New Audit Report – SA 700, SA 705 & SA 706

Key Audit Matters - SA 701

Reporting on other information – SA 720

04 May 2019
CA. DEEPA AGARWAL
Agenda

► New and revised auditor reporting standards and effective date

► Expected benefits of the new auditor’s report

► Enhancements to the auditor’s report

► Significant changes made in SA 700

► SA 701 – Key Audit Matters

► Significant changes made in SA 705

► What Does The Change Mean

► SA 720 - Reporting on Other information

Page 2 Revised Reporting Standards

Why change the auditor’s report?

► Auditor reporting initiatives around the world were largely prompted by

the global financial crisis
► Investors and other users of the auditor’s report want more
information about the audit
► The “pass/fail” opinion is valued but the auditor’s report could be more
informative
► Need to increase the value of auditor reporting by making the information
provided in auditor’s report more relevant to users
► Improved auditor reporting is viewed as essential to the continued
relevance of the audit globally
► Need for a new foundation of global auditor reporting and improved
auditor communications

Page 3 Revised Reporting Standards

Expected benefits of the new auditor’s report

► Enhanced value of the auditor’s report

► Overall improvement of the key deliverable of the audit
► Greater transparency of the audit and its results
► Including information about areas of auditor focus in the auditor’s
report was designed to:
► Increase audit quality, due to increased auditor focus on matters to be
reported
► Enhance financial statement disclosures, due to increased focus by
management and those charged with governance on matters to be
reported
► Enhance communications between the auditor and those charged with
governance
► Increased professional skepticism in areas where KAM are identified

Page 4 Revised Reporting Standards

New and revised auditor reporting standards
and effective date
► The new and revised auditor reporting standards comprise:
► SA 700 (Revised), Forming an Opinion and Reporting on Financial
Statements
► SA 701, Communicating Key Audit Matters in the Independent Auditor’s
Report
► SA 705 (Revised), Modifications to the Opinion in the Independent
Auditor’s Report
► SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report
► Standards effective for audits of financial statements for periods
beginning on or after 1 April 2018

Page 5 Revised Reporting Standards

Auditor’s Report – Changes in Report
Structure
Earlier Structure of Auditor’s Report: Revised Structure of Auditor’s Report:
Report on the Financial Statements Report on the Audit of Financial Statements
► Title: Independent Auditor’s Report ► Title: Independent Auditor’s Report
► Addressee: As per Engagement terms ► Addressee: As per Engagement terms
► Subtitle: Report on the FS ► Subtitle: Report on the Audit of the FS
► Introductory Paragraph: To mention ► Opinion: Including information to be mentioned in
► Whose FS are audited and period covered introductory paragraph before
► Title of each statement in FS ► Basis for Opinion
► Refer summary of significant accounting policies ► Material Uncertainty Related to Going Concern
and explanatory information ► Emphasis of Matter
► Management’s Responsibility for the Financial ► Key Audit Matters
Statements Other information
►
► Auditor’s Responsibility
► Responsibilities of Management and Those Charged
► Basis for modified opinion, if any with Governance for the Financial Statements
► Auditor’s Opinion ► Auditor’s Responsibilities for the Audit of the Financial
► Emphasis of Matter Statements - enhanced
► Other Matters ► Other matter
► Subtitle: Report on Other Legal and Regulatory ► Subtitle: Report on Other Legal and Regulatory
Requirements Requirements*
► Signature Signature
►
► Date Date
►
► Place
► Place
* Additional reporting on managerial remuneration u/s 143(3) in addition to reporting on CARO

Page 6 Revised Reporting Standards

Significant changes made in SA 700

Basis for Opinion

The auditors' report include a section with the heading "Basis of
Opinion" that:
► States that audit is conducted in accordance with Standards of
Auditing (SAs)
► Refer to the section of the auditors' report that describe auditors'
responsibilities
► Includes a statement that the auditor is independent of the entity in
accordance with relevant ethical requirements and has fulfilled
auditors' other ethical responsibilities
► States whether the auditor believes that auditor has obtained
sufficient and appropriate evidence to provide opinion

Page 7 Revised Reporting Standards

Significant changes made in SA 700

More elaborate description of management’s responsibilities including reporting

on going concern

► Management responsibility paragraph shall now include responsibility in assessing the entity’s
ability to continue as a going concern and whether the use of the going concern basis of accounting
is appropriate as well as disclosing, if applicable, matters related to going concern. The
explanation of management’s responsibility for this assessment shall include a description of when
the use of the going concern basis of accounting is appropriate
► Management is responsible for preparation and fair presentation of the financial statements in
accordance with aforesaid Accounting Standards
► This section of auditors report shall identify those responsible for the oversight of the financial
reporting process, when those responsible for such oversight are different from those who fulfil the
responsibilities. In this case, the heading of this section shall also refer to “Those Charged with
Governance” or such term that is appropriate in the context of the legal framework applicable to
entity

