Advanced Audit and Assurance (International) · Auditor's reports

Key Audit Matters (ISA 701) Explained for ACCA AAA

Updated 11 October 2026 · Fact-checked

Key audit matters are the matters that, in the auditor's professional judgement, were of most significance in the audit of the current period financial statements. You choose them from matters communicated to those charged with governance, then describe why each mattered and how you addressed it in the auditor's report.

Understand Key Audit Matters (ISA 701)

ISA 701 applies to audits of listed entities. It also applies where law requires KAM communication, or where the auditor decides to communicate them voluntarily. The purpose is to make the audit more informative. Users see where the auditor spent the most effort and judgement.

KAMs are not a separate opinion. They are not a substitute for a modified opinion, and they do not replace disclosures management should make. They sit in their own section of the auditor's report, headed Key Audit Matters, after the basis for opinion (and after any material uncertainty related to going concern section).

The selection works as a funnel. Start with the matters communicated to those charged with governance. Narrow to those that required significant auditor attention. Then pick the ones of most significance. In making this choice, ISA 701 tells you to consider areas of higher assessed risk of material misstatement or significant risks, significant auditor judgements relating to areas of significant management judgement (including accounting estimates with high estimation uncertainty), and the effect on the audit of significant events or transactions in the period.

For each KAM, the report must say why the matter was considered one of most significance and how it was addressed in the audit. It must also refer to the related financial statement disclosure, if any. Typical KAMs are revenue recognition, goodwill impairment, valuation of complex financial instruments, and inventory valuation.

A KAM is not the same as a going concern paragraph. If a material uncertainty exists and is adequately disclosed, the auditor reports it under a separate heading, Material Uncertainty Related to Going Concern, and not as a KAM. Going concern matters that are not material uncertainties, but were of most significance, can still be KAMs. Do not use KAMs to hide a problem that needs a modified opinion.

Key rules to remember

KAM selection funnel: Matters communicated to TCWG → matters requiring significant auditor attention → matters of most significance = KAMs; Document the judgement. The number of KAMs is not fixed. Fewer, more significant matters are the aim.
Considerations in determining significant attention: Higher assessed risk or significant risks + significant auditor judgement in areas of significant management judgement + effect of significant events or transactions; These are the three ISA 701 considerations. Use them as headings in your answer.
Content required for each KAM: Why it was a KAM + how it was addressed + reference to related disclosure; Describe the matter without giving a separate opinion on it.
Scope of ISA 701: Listed entities; or where law requires; or where the auditor decides to communicate; For unlisted entities it is voluntary unless law requires it.
Matters not communicated as KAM: Matters giving rise to a modified opinion; material uncertainty related to going concern; These are reported under their own headings. They are by nature KAMs but must not be described in the KAM section.
Omitting a KAM: Omit only if law or regulation precludes disclosure, or in extremely rare cases where adverse consequences clearly outweigh public interest benefits; The second exception does not apply if the entity has already publicly disclosed the matter.

How to solve Key Audit Matters (ISA 701) questions

Use this method for any question on KAMs, whether you must select matters, draft wording or explain the rules.

1Check scope. Is the entity listed, or does law require KAMs, or is the auditor choosing to give them? Say so first.
2List the matters from the scenario that were discussed or would be discussed with those charged with governance.
3Filter to those that needed significant auditor attention. Use the three ISA 701 considerations: significant risks, significant management judgement and estimates, and significant events or transactions.
4Choose the matters of most significance. Rank them and explain why others fall out. Do not list everything.
5Exclude matters that lead to a modified opinion or a material uncertainty on going concern. Those go under their own headings.
6For each KAM, draft three parts: why it is a KAM, how the audit addressed it, and the reference to the disclosure note.
7Keep the wording factual and entity-specific. Avoid boilerplate and avoid implying a separate opinion on the matter.
8Close with professional skills: communicate with TCWG about the KAMs you plan to report and document your judgements.

Quickest way: Three-part KAM check

When to use it: Use when time is short and a question asks you to identify or draft KAMs from a scenario.

Scan the scenario for high risk, high judgement or unusual events. Underline them.
Tick only those that were significant to the audit. Drop anything that needs a modified opinion or a going concern material uncertainty.
Write each KAM in three short lines: why, how, note reference.
Add one line stating the entity is listed, so ISA 701 applies.

