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Audit and Assurance · The Independent Auditor's Report

Key Audit Matters (ISA 701) Explained for ACCA AA

Updated 11 October 2026 · Fact-checked

Key audit matters (KAMs) are the matters that, in the auditor's professional judgement, were of most significance in the audit of the current period financial statements. ISA 701 requires them to be communicated in the auditor's report for listed entities. You choose them from matters discussed with those charged with governance, then describe why each matters and how you addressed it.

Understand Key Audit Matters

A key audit matter is a matter that required significant auditor attention and was of most significance in the audit. The aim is to make the report more informative. Users can see where the auditor focused, not just whether the opinion is clean.

ISA 701 applies to audits of listed entities. It also applies where the auditor decides to communicate KAMs for other entities, or where law or regulation requires it. Where the auditor issues a disclaimer of opinion, KAMs are not communicated, unless law requires it.

KAMs are chosen in stages. Start with the matters communicated to those charged with governance. Then narrow to those that required significant auditor attention. Consider areas of higher assessed risk of material misstatement or significant risks, significant auditor judgement relating to areas of management judgement (such as estimates with high uncertainty), and the effect of significant events or transactions in the period. Finally, select those of most significance.

Each KAM is described in a separate section headed Key Audit Matters in the auditor's report. The description says why the matter was one of most significance, and how it was addressed in the audit. It also refers to any related disclosure in the financial statements.

KAMs are not a substitute for a modified opinion. They are not a separate opinion on individual matters. A matter that gives rise to a modified opinion, or a material uncertainty over going concern, is by its nature a KAM, but it is not described in the KAM section. It is reported in the Basis for Modification or Material Uncertainty Related to Going Concern section, and you only refer to it within KAMs. Emphasis of matter paragraphs are different: they draw attention to a matter already properly presented or disclosed that is fundamental to users' understanding.

Key rules to remember

Scope of ISA 701
KAMs required: listed entities (or where law requires, or the auditor chooses)
Not required for an unlisted entity unless the auditor decides to include them or law requires.
Selection funnel
Matters communicated to those charged with governance → matters needing significant auditor attention → matters of most significance = KAMs
Judgement decides how many. There is no fixed number.
Description of each KAM
Why it was of most significance + how addressed in the audit + reference to related disclosure
Put under the heading Key Audit Matters, with a standard lead-in statement that these were not a separate opinion.
Matters not reported as KAMs
Modified opinion basis or material uncertainty over going concern → reported in its own section, not in the KAM section
You may refer to them in the KAM section.
KAM versus emphasis of matter
KAM: audit focus, chosen by auditor. EOM: disclosed matter fundamental to understanding.
EOM does not change the opinion. Neither is a substitute for a modified opinion.

How to solve Key Audit Matters questions

Use this method for any KAM question, whether asked as a multiple-choice item or as a written requirement.

  1. 1Check whether the entity is listed. If not, KAMs are not required unless law requires them or the auditor chooses to include them.
  2. 2Read the scenario and list the matters that needed significant auditor attention: significant risks, high-judgement estimates and unusual significant events or transactions.
  3. 3Rule out matters that cause a modification or a material uncertainty over going concern. These go in their own sections.
  4. 4Pick the matters of most significance to the current audit. Do not list every risk.
  5. 5For each KAM, state why it is significant, using the scenario facts (amounts, judgement, complexity).
  6. 6State how you addressed it: procedures such as testing key assumptions, using an expert, reviewing disclosures or attending the count.
  7. 7Refer to the related note in the financial statements, and remember the report is not giving a separate opinion on the matter.

Quickest way: Why-How-Where in three lines

When to use it: Use it when time is short and the question asks you to draft or assess a KAM paragraph.

  1. Name the matter and the amount in one line.
  2. Write Why: risk, judgement or unusual event that made it most significant.
  3. Write How: two or three specific procedures you performed.
  4. Add Where: the note number or disclosure in the financial statements.

Common mistakes in Key Audit Matters

  • Confusing KAMs with emphasis of matter paragraphs.

    Both add information to the report and both sit outside the opinion paragraph.

    Fix: Remember KAMs show where the audit effort went and are chosen by the auditor. An emphasis of matter points to a disclosure already in the financial statements that is fundamental to understanding.