Page 8 Revised Reporting Standards

Significant changes made in SA 700

Improved description of the responsibilities of the auditor

I. This section of audit report includes:

► State that the ‘objectives’ of the auditor are as follows:
(i) Obtain reasonable assurance about whether the FS as a whole are free from material
misstatement, whether due to fraud or error; and
(ii) To issue an auditor’s report that includes the auditor’s opinion.
► State that reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with SAs will always detect a material misstatement when it
exists; and
► State that misstatements can arise from fraud or error, and either:
► Describe that they are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of
these financial statements; or
► Provide a definition or description of materiality in accordance with the applicable
financial reporting framework

Page 9 Revised Reporting Standards

Significant changes made in SA 700

Improved description of the responsibilities of the auditor

II. Auditor exercises professional judgement and maintains professional skepticism throughout
the audit
► Describe an audit by stating auditors' responsibilities are:

► Identify and assess ROMM, design and perform audit procedures responsive to those risks to
obtain sufficient and appropriate evidence.
► To obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances. We are also responsible for expressing
our opinion on whether the Company has adequate internal financial controls system in place
and the operating effectiveness of such controls
► Evaluate the appropriateness of accounting policies used and reasonableness of accounting
estimates and related disclosures made by the management
► Evaluate overall presentation, structure and content of financial statements including
disclosures
► Auditor shall conclude on the appropriateness of management’s use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern

Page 10 Revised Reporting Standards

Significant changes made in SA 700

Improved description of the responsibilities of the auditor

III. Auditor’s responsibility section of the auditor’s report shall also:

State that the auditor State that the auditor State the key audit matters are
communicates with provides those charged communicated in accordance with SA 701,
those charged with with governance with a with those charged with governance:
governance regarding: statement that : ► the auditor determines those matters that
► Planned scope and ► auditor has complied were of most significance in the audit of
timing of the audit with relevant ethical the financial statements of the current
and requirements period and are therefore the KAM
► Significant audit regarding ► Areas in which the auditor encountered
findings, including independence and significant difficulty during the audit
any significant communicate with
them all relationships ► Circumstances that required significant
deficiencies in modification of the auditors' planned
internal control that and
approach to the audit
the auditor ► other matters that
identifies during the may reasonably be ► The auditor describes these matters in the
audit thought to bear on the auditor’s report unless law or regulation
auditor’s precludes public disclosure about the
independence matter

Page 11 Revised Reporting Standards

Significant changes made in SA 700

Improved description of the responsibilities of the auditor

The specific information outlined in point I is mandatory to be included in auditor’s report whereas,
information mentioned in points II and III above can be disclosed as follows:
(a) Within the body of the auditor’s report or;
(b) Within an appendix to the auditor’s report, in which case the auditor’s report shall include a
reference to the location of the appendix or;
(c) By a specific reference within the auditor’s report to the location of such a description on a website
of an appropriate authority, where law, regulation or the auditing standards expressly permit the
auditor to do so

► Lets look at the new audit report now

Infosys audit
Rolls Royce
report

Page 12 Revised Reporting Standards

Rationale for amendments in the ‘Reporting
Standards’
Applicability: For audits of financial statements (FS) for periods beginning on or after 01 April 2018
Overall purpose: To improve the quality of audit and financial reporting

SA 700 (revised) issued:

► To highlight and draw attention to the auditor’s work and to management’s underlying
responsibilities and provide an additional focus on Going concern

SA 705 (Revised) issued:

► To provide guidance on the impact of Key Audit Matters (KAM) paragraph on modified auditor’s
report

SA 706 (Revised) issued:

► To prohibit the auditor from using Emphasis of Matter (EOM) paragraph or Other Matters (OM)
paragraph when the matter has been determined to be a KAM
► To provide an understanding of the relationship between EOM and KAM in the audit report

SA 701 issued:
► To communicate key audit matters in the auditor’s report
► To address both the auditor’s judgment as to what to communicate in the auditor’s report and the
form and content of such communication

Page 13
SA 701 - Key Audit Matters

Matters to be reported as "Key Audit Matters"

► KAMs are those matters, which in the auditor’s professional judgement, were of most
significance in the audit of the financial statements of the current period
► Selected from matters communicated with those charged with governance (TCWG), which
include significant findings from the audit of the financial statements of the current period,
► For audits of complete sets of general purpose financial statements of listed entities, the
auditor shall communicate key audit matters in the auditor’s report in accordance with SA 701
► When the auditor is otherwise required by law or regulation or decides to communicate key
audit matters in the auditor’s report, the auditor shall do so in accordance with SA 701

