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CA Intermediate · Auditing and Ethics · Audit Report

In auditing Himalaya Pharma Ltd, a listed company, the auditor determined that a revenue recognition issue was among the matters of most significance in the audit and communicated with those charged with governance. Which statement about reporting it as a Key Audit Matter under SA 701 is correct?

The auditor must describe the matter in a separate Key Audit Matters section, explaining why it was of most significance and how the audit addressed it. KAMs apply to listed entities, and they never replace a required modification of the opinion.

  1. AIt must be placed in the Basis for Opinion section
  2. BThe auditor must describe why it was a KAM and how it was addressed in the audit, in a separate KAM sectionCorrect
  3. CKAMs are required in the report of every company, listed or not
  4. DReporting a KAM is a substitute for modifying the opinion on a misstatement

Explanation

SA 701 requires a separate KAM section describing each matter, why it was considered most significant, and how it was addressed. KAMs are mandatory for listed entities (and where the auditor decides or is required), not every company. A KAM cannot substitute for a modified opinion.

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