Messing with tradition – deconstructing Key Audit Matters. Is it fluff? #AuditorProud

Carolyn Ralph, Partner, KPMG Department of Professional Practice

Trendy restaurants selling deconstructed pavlova really mean…meringue, cream, fluff and an Uluru shaped pile of strawberries all sitting separately on a plate covered in icing sugar. If deconstruction is that easy, let me try deconstructing Key Audit Matters.

Key Audit Matters, or KAMs as they have quickly become known, are tailored narratives added to audit reports of listed entities[1]. They are the auditor’s description of matters, in their professional judgement, that were of most significance in the audit. Gone are ye-old-days where tradition only allowed standardised wording, passing or failing the financials. KAMs modernise our opinions, sharing openly the pathways taken to form our opinion, without losing the quality, independence and value of a true and fair opinion.

I talk to auditors about ‘what took the most time, effort and attention’ and why, when forming an opinion. The old ‘what keeps you up at night’ question. These are KAMs.

A common KAM I see is the audit attention applied to goodwill and intangibles for potential impairment.  Accounting for these assets requires estimation of lifetime future cash receipts expected to be derived from using the asset and associated cash payments. Unlike Harry Potter, auditors don’t have a magic wand or crystal ball.  Independently questioning these assessments is particularly challenging and take the time and attention of our senior experienced and industry savvy auditors.

To non-auditors, it may not be obvious what drives auditor effort and attention. Dominating most auditors thinking will be complexity. Complexity, in its many forms, increases the risk of error, disguises nuances important to the accuracy of financial reporting, and means you have to look deeper to test with confidence. If there were more ingredients (than sugar!) in a pav, it would be harder to make and harder to figure out why yours caved in.

Examples of complexity include regulation, go-to-market contracting conditions, volatile and unpredictable economic and business conditions, multiple and/or complicated systems.

Shareholders can now read, in KAMs, about what management and the Board have been privately hearing from auditors, behind the boardroom doors, for decades. The MasterChef opening their recipe book revealing the humble pav’s secrets? KAMs are the auditor’s inner thoughts of what conditions led them to apply more effort to a certain item and the rigour of procedures to achieve high audit quality.

Shareholders shouldn’t use the KAMs as a proxy summary of the financial position and performance of the entity. This is not the intention of KAMs, albeit when read together with the financial report can give shareholders insights never before seen.

I will leave you to decide what part of the deconstructed pavlova KAMs are. A warning to all auditors, avoid the fluff.  Now….where was my #KAM#wand?

KPMG released Key Audit Matters: Auditor’s report snapshot 28 March 2017, providing our insights and observations on KAMs from published audit reports of 56 entities from the ASX 500 with 31 December 2016 year ends.

[1] ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report issued by the Australian Auditing and Assurance Standards Board, applicable to audits of general purpose financial reports of listed entities, for financial reporting periods ending on or after 15 December 2016

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