Matters requiring significant auditor attention depend on:

► Areas of higher assessed risk of material misstatement, or significant risks identified
► Areas involving complexity and significant auditor/management judgments, accounting
estimates having high estimation uncertainty
► Effect on the audit of significant events or transactions that occurred during the period
► Significant transaction with related parties
► Unusual transactions
► Areas posing significant difficulties or challenges to auditor in obtaining sufficient appropriate
audit evidence /forming an opinion on financial statements

Page 14
Examples of KAMs

Some examples of key audit matters are:

► Areas require complex and significant management judgement in financial statements

► Certain complex areas relating to revenue recognition.

► Provisions and contingencies.

► Taxation matters (multiple tax jurisdictions, uncertain tax positions, deferred tax assets).

► Assessment of impairment.

► Put arrangements over non-controlling interests.

► IT systems and controls.

► Significant difficulties encountered during the audit – related party transactions,

limitations on group audit
In short, areas where there are significant estimates / judgements involved, where the
auditor had the need to use experts, where the auditor had the need to seek consultation,
where there are significant transactions with related parties that are outside the normal
course of business, any matter that has the potential to have a significant effect on the
auditor’s overall strategy, are good start points.

Page 15
Purpose of KAM

Greater transparency of audit:

To enhance the communicative value of the auditor’s report by providing greater transparency about
the audit that was performed
Understanding significant matters
Provides additional information to users of financial statements and auditor’s report thereon to assist
them in understanding those items that, in auditor’s professional judgment, were most significant to the
audit
Understanding entity’s significant management judgements
Communicating key audit matters may also assist intended users in understanding the entity and
areas of significant management judgment in the audited financial statements.

Page 16
How to identify KAM?

KAM are defined as those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements of the current period

Matters that were communicated with

those charged with governance
(TCWG)

Matters that require

significant auditor
attention

Matters of most
significance in
the audit

KEY AUDIT MATTERS

Page 17
Matters of Most Significance in Audit –
Factors to consider
► Nature & extent of communication about the matter with TCWG.

► Importance of the matter to users’ understanding of FS.

► Nature of underlying accounting policy – its complexity/subjectivity.

► Nature and materiality of corrected and accumulated uncorrected misstatements due to

fraud / error related to the matter.

► Nature & extent of audit effort needed to address the matter

► Nature & severity of difficulties faced by auditor in applying audit procedures, evaluating
results of those procedures, and obtaining relevant and reliable evidence

► Severity of any control deficiency identified relevant to the matter

► Whether matter involved no. of separate but related audit considerations.

Page 18
SA 701 - Applicability

► Applicability date: Audit of financial statements beginning on or after 1 April 2018

► Listed entities applicability: Complete set of general purpose financial statements for listed
entities. Status of listing to be checked at reporting date (Balance Sheet date). If during the
reporting period listed entity gets delisted, SA 701 is not applicable. SA 701 is also not
applicable for entities in process of listing as at reporting date.

► Entities listed outside India: SA 701 is applicable for audit of complete set of general purpose
financial statements in respect of listed entities. Hence entities whose securities are listed on
any stock exchange outside India falls within purview of SA 701

Securities include shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature

► Applicability for unlisted entities:

► When auditor decides to communicate, or

► When auditor is required by law or regulation

Page 19
SA 701 - Applicability

► Interim Financial Statements:

► Interim financial statements submitted only to Board of Directors cannot be construed as

general purpose financial statements and hence SA 701 is not applicable

► Exception: If interim financial statements are complete in all respects and hosted on
company’s website, it can be construed to be general purpose financial statements and
SA 701 will apply in such case

► Financial results under SEBI :

► Financial results under SEBI (Listing Obligations and Disclosure Requirements)

Regulations 2015 are not a complete set of financial statements and hence in audit of
these financial results, SA 701 is not applicable.

