Auditing and Ethics · Audit Report

Key Audit Matters (SA 701) for CA Intermediate

Updated 4 October 2026 · Fact-checked

Key audit matters are the matters that, in the auditor's professional judgment, were of most significance in the audit of the current period's financial statements. SA 701 requires them to be communicated for listed entities. You pick them from matters discussed with those charged with governance, then describe each one in a separate KAM section.

Understand Key Audit Matters (SA 701)

A standard audit report tells users the opinion, but not where the auditor spent the most effort. Key audit matters (KAM) fill that gap. They give users a view of the areas the auditor found hardest or most significant, so the report becomes more informative.

SA 701 applies to audits of complete sets of general purpose financial statements of listed entities. It also applies where the auditor is otherwise required by law or regulation to communicate KAM, or decides to do so voluntarily. For other entities, KAM is not mandatory.

KAM are chosen from matters communicated with those charged with governance. The auditor then narrows them down to those that required significant auditor attention. Three things guide this: areas of higher assessed risk of material misstatement or significant risks, significant auditor judgments in areas with high estimation uncertainty or management judgment, and the effect on the audit of significant events or transactions in the period. From these, the auditor picks the ones of most significance. These are the KAM.

Each KAM is described under the heading "Key Audit Matters". The description says why the matter was considered one of most significance, and how it was addressed in the audit. It should also refer to the related disclosure in the financial statements. KAM is not a substitute for a modified opinion, and it is not a separate opinion on individual matters.

A matter that gives rise to a modified opinion, or a material uncertainty on going concern, is not a KAM. It is reported in its own section: Basis for Qualified (Adverse) Opinion, Basis for Disclaimer of Opinion, or Material Uncertainty Related to Going Concern. If these are the only matters of most significance, the auditor has no other KAM to communicate, and the KAM section says that there are no key audit matters to communicate in the report.

In the report, the Opinion, Basis for Opinion, Material Uncertainty Related to Going Concern (if any) and Key Audit Matters sections come in that order. Emphasis of Matter and Other Matter paragraphs (SA 706) follow KAM. This is the order of the sections relevant to this topic, not a list of every section in the report.

KAM differs from an Emphasis of Matter (SA 706). An emphasis of matter paragraph points to a matter already appropriately presented or disclosed in the financial statements that is fundamental to users' understanding. KAM explains audit significance and how the auditor responded. Both can appear in one report, in separate sections, with the EOM paragraph following KAM.

Key rules to remember

Applicability of SA 701: KAM required = audit of general purpose financial statements of a listed entity, or where law or regulation requires it. Voluntary for others if the auditor decides.; Do not say KAM applies to every audit. For unlisted entities it is not mandatory.
Determination funnel: Matters communicated with those charged with governance → matters requiring significant auditor attention → matters of most significance = KAM; Write the three stages in order. Each stage narrows the list.
Factors for significant auditor attention: (1) Higher assessed risk or significant risks; (2) significant auditor judgment in areas of significant management judgment, including high estimation uncertainty; (3) effect of significant events or transactions in the period; Name all three factors in a descriptive answer.
Content of each KAM description: Why it was a KAM + how it was addressed in the audit + reference to the related financial statement disclosure; These are the elements to list when asked what the KAM section should contain.
Matters that are not reported as KAM: A matter giving rise to a modified opinion, or a material uncertainty on going concern, is not a KAM; They are reported in their own sections: Basis for Qualified (Adverse) Opinion, Basis for Disclaimer of Opinion, or Material Uncertainty Related to Going Concern. If these are the only matters, the KAM section states that there are no key audit matters to communicate.
Order of sections in the report: Opinion → Basis for Opinion → Material Uncertainty Related to Going Concern (if any) → Key Audit Matters → Emphasis of Matter and Other Matter paragraphs (SA 706); The going concern section comes before KAM, not after it. EOM and Other Matter paragraphs follow KAM. Where the opinion is modified, the Basis for Opinion section is titled Basis for Qualified (Adverse) Opinion. Other report sections are not shown here.
Omitting a KAM: Do not communicate a KAM only if law or regulation precludes public disclosure, or in extremely rare cases where adverse consequences outweigh public interest benefits; The second exception does not apply if the entity has publicly disclosed the matter.