Common mistakes in Key Audit Matters (ISA 701)

Treating KAMs as a modified opinion or a way to qualify the report.
Students see a serious matter and assume it belongs in the KAM section.
Fix: If the matter requires a modified opinion, use ISA 705. KAMs are about matters that were significant but where the opinion is unmodified.
Reporting a material uncertainty on going concern as a KAM.
Both sections sit near each other and both deal with significant matters.
Fix: Use the separate heading Material Uncertainty Related to Going Concern. The KAM section can refer to it but must not describe it.
Listing every significant risk as a KAM.
Students think more KAMs means a better answer.
Fix: KAMs are the matters of most significance. Select and justify. A long list dilutes the information.
Describing only the matter and not how the audit addressed it.
Students focus on the accounting issue instead of the audit response.
Fix: Always include the audit procedures or key observations, such as testing assumptions, using an expert or challenging forecasts.
Using generic wording that could apply to any entity.
Students memorise a template.
Fix: Tie the wording to the facts: the amount, the asset, the judgement and the note reference in the financial statements.
Giving a separate opinion on the KAM or saying the matter is fine.
Students want to reassure the reader.
Fix: State that the matter was addressed in the context of the audit as a whole and in forming the opinion. Do not give a separate opinion.

Worked examples

Example 1

Mirza plc is listed. The auditor has assessed three matters. (1) Goodwill of $42 million, where impairment depends on ten-year cash flow forecasts and was discussed with the audit committee as a significant risk. (2) A routine office relocation with immaterial costs. (3) Revenue recognition for long-term contracts, a significant risk discussed with the audit committee. Identify the key audit matters and explain your choice.

Show the solution

Scope: Mirza plc is listed, so ISA 701 applies and KAMs must be communicated.
Start with matters communicated to those charged with governance: goodwill and revenue. The relocation was not communicated and was not significant.
Test against the ISA 701 considerations. Goodwill: significant risk and significant management judgement with high estimation uncertainty in forecasts. Revenue on long-term contracts: significant risk and judgement on stage of completion.
The relocation required no significant auditor attention, so it is not a KAM.
Neither matter gives rise to a modified opinion or a going concern material uncertainty on the facts given, so both can be KAMs.
Conclude that goodwill impairment and revenue recognition are the KAMs. For each, the report explains why it mattered, how the audit addressed it and refers to the note.

Answer: The KAMs are goodwill impairment and revenue recognition on long-term contracts. The office relocation is excluded because it needed no significant auditor attention.

Example 2

Draft the KAM wording for goodwill at Mirza plc. Goodwill is $42 million. The auditor challenged cash flow forecasts and discount rate with a valuation specialist, compared prior forecasts to actual results, and tested sensitivity. Disclosure is in Note 12.

Show the solution

Heading: Impairment of goodwill.
Why it is a KAM: goodwill of $42 million is material, and the impairment test relies on management judgements about future cash flows and the discount rate, which are subject to high estimation uncertainty.
How it was addressed: we evaluated management's forecasts by comparing prior forecasts to actual results, involved a valuation specialist to assess the discount rate, and performed sensitivity analysis on key assumptions.
Disclosure reference: refer to Note 12 for the accounting policy and disclosures.
Check the wording: it does not give a separate opinion and does not suggest the opinion is modified.

Answer: Impairment of goodwill: Goodwill of $42 million is significant and its recoverable amount depends on judgements about forecast cash flows and the discount rate (Note 12). We compared prior forecasts to actual results, used a valuation specialist to assess the discount rate and tested sensitivity to key assumptions. These procedures were performed as part of our audit as a whole and in forming our opinion, and we do not provide a separate opinion on this matter.

Exam tips

Start by stating whether ISA 701 applies. Marks often depend on spotting that the entity is listed.
Use the three ISA 701 considerations as headings when selecting KAMs. It shows method.
When asked to draft, include all three parts: why, how and disclosure reference. Missing one loses marks.
Separate KAMs clearly from going concern material uncertainty, modified opinions and emphasis of matter. Examiners test the boundaries.
Show professional skills: justify why you chose some matters and not others, and mention communicating with those charged with governance.

Practice questions from Auditor's reports

Key Audit Matters (ISA 701) 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 (ISA 701): frequently asked questions

Who must report key audit matters?

ISA 701 applies to audits of listed entities. It also applies where law requires KAMs or where the auditor decides to communicate them. For other entities it is not mandatory.

What is the difference between a KAM and a going concern paragraph?

A material uncertainty on going concern that is adequately disclosed goes in its own section, Material Uncertainty Related to Going Concern. It must not be described as a KAM. A going concern matter that is not a material uncertainty can still be a KAM if it was of most significance.

Can KAMs replace a modified opinion?

No. KAMs are not a substitute for a modified opinion. If a misstatement or scope limitation is material, you modify the opinion under ISA 705.

How many KAMs should an auditor report?

There is no set number. It depends on the size and complexity of the entity and the audit. The auditor reports only the matters of most significance.