► Early adoption: Not permissible

► Audits provided for tax financial statements: tax financial statements are considered as
general purpose financial statements since they are provided to a regulator, they are not
intended to meet the common financial information needs of a wide range of users.
Therefore, SA 701 does not apply to tax financial statements

Page 20
SA 701, Communicating Key Audit Matters in
the Independent Auditor’s Report
Key Audit Matters

Communicating key audit matters is not a substitute for:

► Disclosures in financial statement that the applicable financial reporting
framework requires management to make, or that are otherwise necessary
► The auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705
► Reporting in accordance with SA 570 (Revised) when a material uncertainty
exists relating to events or conditions that may cast significant doubt on
entity’s ability to continue as a going concern

Page 21
Communication with those charged with
governance - KAM
Auditor to communicate with those charged with governance
► Matters the auditor has determined to be a KAM or
► If there are no KAM to communicate in auditor’s report
► Appropriate timing of communication
► Communicate preliminary views about KAM at the time of discussing planned
scope and timing of audit
► Further discussion when communicating about audit findings
This would help to alleviate practical challenges of having a robust communication at
the time the financial statements are being finalized for issuance

Auditor’s determination of KAM is based on the results of the audit or evidence

obtained throughout the audit

Page 22
Circumstances where a KAM should not be
communicated

There are two situations where KAM should not be communicated

► Law or regulation precludes public disclosure about that matter;
► E.g. a public communication might prejudice an investigation by an
appropriate authority into an actual, or suspected, iilegal act (matter that
are or appear to be related to money laundering)
► In extremely rare circumstances, the auditor determines that the
matter should not be communicated because the adverse
consequences of doing so would reasonably be expected to outweigh
the public interest benefits of such communication

Issues regarding a decision to not communicate a matter are complex and involve
judgement – auditor may obtain legal advice

Page 23
Circumstances where KAM Section required but no KAM
will be communicated/described thereunder

Key Audit Matters

There are three situations

► auditor determines there is no KAM
► auditor determines that a KAM should not be communicated due to
restrictions in SA 701 and no other KAM determined by him
llustrative wording
“We have determined that there are no key audit matters to
communicate in our report”.
► The only KAM determined is a matter giving rise to modified opinion
or a material uncertainty related to going concern
In rare circumstances, there may be no KAM to communicate

Page 24
Reporting of KAM

If the auditor has determined there are no key audit matters to communicate
(matter giving rise to modified opinion or a material uncertainty related to events
or conditions that may cast significant doubt on entity’s ability to continue as
going concern are by their nature KAM):

Key Audit Matters

► [Except for the matter described in the Basis for Qualified (Adverse) Opinion
section or Material Uncertainty Related to Going Concern section,] We have
determined that there are no [other] key audit matters to communicate in our
report

Page 25
How to write KAM?

► Using an appropriate sub-heading “KAM” the auditor shall describe

each KAM with reference to the related disclosures in financial
statements and explain:
► Why the matter was considered to be one of the most significant
► Changes in the entity’s strategy or business model that had a material effect on
the financial statements
► New/emerging accounting policies, e.g.: industry specific matters on which
engagement team consulted within the firm
► Economic conditions that affect auditor’s ability to obtain audit evidence, eg:
illiquid markets for certain financial instruments
► How the matter was addressed in the audit
► Auditor’s response or approach to address the matter
► A brief overview of procedures performed
► Auditor’s key observations with respect to the matter

Page 26
How to write KAM?

Separate Section for reporting on KAM

► To be placed immediately below “Basis for Opinion” Section

► If “Material Uncertainty Related to Going Concern” Section required as per revised SA

570, then immediately below that Section
► Auditor needs to describe each KAM under appropriate sub-heading so that individual
KAM are differentiated
► If there is no KAM to communicate, KAM Section is still required where the auditor
needs to include a statement to that effect
► Do not include in KAM references to disclosures or other information outside the
financial statements, unless such other information is audited

Auditor’s report illustration - Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with SA 701.]

Page 27
How to write KAM?

Writing guidelines for KAM

KAM should be entity-specific and avoid standardized or overly technical
language; description of a KAM should not
► Imply that the matter has not been appropriately resolved by the auditor in
forming the opinion on the financial statements
► Contain or imply discrete opinions on separate elements of the financial
statements (a “piecemeal opinion”)
► Include a precise, concise and entity-specific explanation about the
nature of the matter
► Provide a clear rationale for the team’s selection of the matter as one
of most significance to the audit.
► Include a reference to the related disclosures

Page 28
Implementation guide to SA 701

► Consolidated Financial Statements:

The principal auditor or the group auditor while reporting on key audit
matters in accordance with SA 701 should comply with the
requirements of SA 600 and the Guidance Note on audit of
consolidated financial statements.
Group Auditor: required to assess matters that in his professional
judgement, are key audit matters from the perspective of consolidated
financial statements
Parent Auditor is auditor of all components: he would be required
to assess matters that in his professional judgement are key audit
matters from a perspective of the consolidated financial statements.
Parent’s auditor is not the auditor of all the components to be
included in the consolidated financial statements: Consider the
requirements of SA 600, ‘Using the work of an other auditor

Page 29
Interrelationship of KAM with Other Elements
of Auditor’s Report
KAM vs Modified Opinion

► Auditor should not communicate a matter as KAM if that matter

requires modification of auditor’s opinion
► Matters giving rise to modified opinion are by their nature KAM.
However, these should be reported as per revised SA 705 and not
under KAM
► KAM section should not be given in case of disclaimer of opinion
unless required by law or regulation
► KAM section may be given in case of qualified opinion and adverse
opinion
► Adverse opinion given when a material misstatement has a pervasive
effect on the financial statements – auditor to carefully consider whether
communicating any further KAM is appropriate

Page 30
Interrelationship of KAM with Other Elements
of Auditor’s Report
KAM vs EOM / OM Paragraph

► Concepts of EOM and OM still exist in accordance with revised SA 706.

