Materi Ibu Ningsih - Webinar IAPI-ACCA "Key Audit Matters in The Context of The New Audit Regulation"

Webinar IAPI - ACCA
Key Audit Matters

Presented by:
• Kusumaningsih Angkawidjaja – Indonesian Auditing and Assurance
Standards Board 1
Jakarta - June 30, 2020

© 2020 Institut Akuntan Publik Indonesia (IAPI)
Polling Question #1
Apakah anda pernah mendengar mengenai enhanced / new-style Independent
Auditor’s Report?
1. Sudah pernah mendengar dan pernah melihat contoh laporannya.
2. Sudah pernah mendengar tetapi belum pernah melihat contoh laporannya.
3. Pertama kali mendengar bahwa akan ada new-style independent auditor’s report.
Have you heard about the enhanced / new-style Independent Auditor’s Report?
1. Yes and have seen the example of such report.
2. Yes but have not seen the example of such report.
3. First time to hear that there will be new-style independent auditor’s report.
2
Polling Question #2
Apakah anda sudah pernah membaca ED SA 701 (ISA 701) mengenai
“Pengomunikasian Hal Audit Utama Dalam Laporan Auditor Independen”?
1. Sudah membaca standar tersebut secara keseluruhan.
2. Sudah membaca sebagian dari standar tersebut.
3. Belum pernah membaca standar tersebut.
4. Tidak mengetahui bahwa ED SA 701 sudah diterbitkan.
Have you read ED SA 701 (ISA 701) regarding “Communicating Key Audit Matters in
the Independent Auditor’s Report?
1. Have read the whole standard.
2. Have partially read the the standard.
3. Have not read the standard.
4. Not aware that ED SA 701 has been issued.
3
New-Style Enhanced Auditor’s Report & KAM
New style of audit Key Audit Matters:
reports:
This is the most
Without changing the significant change
scope of an introduced by the
independent audit, the new requirements –
new standard (ISA 700 the auditor needs to
series) open the door include descriptions
of key audit matters
for auditor to give users in the auditor’s
more insight into the report (ED SA 701
audit and improve issued in Dec ‘19).
transparency.
4
Whats are the Changes in the New-Style Enhanced
Independent Auditor’s Report?
Current auditor’s report Draft new-style enhanced auditor’s report
1. Introductory paragraph 1. Auditor’s opinion
2. Management’s responsibility 2. Basis for opinion
3. Auditor’s responsibility 3. Material uncertainty regarding going concern (if any)
4. Audit procedures 4. Emphasis of matters (if any)
5. Basis for opinion 5. Key audit matters Certain
6. Auditor’s opinion 6. Others matters (if any) entities
7. Emphasis of matters (if any) 7. Other information

8. Other matters (if any) 8. Management and TCWG responsibilities
9. Auditor’s responsibility
5
New Style Auditor’s Report
• Report reordered – opinion required to go first.
• Revised description of management’s and those charged with
governance’s responsibilities including an assessment of the entity’s
ability to continue as a going concern and if the going concern basis of
accounting is still appropriate.
• Revised description of the auditor’s responsibilities including a
conclusion on the appropriateness of management’s use of the going
concern basis of accounting.
• Include a separate section with heading “Other Information” when at the
date of the report, we have obtained, or expect to obtain, the other
information.
• KAM section for certain engagements – significant change in the new
style auditor’s report.
6
Applicability to Implement KAM – According
to ISA 701 / ED SA 701
For audits of When we are

complete set of otherwise required When we otherwise
general purpose by law or decide to.
financial regulation.
statements of listed
entities.
7
What Are Key Audit Matters are those matters, that in the
The Key Audit auditor’s professional judgment were the most
significance in the audit of the financial statements
Matters (KAM)? of the current period.
Key Audit Matters are selected from matters

communicated with those charged with
governance.
8
Enhancing the communicative value of the audit report by
offering better transparency about the audit.
It provides additional information to users to

understand the professional judgment of the auditors.
Whats
KAMs do: It helps in understanding the areas of significant
management judgment in audited financial statements.
May encourage users to further engage with the audit

committee and management by using the information in
KAMs.
9
A substitute of the preparer’s view reported in the financial
statements.
KAMs are
not:
KAMs are not a substitute for expressing a modified
opinion.
It is important to note that communicating KAMs in the

auditor’s report is in the context o the auditor having formed
an opinion on the FS as a whole – not a separate opinion on
individual matters reported in KAMs.
10
Presentation of KAM
The matters giving rise to a qualified or adverse