  • Saying KAMs are required for every audit.

    Students forget the listed-entity scope.

    Fix: State that ISA 701 requires KAMs for listed entities. For others they are optional or required only by law.

  • Describing only the risk and not the audit response.

    Students stop after saying why the area was risky.

    Fix: Always cover how the matter was addressed, with specific procedures, and refer to the disclosure.

  • Putting a modification matter or going concern uncertainty under KAMs.

    Such matters are clearly significant, so they look like obvious KAMs.

    Fix: Report them in the Basis for Modification or Material Uncertainty Related to Going Concern section. You can cross-refer from the KAM section.

  • Listing every audit risk as a KAM.

    Students think more KAMs shows more thoroughness.

    Fix: Select only matters of most significance. Too many dilutes the value.

  • Presenting KAMs as a separate opinion on the matter or as a way to give a partial opinion.

    The wording on how the matter was addressed sounds like assurance.

    Fix: Use the standard statement that the matters were addressed in forming the opinion on the financial statements as a whole, and no separate opinion is given.

Worked examples

Example 1

Bryn plc is a listed company. The audit team judged that the valuation of its goodwill of $48 million was a significant risk because the cash flow forecasts rely on uncertain growth assumptions. Draft the key audit matter paragraph points the auditor should include.

Show the solution
  1. Check scope: Bryn plc is listed, so ISA 701 applies.
  2. Identify why: goodwill of $48 million is material and impairment testing depends on management's growth assumptions, which are highly judgemental. It was a significant risk.
  3. Describe how addressed: assessed the reasonableness of forecasts against approved budgets and past accuracy; tested the discount rate and growth rate with the help of a valuation expert; performed sensitivity analysis; recalculated the model.
  4. Refer to disclosure: cite the note on goodwill and impairment in the financial statements, and check the adequacy of its disclosures.
  5. Place it in the Key Audit Matters section with the standard lead-in.

Answer: The KAM states that goodwill of $48 million was of most significance because impairment depends on uncertain forecasts. It explains the procedures on forecasts, discount and growth rates, expert involvement and sensitivities, and refers to the goodwill note.

Example 2

Explain whether each of the following belongs in the Key Audit Matters section: (a) a material uncertainty over going concern that is adequately disclosed; (b) a significant revenue recognition risk that was addressed with no issues remaining.

Show the solution
  1. Part (a): a matter that is a material uncertainty related to going concern is reported in its own section, Material Uncertainty Related to Going Concern. It is by its nature a KAM but is not described in the KAM section.
  2. The KAM section may include a reference to that separate section.
  3. Part (b): a significant risk that needed significant auditor attention and was of most significance is a candidate KAM, so describe why it matters and how you addressed it.
  4. Include it only if, after selection, it is among the matters of most significance.

Answer: (a) No. Report it in the Material Uncertainty Related to Going Concern section, with at most a cross-reference. (b) Yes, if it is among the matters of most significance, with the why and how described.

Exam tips

  • Always check whether the entity is listed before discussing KAMs. Many marks hinge on that.
  • In written answers, cover why and how for each KAM. Use scenario figures to show why it is significant.
  • For objective questions on differences, anchor on one test: KAM is auditor focus in the audit; emphasis of matter is an existing disclosure fundamental to users.
  • Do not describe KAMs as modifying or qualifying the opinion. They do not change the opinion.
  • Keep draft paragraphs short and specific. Procedures such as attending the count or testing assumptions earn more than generic statements.

Key Audit Matters in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Key Audit Matters: frequently asked questions

What are key audit matters in simple terms?

They are the matters that mattered most in the audit of the current period, such as high-risk or highly judgemental areas. The auditor describes them in the report so users understand where the audit effort went.

What is the difference between key audit matters and emphasis of matter?

A KAM is chosen by the auditor from the matters that needed most attention, and the report describes why and how it was addressed. An emphasis of matter paragraph draws attention to a matter already properly disclosed that is fundamental to users' understanding. Neither changes the opinion.

Are key audit matters required for all audits?

No. ISA 701 requires them for listed entities. For other entities they are included only if the auditor decides to or law requires it.

Can a key audit matter lead to a modified opinion?

A KAM itself does not modify the opinion. If a matter causes a modification, it is reported in the Basis for Modification section, not as a KAM.