► EOM/OM paragraph cannot be used as a substitute for KAM.
► Revised SA 706 expressly prohibit including under EOM / OM paragraph, a
matter that has been determined as KAM.
► Sometimes, a matter determined as KAM may also be, in auditor’s judgment,
fundamental to users’ understanding of FS. In such cases, auditor may
highlight such matter by presenting it more prominently than other matters in
KAM section (e.g., as the first matter) or by including additional information in
its description to indicate its importance to users’ understanding of FS

Page 31
Interrelationship of KAM with Other Elements
of Auditor’s Report
KAM vs Going Concern

“A Material Uncertainty related to Going Concern” is by its nature KAM. However,

it should be reported as per revised SA 570 and not under KAM.
► Auditor's report to focus more on GC
► Explicit description of the respective responsibilities of management and
the auditor in all auditor’s reports
► Separate GC section required when material uncertainty exists, with a
heading “Material Uncertainty Related to Going Concern”
► New requirement to challenge adequacy of disclosures for GC “close
calls”

Page 32
How to write KAM?

How to Communicate the KAM?

► Using an appropriate sub-heading “KAM” the auditor shall describe each KAM with reference to the
related disclosures in financial statements and explain:
► Why the matter was considered to be one of the most significant
► Changes in the entity’s strategy or business model that had a material effect on the
financial statements
► New/emerging accounting policies, e.g.: industry specific matters on which engagement
team consulted within the firm
► Economic conditions that affect auditor’s ability to obtain audit evidence, eg: illiquid
markets for certain financial instruments
► How the matter was addressed in the audit
► Auditor’s response or approach to address the matter
► A brief overview of procedures performed
► Auditor’s Key observations with respect to the matter

Page 33
How to write KAM?
Separate Section for reporting on KAM

► To be placed immediately below “Basis for Opinion” Section

► To include preamble language

► If “Material Uncertainty Related to Going Concern” Section required as per revised SA 570, then immediately below
that Section

► In this auditor needs to describe each KAM under appropriate sub-heading so that individual KAM are differentiated

► If there is no KAM to communicate, KAM Section is still required where the auditor needs to include a statement to
that effect

► Do not include in KAM references to disclosures or other information outside the financial statements, unless such
other information is audited

Auditor’s report illustration - Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with SA 701.]

Page 34
Communicating KAM

Use of Auditor’s Professional judgement in Presentation of KAM

► Order of presentation of individual KAM
► Order of Individual KAM :
► relative importance of each KAM
► based on auditor’s judgment
► corresponding to the manner in which such matters are disclosed in FS
► Number of KAM (No Ceiling By Standard)
► complexity of the entity
► nature of entity’s business and environment
► facts and circumstances of the audit engagement
Lengthy list of KAM may be contrary to notion of matters being those of most
significance in the audit

Page 35
Documentation of KAM

► Documentation requirements

► Matters required significant auditor attention and rationale for auditor’s determination as to
whether it is a KAM or not

► Rationale for auditor’s determination in case there is no KAM to communicate

► Rationale for auditor’s determination not to communicate in the auditor’s report a matter
determined to be a key audit matter

► a written representation from management as to why public disclosure about a matter

determined to be a key audit matter is not appropriate, including management’s view about the
significance of the adverse consequences that may arise as a result of such communication

► Auditor not required to document why other matters communicated with those charged with
governance were not matters that required significant attention

