Key audit matters are the issues that, in the auditor's professional judgement, were of most significance in the audit of the current period's financial statements. SA 701 requires them to be communicated in the auditor's report for listed entities.
Facts checked: 9 October 2026. ICAI made SA 701 effective for audits of periods beginning on or after 1 April 2018, after a one-year deferral. I could not confirm the exact ICAI wording on non-listed entities; the international standard allows a voluntary KAM section, so check SA 701 itself before including one for an unlisted client.
Where KAMs come from
KAMs are chosen from matters communicated to those charged with governance. The auditor looks at three things.
| Step | Question |
|---|---|
| 1 | Which matters needed significant auditor attention (higher risk areas, significant judgements, significant events)? |
| 2 | Of those, which were the most significant in this audit? |
| 3 | Can any be omitted because law prohibits disclosure, or in extremely rare cases because harm outweighs public interest? |
KAMs are not a substitute for a modified opinion, and they do not replace the entity's own disclosures. If the auditor disclaims an opinion, KAMs are not reported.
Structure of the KAM section
The section sits after the basis for opinion. For each matter:
- Why it was considered a KAM
- How it was addressed in the audit
- A reference to the related financial statement disclosure
Generic examples
These are illustrations, not extracts from any real report.
| Area | Why it can be a KAM | How it might be addressed |
|---|---|---|
| Revenue recognition | Multiple contracts, cut-off, timing under Ind AS 115 | Test controls, sample contracts, cut-off near year end |
| Trade receivables | Large balances, expected credit loss judgement | Ageing review, subsequent receipts, challenge of provision model |
| Inventory | Valuation and existence across locations | Count attendance, NRV testing, slow-moving review |
| Goodwill impairment | Management forecasts and discount rate | Evaluate assumptions, sensitivity, use of an expert |
| IT systems | Reliance on automated controls and data | Test general IT controls, access, change management |
Worked scenario
A listed manufacturer has receivables of ₹320 crore and a loss allowance based on a model. The audit team spent the most time challenging the model's inputs. The auditor includes "Valuation of trade receivables" as a KAM, stating the allowance amount, the audit procedures such as ageing tests and subsequent receipts, and the note reference. It does not give a separate opinion on the matter.
Mistakes to avoid
- Boilerplate wording copied from last year
- Listing every risk instead of the most significant few
- Describing management's position rather than the audit response
- Treating a KAM as a way to avoid a qualification
For report structure see the audit report format template and the audit process. Standards are indexed in the Ind SA resource.
Frequently asked questions
Does SA 701 apply to all companies?
It applies to listed entities. Voluntary use for others is for the auditor and client to agree; verify against the standard text.
How many KAMs should a report have?
There is no fixed number. It depends on how many matters were most significant.
Are KAMs the same as emphasis of matter?
No. An emphasis of matter paragraph (SA 706) draws attention to a disclosed matter fundamental to understanding the statements. A KAM explains audit significance.
Does a KAM mean the auditor found an error?
No. It signals where judgement and effort concentrated.
Related: concurrent audit and stock audit.
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