Author: Adv. Rtn. Bhumesh Verma
In the corporate world, auditors are the first and foremost key professionals entrusted with ensuring that the business operations of an entity are conducted in accordance with law and ethics. It is an auditor’s mandate to execute the audit process with the objective of bringing a transparent state of an entity’s financial affairs (including any act of unfair trade practice / siphoning of funds) to the knowledge of all the concerned quarters – all this without any fear of favour! This is particularly more important in the context of a listed company, where public shareholding and interest is involved.
The frequency of monumental financial frauds in the last few years has raised serious concerns over the credibility of auditors’ processes and ethics and at times has put the audit profession in a bad light.
As per the prevalent practice, auditors and the company management have interaction on crucial financial / business risks behind the closed curtains – the auditor’s conclusions derived from such interactions end up in audit report.
However, so far, an auditor wasn’t obligated to expressly cover certain matters in the audit report even although such matters had the potential to influence the understanding of financial statements/audit report – provided the company has provided a satisfactory explanation to the auditor in this regard.
However, a new regulation (SA 701) has been introduced in Auditing Standards by the Institute of Chartered Accountants of India (ICAI). This regulation makes it mandatory for auditors to report vital financial matters in the audit report. The underlying intent of the regulation is to uplift the credibility of the audit report by bringing more clarity/ transparency in the audit process.
This new regulation takes effect from the financial period beginning from April 01, 2018. It is made mandatory for auditors by the to report all key audit matters, i.e., vital financial/business matters (KAM) for the audit of general purpose financial statement in relation to listed entities.
This would, inter alia, include:
- All matters which are very crucial from the perspective of the audit of financial statements shall be considered as KAM. Auditors will pick the KAMs from the matters reflected during the interaction with the client.
- High financial/business risks, prospects associated with the management discretion, outstanding business impacting transactions contemplated during the audit period, etc., will be crucial parameters which will play a vital role in the selection of KAMs.
Selection of KAMs will vary from industry to industry and purely dependent on the financial risks associated with the line of company business.
Another dimension to the new auditing regulation is that it expects that auditors will interact with the audit committee upfront to discuss the inclusion of KAMs prospects in the audit report.
Such upfront interaction amid the auditors/audit committee is likely to bring more clarity/transparency to the audit process by adding new perspectives for audit committees and auditors – it should ultimately uplift the overall quality and credibility of an audit report.
Another advantage of the new auditing regulation is that it would benefit the Investors/users by providing them with additional information on KAMs in the listed companies’ audited financial statements. Such vital information will assist the investors in assessing the impact of the key financial/business risks associated with the company business operations on their investment/financial prospects.
Typically, all the KAMs will be made accessible to the general public after the publication of a listed company’s annual report in the public domain along with distributing the same amid its shareholders/investors.
Reporting of KAMs is not mandatory for unlisted companies except in case the reporting is demanded as a part of a listed entity’s consolidated financial statement.
There are certain key modifications made in the audit report sequence and format.
Such modifications shall include –
- Rather than reframing Auditors responsibility– A link related to the relevant authority which prescribes the same can be provided in the report.
- Auditor’s Opinion paragraph to be mentioned at the start of the Auditor’s report.
- Assumptions related to going concerns to be provided in a separate paragraph
All over the world, authorities are taking significant measures towards rebuilding the lost confidence and trust in the functionality of auditors’ fraternity. The mandatory inclusion of KAMs to the audit process should open the gateway for more communication/interaction amid the key stakeholders involved in the audit process
Seamless integration of KAMs into the audit process will undoubtedly tend to boost the credibility of auditors’ fraternity and reinforce the audit process across organizations and uplift the corporate governance standards.