opinion are KAM by nature. When we express a
KAM is
communicated as In case “material
qualified or adverse opinion, we shall add a
uncertainty KAM section is statement which clarifies that. For example:
a separate section
of the report under relating to going excluded in the “In addition to the matter described in the Basis
the heading “Key concern” section is report when we for Qualified Opinion section we have
Audit Matters”, required as per disclaim an determined the matters described below to be
revised ISA 570, opinion on the the key audit matters to be communicated in our
after the basis for report”.
opinion section of then KAM section financial
and auditor’s is placed after that statements. “Except for the matter described in the Basis for
report. section. Adverse Opinion section, we have determined
that there are no other key audit matters to
communicate in our report”.
11
Going Concern • ISA 701 / ED SA 701 highlights that a material uncertainty related to
going concern is, by its nature, a KAM.
as a KAM • These matters are to be reported in accordance with ISA 570, Going
Concern.
• In the KAM section, reference to the basis of qualified/adverse
opinion or material uncertainty related to going concern section
should be given.
• There could be events or conditions which may cast significant doubt
on an entity’s ability to continue as a going concern, but based on
the audit evidence obtained, the auditor concludes that no material
uncertainty exists.
• In the above case, an auditor should evaluate whether the financial
statements provide adequate disclosures about these events or
conditions. These may be fundamentals to the understanding of
the entity and can be considered and reported as KAM.
12
Interplay Between EOM, OM and KAM Section
• ISA 706 / ED SA 706 regarding EOM and OM in the Independent Auditor’s Report
establishes mechanism to include additional communication in the auditor’s report through
the use of EOM and OM paragraphs when the auditor considers it necessary to do so.
• These paragraphs are presented separately from the KAM section in the auditor’s report.
• ISA 701 / ED SA 701 provides the following guidance with respect to EOM, OM and KAM
section:
In case a matter has been determined to be a KAM:
• Report the matter in KAM section in accordance with ISA 701 / ED SA 701.
In case a matter is not determined to be a KAM as per ISA 701 / ED SA 701:

• Report the matter in an EOM/OM paragraph in accordance with ISA 706 / ED SA
706.
13
Types of KAMs Not To Be Reported
• Under what circumstances a matter determined to be a KAM is not required to be
communicated in auditor’s report?
➢ Law or regulation precludes public disclosures about the matter; and
➢ The auditor determines that the matter should not be communicated in the
auditor’s report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such
communication.
• In such a case, obtain written representation from management as to why public
disclosure about the matter is not appropriate.
• In certain limited circumstances (e.g. for a listed entity that has very limited
operations), we may determine that there are no key audit matters in accordance with
ISA 701 / ED SA 701 because there are no matters that required significant auditor
attention.
14
Communication with TCWG
We shall communicate with those charged

with governance (TCWG):
If applicable, depending on the facts and

Those matters we have determined to be the circumstances of the entity and the audit, our
key audit matters. determination that there are no key audit
matters to communicate in our report.
15
Matters that
were
communicated Matters that
required
Determination of with those
charged with significant
auditor
KAM - a funnel governance.
attention in
performing the
approach audit.
Matters of
most
significance
to the audit.
KEY AUDIT MATTERS

16
Matters Communicated with TCWG
• KAM should be identified from the matters communicated
with those charged with governance.
Step • These matters could include: the auditor’s responsibilities in
1 relation to the financial statements audit, significant risks,
audit approach to address significant risks, and significant
findings from the audit, including findings related to control
deficiencies.
17
Matters that required significant auditor
attention
Step This primarily relates to matters that pose challenges to the auditor in
forming an opinion or obtaining evidence that in the auditors’ judgment
2 was sufficient and appropriate under the circumstances.
The auditor is required to consider the following:

