What are key audit matters?
ISA 701.8 requires the auditor to determine which of the matters communicated to those charged with governance were of most significance in the audit. This is a funnelling exercise: start with everything communicated under ISA 260, then narrow to areas that required significant auditor attention (ISA 701.9). The auditor considers areas of higher assessed risk or significant management judgment (including accounting estimates with high estimation uncertainty) and the effect on the audit of significant events or transactions during the period.
For each KAM selected, ISA 701.13 requires the auditor to describe why the matter was considered one of most significance and how it was addressed in the audit. The description must be entity-specific. A generic paragraph about "revenue recognition risk" that could appear in any auditor's report fails the standard. ISA 701.A46 makes this explicit: the description should enable intended users to understand the matter in the context of the audit of that specific set of financial statements.
The auditor should also refer to the related financial statement disclosures where relevant (ISA 701.13(b)). This cross-reference connects the KAM to something the reader can verify, which is the point.
Key Points
- KAMs apply to listed entity audits and to other audits where required by law or auditor decision.
- Each KAM must explain why the matter was significant and how the audit addressed it.
- Inspectors consistently flag KAM descriptions that read as boilerplate rather than entity-specific.
- A KAM does not replace an emphasis of matter paragraph or a modified opinion when those are required.
Why it matters in practice
The FRC's Audit Quality Inspection reports have repeatedly noted that KAM descriptions lack entity-specific detail, defaulting instead to generic language about the nature of the risk. ISA 701.A46 requires the description to reflect the specific circumstances of the engagement. A KAM that could be copied into a different auditor's report without changing a word is not compliant.
Teams sometimes confuse the KAM with the audit response. The KAM description must explain both why the matter was significant and how the auditor addressed it (ISA 701.13(a)–(b)). Describing only the audit procedures without explaining why the matter warranted significant attention satisfies half the requirement.
Worked example: Petersen Messtechnik AG
Client: German listed precision engineering company, FY2024, revenue €195M, Euronext Frankfurt, IFRS reporter. The engagement team communicated 11 matters to the supervisory board during the audit.
Apply the ISA 701.9 filter: Of the 11 matters, the engagement team identified two as KAMs. Revenue recognition on long-term contracts required significant auditor attention because the contracts use percentage-of-completion under IFRS 15.35(c) with management estimates of costs to complete. Goodwill impairment testing required significant attention because the Swiss subsidiary's CGU generated actual cash flows 22% below the original acquisition model, and the headroom was €4.1M (3.8% of the CGU carrying amount).
Draft the KAM descriptions: For the goodwill KAM, the description explains that the Swiss CGU's actual performance fell below the acquisition model and that the headroom is narrow. It states that the auditor tested management's key assumptions (discount rate of 9.2%, terminal growth rate of 1.5%, five-year revenue CAGR of 4.8%, and operating margin convergence to 14% by Year 3) by reference to independent market data and peer comparisons, and refers the reader to Note 14. The two KAMs are defensible because the file documents the funnelling from 11 communicated matters to two, with reasons at each stage.
Key audit matters vs emphasis of matter paragraph
The two serve different purposes. A KAM tells the reader what the audit focused on and why. An EOM paragraph tells the reader what to focus on in the financial statements. A KAM communicates why a matter was significant in the audit and how the auditor addressed it. An EOM highlights a disclosed matter that is fundamental to users' understanding.
KAMs apply to listed entities (and others where required). EOM paragraphs apply to all audits where ISA 706.8 conditions are met. When a matter qualifies as both, the auditor includes both paragraphs – ISA 706.A8 confirms they can coexist in the same report. Neither changes the audit opinion.
Key standard references
- ISA 701.8–9: Determining which matters communicated to TCWG are of most significance.
- ISA 701.13: Requirements for describing each KAM (why significant and how addressed).
- ISA 701.A46: Entity-specific descriptions – generic language does not comply.
- ISA 701.15: Material uncertainty related to going concern is not reported as a KAM.
- ISA 706.A8: A KAM does not replace an EOM paragraph when ISA 706.8 conditions are met.
Related terms
Related reading
Frequently asked questions
Do KAMs apply to all audits?
No. ISA 701 requires KAMs for audits of listed entities. They also apply when law or regulation requires their inclusion, or when the auditor voluntarily decides to communicate them. For non-listed entities, KAMs are not mandatory unless specified by local regulation.
How many KAMs should the auditor include?
ISA 701.9 does not prescribe a fixed number. The auditor selects from the matters communicated to those charged with governance, narrowing to those of most significance. In practice, most listed entity reports include between one and four KAMs depending on the complexity of the engagement.