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CA Intermediate · Auditing and Ethics · Audit Report

Auditor CA Neha is auditing Orion Auto Ltd, a listed company, and has identified a matter as a Key Audit Matter (KAM) relating to revenue recognition on bill-and-hold sales. Management asks her not to communicate it since it could embarrass the company. Which is the correct response under SA 701?

The auditor must communicate the KAM in the report. SA 701 permits omission only if law or regulation precludes public disclosure, or in extremely rare cases where the adverse consequences outweigh the public interest benefit. Management's wish to avoid embarrassment is not a valid reason to omit it.

  1. AOmit the KAM, because management consent is needed for communication
  2. BCommunicate the KAM in the audit report, since only where law or regulation precludes public disclosure, or in extremely rare circumstances where adverse consequences outweigh public interest benefits, may it be omittedCorrect
  3. CCommunicate it only to those charged with governance and not in the report
  4. DConvert the KAM into a qualified opinion

Explanation

SA 701 requires KAMs to be communicated for listed entities. Omission is allowed only when law or regulation precludes public disclosure, or in extremely rare cases where adverse consequences clearly outweigh public interest benefits. Management embarrassment is not a ground, and a KAM does not itself modify the opinion.

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