Documentation of key audit matters

Page 36
Illustrative wordings - KAM

Description of Key Audit Matter Auditor’s response

Revenue recognition

► Revenue from rendering of container handling services is We have performed the following procedures in
recognised and accrued with reference to the throughput relation to the accuracy of revenue recognised and
handled and the terms of agreements for such service. For accrued:
the year ended 31 March 2018, revenue from container • Understood, evaluated and tested the key
handling services amounting to INR XXXX million is
controls over the tariff applied in container
recognised based on the containers handled as well as the handling services. We selected a sample of
tariff applied. The tariff applied is the rate agreed with
transactions and:
customers or estimated by management based on the latest
terms of the agreement or latest negotiation with customers • Agreed the applied tariff to the respective terms
and other industry considerations as appropriate. in the contracts or latest correspondence with
customers where the tariff has been estimated
► Due to the large variety and complexity of contractual terms, by management.
as well as ongoing negotiations with customers, significant
judgements are required to estimate the tariff rates applied. If • Agreed throughput handled, used in the
the actual rate differs from the estimated rate applied, this will calculation of tariffs, to the operating system
have an impact on the accuracy of revenue recognised in the recording throughput.
current year and accrued as at year end. • Tested revenue calculations and agreed the
revenue recognised to the underlying
accounting records.
• Checked to bank advices or credit notes on a
sample basis for the net settlement and
reviewed aged items for any disputed amounts.

Page 37
Illustrative wordings - KAM

Description of Key Audit Matter Auditor’s response

Restructuring and severance charges

► The Company closed five store locations due to poor Based on our audit procedures performed, we
operating results. This is the first time the Company has made evaluated the accounting for store closures by the
such closures. The Company recorded INR [X million] in management and assessed the adequacy of the
restructuring costs, that related primarily to remaining lease required disclosures within the financial
obligations and severance packages. The Company statements.
appropriately considered and documented its treatment in
accordance with AS 29/Ind AS 37.
► The Company made the determination to close these stores
based on declining operating results in those regions and its
analysis of future growth opportunities.

Page 38
Illustrative wordings - KAM
Description of Key Audit Matter Auditor’s response

Accounting for lease rental income

► Lease rental income amounted to INR XXXX million for the Our audit procedures included considering
year ended 31 March 20XX. Generally lease revenue is evaluating the adequacy of Company's revenue
recognized net of discount, in accordance with the terms of recognition accounting policies and assessing
lease contracts over the lease term on a straight line basis compliance with the policies in terms of the
using a standard IT system implemented in late 20XX. Also applicable accounting standards.
there are few lease arrangements where revenue recognition
We performed test of controls, assisted by our IT
is not subject to straight line basis depending on the nature of specialists, over revenue recognition with specific
the lease arrangements and performance of the lease. There
focus on whether lease income is recorded over
is an inherent risk around the accuracy of the revenue the lease term on a straight line basis or other
recorded given the complexity of the IT system and impact of applicable basis as per the terms of the lease
the terms of lease agreements to the revenue recognition. contract. We performed tests of details, on a
sample basis, to review the case contracts entered
into with the customers to assess whether lease
income recorded is as per the contract terms and
also to identify any non-standard lease clauses
and to assess the appropriateness of the rental
income accounting. We assessed the
completeness of lease rental income recorded
during the year through matching the data used in
the revenue recognition to the approved lease
agreements with the customers. We also
performed detailed substantive analytical
procedures of case rental income and the timing of
its recognition.

Page 39
Significant changes made in SA 705

The Relationship between Disclaimer of Opinion and KAM

Unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the auditor’s report shall not include a KAM section in accordance with SA 701

However, if the auditor has expressed

an adverse opinion or disclaimed an
opinion on the financial statements, the
auditor shall describe in the Basis for
Opinion section the reasons for
any other matters of which the auditor is
aware that would have required a
modification to the opinion, and the
effects thereof

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What Does The Change Mean

FOR AUDITOR

► It is the auditor’s report, but management and audit committee are

keenly interested
► Discussions on the audit report may lead management to decide to
enhance or change their disclosures too.
► Getting the key audit matters right is a very challenging task
► Being precise about particular areas of focus is difficult to
articulate.
► Anticipate the time involved
► Engage early with stakeholders to finalise in time.

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Key Audit Matters – International Experience

► Being adopted in more than 110 countries

► Earlier adoption in a number of countries – UK, Netherlands, South
Africa, Australia
► Challenges identified
► Management time involved
► Disclosure of sensitive information
► Board collaboration

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Sector wise Insights

Goodwill (and related CGU 11 28 5 11 7 18 80

assets)
Revenue 6 13 6 4 4 4 37
Taxation 1 5 2 2 10 6 26
Acquisitions 10 9 2 - 1 3 25

Inventory 8 5 5 - 5 1 24

Provisions 2 4 - 5 10 1 22

Property investments - - 17 1 - 2 20

Receivables & allowances 6 3 1 3 4 2 19

Investment in related - 6 2 1 3 2 14
entities
Investments - 1 - 13 - - 14
Insurance related - - - 11 - 1 12

PPE & finite life intangibles 4 4 - 1 1 2 12

*Other Corporates denotes Technology, Media & Telecommunications (TMT) & Industrials
•

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Sector wise Insights (contd.)