How to solve Key Audit Matters (SA 701) questions

Use this method for both theory questions and case-based questions on KAM.

1Check the entity first. Is it listed, or is KAM required by law, or chosen voluntarily? If none apply, KAM is not mandatory.
2List the matters communicated with those charged with governance during the audit.
3Pick out those that needed significant auditor attention. Test each against the three factors: high risk, significant judgment or estimation uncertainty, and significant events or transactions.
4From these, select the ones of most significance in the current period. These are the KAM. There can be more than one, or the auditor may conclude there are none.
5Check that no selected matter should instead be the basis for a qualified, adverse or disclaimer of opinion, or a going concern uncertainty. Those are not KAM. If nothing else remains, the KAM section states that there are no key audit matters to communicate.
6Describe each KAM: why it is a KAM, how the audit addressed it, and the reference to the financial statement disclosure.
7Place the KAM section under the heading Key Audit Matters. The order is Opinion, Basis for Opinion, Material Uncertainty Related to Going Concern (if any), then Key Audit Matters. Emphasis of Matter and Other Matter paragraphs (SA 706) follow KAM. State that the matters were addressed in the context of the audit as a whole and no separate opinion is given on them.
8If asked, compare with emphasis of matter: KAM is about audit significance, EOM is about a disclosed matter fundamental to understanding.

Quickest way: Four-line KAM check for MCQs and short answers

When to use it: Use when you have under four minutes for a KAM question.

MCQ: look for the word listed. If the entity is listed, KAM is required. If unlisted, it is voluntary.
MCQ: if an option says KAM replaces a modified opinion or gives a separate opinion on the matter, eliminate it.
MCQ: if a matter causes a qualification or going concern uncertainty, it is not a KAM. Eliminate options that call it one.
Written: use the funnel in one line, then the three factors, then the three content elements. Add one line on KAM vs EOM. Each point earns a step mark.

Common mistakes in Key Audit Matters (SA 701)

Saying KAM is required in every audit.
Students remember that the report has many standard sections and assume KAM is one of them.
Fix: Link KAM to listed entities, or to law or regulation, or to voluntary choice. Say it is not mandatory for other entities.
Treating KAM as a separate opinion or a way to avoid qualifying.
KAM looks like a list of problem areas, so it feels like a substitute for a modified opinion.
Fix: State that KAM is not a substitute for a modified opinion and that no separate opinion is given on each matter.
Reporting a going concern material uncertainty as a KAM.
Going concern is clearly a significant matter, so students assume it belongs in KAM.
Fix: Remember that it goes in its own section, Material Uncertainty Related to Going Concern, which comes after Basis for Opinion and before KAM. Matters leading to a modified opinion go in Basis for Qualified (Adverse) Opinion or Basis for Disclaimer of Opinion, not in KAM.
Confusing KAM with emphasis of matter.
Both are extra paragraphs in the report that draw attention to something.
Fix: KAM comes from audit significance and describes how it was addressed. EOM refers to a matter already properly disclosed that is fundamental to understanding. Both can appear together in separate sections, with EOM and Other Matter paragraphs following KAM.
Writing KAM descriptions that only restate the financial statement note.
Students copy the disclosure and forget the audit angle.
Fix: Always say why the matter was a KAM and how the auditor addressed it, then refer to the disclosure.
Choosing KAM straight from the whole audit file.
Students skip the step of starting from matters communicated with those charged with governance.
Fix: Start from that communicated list, narrow to significant auditor attention, then to most significance.

