Module: | SEBI LODR & Corporate Governance Frameworks
Q39: Consider the following statements regarding the communication of Key Audit Matters (KAM) in the independent auditor's report under SA 701:
1. Communicating Key Audit Matters is a mandatory requirement in the audit reports of all listed entities.
2. A matter giving rise to a modified opinion must be described in the Basis for Qualified or Adverse Opinion section, rather than being described in the Key Audit Matters section.
3. The auditor is permitted to communicate Key Audit Matters for unlisted entities if they decide to do so voluntarily or if required by law or regulation.
Which of the above statements is/are correct?
2. A matter giving rise to a modified opinion must be described in the Basis for Qualified or Adverse Opinion section, rather than being described in the Key Audit Matters section.
3. The auditor is permitted to communicate Key Audit Matters for unlisted entities if they decide to do so voluntarily or if required by law or regulation.
Which of the above statements is/are correct?
✅ Correct Answer: D
🎯 Quick Answer:
D. All statements 1, 2, and 3 are correct.Structural Breakdown: Statement 1 is correct; SA 701 strictly mandates KAM for audits of complete sets of general purpose financial statements of listed entities.
Statement 2 is correct; modifications to the opinion take precedence and are structurally separated from KAM to avoid diluting the severity of the qualification.
Statement 3 is correct; while mandatory for listed entities, SA 701 explicitly allows voluntary application for unlisted entities if the auditor believes it enhances transparency.
Historical/Related Context: KAM was introduced to move away from the binary "pass/fail" nature of traditional audit reports, providing investors with a window into the complex judgments, high-risk areas, and intense debates the auditor had with management.
Causal Reasoning: By forcing the auditor to publicly articulate the most difficult parts of the audit, KAM enhances the communicative value of the report and increases the auditor's professional accountability regarding high-risk valuations.