, not just your procedures. State what challenged you and what you concluded.
5. Cross-reference every KAM to the specific financial statement disclosure (ISA 701.13). If the disclosure is inadequate, discuss it with management before finalising the report.
6. Review the prior year's KAMs before drafting. If a matter is no longer a KAM, you have no obligation to explain the change in the report, but you should document the reason in the file. If the same KAM recurs, update the description to reflect the current year's facts; do not copy last year's text.

Common mistakes

• Selecting revenue recognition as a KAM on every engagement without linking it to a specific assessed risk or management judgement. Revenue is a KAM when the recognition involves significant estimation (variable consideration, percentage of completion, multiple performance obligations). It is not a KAM solely because ISA 240 presumes a fraud risk on revenue. The FRC has flagged this distinction repeatedly in its inspection reports.
• Describing the audit response as a list of procedures without stating what was found. The FRC's 2022–2024 inspection themes consistently identify this as a quality deficiency: KAMs that describe what the auditor did but not what the auditor observed or concluded.
• Drafting KAMs at planning and not updating them at completion. A KAM drafted before fieldwork reflects the risk assessment, not the audit execution. The final KAM must reflect what actually happened during the audit, including any unexpected findings that changed the scope or focus of procedures.

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Frequently asked questions

Further reading and source references

• IAASB Handbook 2024: the authoritative source for the complete ISA 701 text, including illustrative KAM descriptions.
• IAASB Implementation Guide (Key Audit Matters): practical guidance on determining and communicating KAM.
• ISA 260 (Revised), Communication with Those Charged with Governance: the starting pool for KAM determination.
• ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements: the baseline report that KAM supplements.
• ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report: how modified opinions interact with KAM.
• Seebeck (2024), International Journal of Auditing: research on KAM boilerplate and herd behaviour in auditor reporting.
• FRC Inspection Reports 2022–2024: recurring findings on KAM quality, entity-specificity, and the distinction between procedures and findings.