Worked examples

Example 1

Navya & Co. audits the financial statements of Orion Ltd., a listed company. During the audit, the auditor discussed with the audit committee the valuation of a large unquoted investment, which involved high estimation uncertainty, and a routine bank reconciliation that raised no issues. Explain whether KAM is required and which matter qualifies as a KAM.

Show the solution

Step 1: Orion Ltd. is a listed entity, so SA 701 requires communication of KAM in the auditor's report.
Step 2: Both matters were discussed with those charged with governance, so both are starting candidates.
Step 3: Test for significant auditor attention. The investment valuation involves high estimation uncertainty and significant judgment, which is one of the three factors. The bank reconciliation raised no issues and involved no high risk or judgment.
Step 4: Among the matters needing significant attention, the auditor selects those of most significance. The investment valuation qualifies.
Step 5: The auditor describes it under Key Audit Matters: why it is significant, how the audit addressed it, and the reference to the related disclosure.

Answer: KAM is required because Orion Ltd. is listed. The valuation of the unquoted investment is a KAM. The routine bank reconciliation is not. The report must describe why and how the valuation was addressed, with a reference to the disclosure.

Example 2

Differentiate between Key Audit Matters under SA 701 and an Emphasis of Matter paragraph under SA 706.

Show the solution

Step 1: Purpose. KAM tells users which matters were of most significance in the audit. EOM draws attention to a matter already presented or disclosed that is fundamental to users' understanding of the financial statements.
Step 2: Basis. KAM is selected from matters communicated with those charged with governance that needed significant auditor attention. EOM is used when the auditor judges the disclosed matter is fundamental.
Step 3: Applicability. KAM is required for listed entities or where law requires, and otherwise voluntary. EOM is used when the auditor considers it necessary to draw attention to a disclosed matter that is fundamental to users' understanding, or when law or regulation requires it.
Step 4: Content. A KAM description explains why it was a KAM and how it was addressed in the audit, with a reference to the disclosure. An EOM paragraph refers to the matter and where it is disclosed, and states the opinion is not modified in respect of it.
Step 5: Placement. KAM has its own section headed Key Audit Matters. EOM has a separate paragraph headed Emphasis of Matter, which follows KAM. Both can appear in the same report.

Answer: KAM explains audit significance and how the auditor responded. EOM points to an appropriately disclosed matter fundamental to understanding, and is used when the auditor considers it necessary or when law or regulation requires it. They are different sections and neither modifies the opinion.

Exam tips

Open any KAM answer by checking whether the entity is listed. This one line often earns the first mark.
Write the determination funnel and the three factors in order. Examiners look for this structure.
In case studies, separate matters that are KAM from those that need a modified opinion or a going concern section.
For difference questions, give four to five points in two columns of thought: purpose, basis, content, applicability and placement.
For MCQs, eliminate options that say KAM gives a separate opinion or replaces a modified opinion.

Practice questions from Audit Report

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

Is SA 701 applicable to all audits?

No. It applies to audits of complete sets of general purpose financial statements of listed entities, and where law or regulation requires KAM. The auditor may also choose to communicate KAM voluntarily for other entities.

How does an auditor determine key audit matters?

The auditor starts with matters communicated with those charged with governance. Then picks those that required significant auditor attention, using risk, judgment and significant events as guides. Of these, the ones of most significance become KAM.

What is the difference between KAM and emphasis of matter?

KAM describes matters of most significance in the audit and how they were addressed. An emphasis of matter paragraph draws attention to an appropriately disclosed matter that is fundamental to users' understanding. They sit in separate sections of the report, with the EOM paragraph following KAM.

Can the auditor report no key audit matters?

Yes. If the auditor determines there are no KAM to communicate, the KAM section says that there are no key audit matters to communicate in the report. This is the case, for example, where the only matters of most significance are those giving rise to a modified opinion or a going concern uncertainty. The conclusion should come from a careful application of the determination process, not from skipping it.