Exploration & Evaluation - 1 - - 10 - 11

Financial instruments - - 3 2 3 1 9
Other 2 2 1 3 - 1 9
Disposals & assets held 3 3 - - 1 1 8
for sale
Interest bearing liabilities - 3 1 - 1 1 6
IT systems 2 2 - 2 - - 6

Trade & other payables - 3 - - 2 1 6

Expenses - 1 - 3 - - 4

Going concern related - - - - - - -

Total 55 93 45 62 62 47 364

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SA 720, The Auditor’s Responsibilities
relating to Other Information
SA 720 deals with auditor’s responsibilities relating to other information,
whether financial or non-financial information included in an entity’s
annual report which may include:
► Director’s Report (with annexures – Annual Return extracts,
Secretarial audit report, annual report on CSR, etc.)
► Management Discussion & Analysis

► Corporate Governance Report

► Business Responsibility Report

► Shareholder information

► Any other information/report forming part of the annual report

► Also, refer to Regulation 34 of the SEBI (Listing Obligations and

Disclosure Requirements) Regulations, 2015 specifying the contents
of the annual report.

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SA 720 (Revised)
The Auditor’s Responsibilities Relating to Other Information

Effective for audits of financial statements for periods beginning on/after April 1, 2018 –
Applicable to listed and unlisted corporate entities

Enhanced
Responsibilities on Expectations from management - What consists “Other
auditor availability of other information Information”

► Auditor to read and ► Timely availability of the draft of ► Documents that are
consider whether there is Annual Report including director’s provided to
material inconsistency report - before audit report is finalised stakeholders along
between the ► Written confirmation that drafts are with FS
► other information and near final ► Annual Report (also
the FS ► Other Information to be consistent with refer Regulation 34 of
► other information and financial statements LODR)
the auditor’s ► In case some information is not ► Director’s report
knowledge obtained in provided during audit process: ► chairman’s
the audit statement
 mention this fact in audit report
► Respond / perform
 written representation from ► Corporate
additional procedures if management that the final version of governance
there is material the outstanding documents, if any, statement/ report
inconsistency will be available to us prior to
► Report as required by SA issuance by entity.

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Examples

► Other information may include amounts or other items that are intended
to be the same as, to summarize, or to provide greater detail about, the
amounts or other items in the financial statements. Examples of such
amounts or other items may include:
► Tables, charts or graphs containing extracts of the financial
statements.
► A disclosure providing greater detail about a balance or account
shown in the financial statements, such as “Revenue for 20X1
comprised Rs. XXX million from product X and Rs. YYY million from
product Y.”
► Descriptions of the financial results, such as “Total research and
development expense was Rs. XXX in 20X1.”

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The Auditor’s Responsibilities Relating to Other
Information
Enhanced Responsibilities Steps

► Consider whether there is material Our procedures include the following:

inconsistency between the ► appraise audit committee/TCWG with
► other information and the FS revised requirements
► other information and the auditor’s ► Discuss with management timing of
knowledge obtained in the audit availability of the final version of
documents forming part of annual report.
► Respond when such material inconsistencies ► obtain a draft of AR including director’s
appear to exist or it otherwise becomes aware report, along with written confirmation that
that other information appears to be materially drafts are near final
misstated ► obtain a written representation from
► Report as required by the SA management that the final version of the
► Remain alert for indications that other
outstanding documents, if any, will be
information not related to the financial available to us prior to issuance by entity
statements or auditor’s knowledge obtained in ► re-iterate the agreed timelines during
the audit appears to be materially misstated. quarterly communications with audit
committee/ TCWG

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Some important considerations

► Where those charged with governance are to approve the other information
prior to its issuance by the entity, the final version of such other information is
the one that has been approved by those charged with governance for
issuance.
► Audit engagement letter may make reference to an agreement with
management to make available to the auditor the other information in a timely
manner, and if possible prior to the date of the auditor’s report.
► We request management to provide written representations that:
► Management is responsible for the other information;

► the other information is consistent with the financial statements (when

some or all of the other information is obtained prior to the date of our
auditor’s report);
► the final version of document(s) not available to us prior to our auditor’s
report date will be provided to us when available, and prior to issuance by
the entity, such that we can perform our procedures.

