a3_bThe new auditor reporting requirements are not just going to affect the audits of listed entities. This article highlights some of the considerations for smaller entities in terms of the requirements applicable to all entities and those that may be applied on a voluntary basis.

As from 15 December 2016 the new auditor reporting standards will come into effect. The requirements to communicate key audit matters (KAM) and to disclose the name of the engagement partner have been well communicated already and are compulsory for listed entities only.  But there are other changes that impact all audits:

  • The opinion section must now be presented first, followed by the Basis for Opinion section.
  • A requirement to make a positive statement about independence and ethical responsibilities.
  • Additional requirements to report on going concern.
  • More details regarding the auditor’s responsibilities and the key features of an audit.

However it should be noted that application of the listed company specific requirements regarding the communication of KAM are also allowed in other audits (i.e. voluntary application).  And the question should be whether the disclosure of KAM will be beneficial for non-listed entities?

Voluntary disclosure of key audit matters

Key audit matters are defined as those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period. Although this is a matter of professional judgement, the focus should be on areas of significant auditor attention in the context that an audit is risk-based, for example

  • Areas identified as significant risks or involving significant auditor judgement.
  • Areas in which the auditor encountered significant difficulty during the audit, including with respect to obtaining sufficient appropriate audit evidence.
  • Circumstances that required significant modification of the auditor’s planned approach to the audit, including as a result of the identification of a significant deficiency in internal control.

The partner and firm who audit smaller entities (SMEs) may often have more opportunities to communicate their audit approach and provide comments in relation to identified significant matters than the listed company auditor who may not be practically able to communicate with all levels of management in large corporations. However the auditor’s report is still the key deliverable that addresses the output of the audit process for users of the audited financial statements, whether they are listed, non-listed companies or SMEs.

There are a number of factors that have to be considered in deciding on the voluntary disclosure of KAM; for example costs associated with disclosure and, most importantly, whether such disclosure will add value to the entity.

The purpose of communicating KAM is to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that has been performed. By supplementing the existing avenues of communication, such as the management report, and formalising informal communications, disclosure of KAM will provide additional information to owner-managers of SMEs, as well as other intended users of the financial statements to assist them in understanding those matters that, in the auditor’s professional judgment, were of most significance in the audit and understand the entity and areas of significant management judgment in the audited financial statements.  This is expected to have a positive effect on user’s perception of the audit and of the financial statements even for SMEs.

Is there a difference between KAM and the current “Emphasis of matter” or “Other matters” paragraphs” that are already available to auditors?  The most common use of “Emphasis of matter” paragraphs currently is to highlight material uncertainties relating to going concern (which will now be replaced by a similar paragraph as part of a separate Going Concern section – see below) or to emphasise other matters that are already disclosed in the financial statements but need more emphasis. KAM can be compared to the current “Other matters” paragraphs that can be used to communicate matters that are not necessary disclosed in the financial statements but are relevant to users’ understanding of the audit.  However, in practice these paragraphs seldom provide useful information about the audit.

Voluntary disclosure of KAM may just be the opportunity for auditors to distinguish their product.  By nature SMEs have different challenges and issues that affect their financial and operational functioning. The shift from boilerplate templates for auditor reports to providing more entity-specific and audit-specific information can serve to emphasise the unique challenges that affect an entity and one of its most important governance elements, the independent audit.

In addition to the cost-benefit considerations mentioned above, auditors may also be concerned about increased liability risk, costs that cannot be recovered and further delaying the audit.  There is no evidence yet that this additional information will significantly affect any of these concerns or that it will even indeed enhance communication, but research (Bedard, Gonthier-Besacier, & Schatt, 2014) indicates that the disclosure of additional information by the auditors may at least have a symbolic (if not informative) value.

In summary, should auditors of smaller entities add KAM to their reports?  Disclosure of KAM will uniquely identify entity-specific issues and challenges, and provide more relevant information about the audit that has been performed, using the requirements and application material and guidance provided in the new ISA 701.  SMEs may stand to get more from the audit services when KAM is disclosed, further drawing the attention of those charged with governance (in the case of SMEs primarily the directors and owner-managers) to the value an audit of financial statements brings.

On the negative side, the informative value of such disclosures for smaller entities is questionable, it may cause delays and may add costs to audits that are already under time and cost pressure (e.g. owing to more interaction between the auditor and the audit client, and involvement of more senior audit personnel, including more audit partner time). There could also be a perception that it adds even more to the audited financial statements that are already perceived as “information overload”.

We would recommend that auditors consider each of their clients individually against the above considerations, discuss the matter with their clients and then make an informed decision on an engagement level.  It could be worthwhile to “dry-run” once and see if it adds value to SMEs?

Going concern reporting

Going concern is a key issue that affects most SMEs at some stage, especially at the initial stages of the business due to lack of funding and other operational issues.  Matters relating to going concern may be determined to be KAM and hence communicated in the auditor’s report in accordance with the new ISA 701, provided that the auditor does not conclude that a material uncertainty exists regarding going concern.

Where a material uncertainty exists regarding going concern, there are now more specific reporting requirements, even if such an uncertainty is adequately disclosed in the financial statements.  This includes specific reference to such disclosure, as well as the inclusion of a new paragraph headed “Material uncertainty related to going concern”. The new requirements are expected to affect the audits of many smaller entities.

While this is a significant strengthening of the current requirement in ISA 570 which requires the matter to be highlighted in an “Emphasis of matter” paragraph, it is a relatively small change. But it signals the beginning of a project that will include the reporting frameworks and that will revisit the entire going concern reporting regime.  The standards do not yet require an explicit statement about the applicability of the going concern concept, but that is not ruled out for future developments.


These changes may have positive benefits for audit quality and users’ perceptions of it; also in relation to the audits of smaller entities. A renewed focus on matters to be reported could indirectly result in an increase in the auditor’s professional scepticism, and result in a more robust dialogue with those charged with governance, both of which may contribute to increased audit quality.

Henk Heymans Dexter Moyo
Partner, Johannesburg, RSM Senior Trainee, Johannesburg, RSM


**Article originally appeared in Accountancy SA – 14 March 2016

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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