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Other Information - Reporting
The Auditor’s Responsibilities Relating to Other Information
► Management/Board should ensure that financial or non-financial information given in Annual Report (other than financial statements
and auditor’s report) is in consonance with the information in financial statements and auditor’s report
► To ensure the above the auditor is also required to read and consider the other information – financial or non financial – to identify
inconsistencies with financial statements and auditor’s report
► We are also required to include a separate section with a heading “Other Information” or other appropriate heading such as
‘Information other than the financial statements and Auditor’s report thereon’ in all cases i.e. irrespective of whether we have
something /nothing to report on other information.
► Based on our procedures performed on other information in the annual report, we have included the following language in our audit
report for the Company for the year ended March 31, 2019:

Other Information

The [Holding] Company’s Board of Directors is responsible for the other information. The other information comprises the [information included in the
Annual Report, but does not include the [standalone/consolidated] Ind AS financial statements and our auditor’s report thereon.]

Our opinion on the [standalone/ consolidated] Ind AS financial statements does not cover the other information and we do not express any form of
assurance conclusion thereon.

In connection with our audit of the [standalone/consolidated] Ind AS financial statements, our responsibility is to read the other information and, in
doing so, consider whether the other information is materially inconsistent with the [standalone/consolidated] Ind AS financial statements or our
knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is
a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

► Besides other matters; we will also obtain a written representation from the Management that the final version of the outstanding
documents namely………….. will be provided to us when available, and prior to issuance by the Company to enable us to
complete the procedures as required by SA 720 Revised. [TO INCLUDED WHEN WE HAVE NOT OBTAINED ALL OTHER
INFORMATION PRIOR TO OUR AUDITOR’S REPORT DATE]

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 Other Information - Reporting
The Auditor’s Responsibilities Relating to Other Information
► For a listed company - The auditor has obtained part of the other information prior to the date of the auditor’s report,
has not identified a material misstatement of the other information, and expects to obtain other information after the date
of the auditor’s report

Other Information

The [Holding] Company’s Board of Directors is responsible for the other information. The other information comprises
the X Report (but does not include the [standalone/consolidated] Ind AS financial statements and our auditor’s report
thereon), which we obtained prior to the date of this auditor’s report, and the Y report , which is expected to be made
available to us after that date.

Our opinion on the [standalone /consolidated] Ind AS financial statements does not cover the other information and
we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the [standalone/ consolidated] Ind AS financial statements, our responsibility is to read
the other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the [standalone/ consolidated] Ind AS financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s
report, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.

[When we read the Y report, if we conclude that there is a material misstatement therein, we are required to
communicate the matter to those charged with governance and [describe actions applicable under the applicable
laws and regulations] ]

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Other Information - Reporting
The Auditor’s Responsibilities Relating to Other Information
► For a private/unlisted public company - Illustrative reporting language for an Unlisted Company where no Other
Information is received prior to the auditor’s report date:

Other Information

“The Company’s Board of Directors is responsible for the other information. The other information comprises the
information included in the [X report], but does not include the [standalone/ consolidated] [Ind AS] financial
statements and our auditor’s report thereon.

Our opinion on the [standalone/ consolidated] [Ind AS] financial statements does not cover the other information and
we do not express any form of assurance conclusion thereon.

In connection with our audit of the [standalone/ consolidated] [Ind AS] financial statements, our responsibility is to
read the other information and, in doing so, consider whether such other information is materially inconsistent with
the [standalone/ consolidated] [Ind AS] financial statements or our knowledge obtained in the audit or otherwise
appears to be materially misstated.

The [X report] is not made available to us as at the date of this auditor's report. We have nothing to report in this
regard.”

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Documentation of other information

In addressing the requirements of SA 230, the auditor shall include in the

audit documentation:

► Documentation of the procedures performed under this SA; and

► The final version of the other information on which the auditor has
performed the work required under this SA.

Disclaimer of opinion – Auditor’s report not to include reporting on other

information

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 Examples

Appendix 1 to the revised SA 720 contains examples of amounts or other items that may be included in the
other information :
► Amounts
► Items in a summary of key financial results, such as net income, earnings per share, dividends, sales
and other operating revenues, and purchases and operating expenses.
► Selected operating data, such as income from continuing operations by major operating area, or sales
by geographical segment or product line.
► Capital expenditures by segment or division.
► Amounts involved in guarantees, contractual obligations, legal or environmental claims, and other
contingencies.
► Financial measures or ratios, such as gross margin, return on average capital employed,
► Other Items
► Explanations of critical accounting estimates and related assumptions.
► Identification of related parties and descriptions of transactions with them.
► Articulation of the entity’s policies or approach to manage commodity, foreign exchange or interest rate
risks, such as through the use of forward contracts, interest rate swaps, or other financial instruments.
► Descriptions of the nature of off-balance sheet arrangements.
► Descriptions of guarantees, indemnifications, contractual obligations, litigation or environmental liability
cases, and other contingencies, including management’s qualitative assessments of the entity’s related
exposures.

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Thank You

[email protected]
[email protected]

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