• Area of higher assessed risk of material misstatement, or significant risks
identified.
• Significant auditor judgments relating to areas in the financial statements that
involved significant management judgment, including accounting estimates –
having high estimation uncertainty.
• The effect on the audit of significant events or transactions that occurred
during the period. 18
KAMs
• Auditors need to determine which of the matters identified in
Step Step 2 were the most significance in the audit of the
financial statements of the current period.
3 • It is a matter of auditor’s professional judgement.
• Different entities in the same industry can have different
KAMs as the identification of KAM depends on the risk
assessment process of the auditor and entity-specific-
conditions and circumstances.
• KAMs need to be reconsidered each year. However, we would
not expect the KAMs to change much year-on-year, unless
there are significant changes or new transactions entered into
by an entity.
19
What Typically Constitutes a KAMs?
Matters that relate to significant or complex matters disclosed in the
financial statements. For example assessment of impairment, valuation
of goodwill, valuation of financial instruments, difficult/unique revenue
recognition, taxation matters, accounting for business combination, etc.
Matters that involved significant complexity of subjectivity in the
management’s selection of accounting policies
Matters that involved significant management assumptions and
estimation uncertainties
Significant weaknesses in internal controls that have a material impact
on the financial statements.
20
Key Audit Matters section in auditor’s report
Key audit matters are those matters that, in our professional judgement, were of most significance in
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 (standard wording of unmodified opinion).
Note: When we express a qualified or adverse opinion, we shall add a statement to clarifies that the
matters giving rises to qualified or adverse opinion are key audit matters.
[Name of key audit matter]
Refer to Note [X] to the financial statements
The key audit matter How the matter was addressed in our audit
[describe matter and why it was considered to be one of [describe how the matters was addressed in the audit]
the most significance in the audit]
It is permitted but not required that auditors provide an indication of the outcome of the auditor’s response.
However, the auditors should not provide discrete opinion on separate elements
21
A KAM description would generally meet the objective of the
requirements if it includes the following features:
• Fact based and tailored to the company.
• Informative, concise and understandable to a non- auditor.
• Sufficient details to understand how the matter was addressed.
• Do not inappropriately provide original information about the entity.
• Do not contain or imply discrete opinions on a separate element of the
financial statements.
Boilerplate text would not meet the

requirements
22
EXAMPLES of KAM
23
Example 1: Description of KAM – extract from report to Rolls-Royce Holdings pls
shareholders for the year ended 31 December 2019 (source: 2019 Annual Report)
Key Audit Matter

The translation of foreign-currency denominated transactions and balances (relevant to the
Consolidated Financial Statements) Page 128 (note 1 to the Consolidated Financial Statements –
Accounting policies- Foreign currency translation).
Foreign exchange rate movement influence the reported consolidated Income Statement, the
Consolidated Cash Flow Statement and closing net funds balance. One of the Group’s primary
accounting systems translates transactions denominated in foreign currencies at a fixed rate.
Foreign currency denominated transactions and balances are then re-translated to actual average and
spot rates through manual adjustments. Due to the manual nature of the process and significance
of the recurring adjustments there is a risk that transactions and balances denominated in
foreign currencies are inappropriately translated to the Consolidated Financial Statements.
24
How Our Audit Addressed The Key Audit Matter
In addition to our testing in other areas of the various financial statement line items, we performed the
following specific audit procedures over this area:
- Obtained an understanding of the process employed by management to correctly report the
translation of foreign currency balances and transactions;
- Tested system reports identifying transactions and balances in source currency by agreeing these to
general ledger balances;
- We reconciled the balances and transactions requiring adjustment by source currency to source data
and assessed the completeness of theses balances and transactions;
- For exchange rate used in management’s calculation for the translation adjustments we agreed these
to an independent source; and
- For each adjustment sample we assessed whether the foreign currency denominated balance or
transaction was translated at the appropriate exchange rate depending on its nature.
We did not identify any material uncorrected exceptions from our audit work.
25
Example 2: Description of KAM - extract from report to the Members of Overseas
Chinese Banking Corporation Limited for the year ended 31 December 2019 (source:
2019 Annual Report)
Key Audit Matter

Impairment of Loans and Bills Receivable
(Refer to Notes 9, 26, 28 and 30 to the financial statements)
At 31 December 2019, the Group’s loans and bills receivable comprised 54% of Total
Assets.
The Group has developed quantitative models to determine the Expected Credit Loss
(ECL) allowance for credit exposures, in accordance with the requirements of SFRS(1) 9
“Financial Instruments”. Significant judgement is applied in developing the models
and in determining relevant models inputs and applicable assumption.
26
How The Matter Was Addressed In Our Audit
Non credit-impaired exposures
We tested the design, implementation and operating effectiveness of key
controls around the determination of ECL allowance. These controls include:
• general IT controls over the ECL system, comprising user access rights and
change management controls, as well as IT application controls over the
completeness and accuracy of data flows from source systems to the ECL
system;
• the existence of an independent model validation function; and
• the effective monitoring of the macroeconomic variables used in the models
and the review and approval of scenarios and probabilities.
27
Example 3 : Description of KAM – extract from Report to the members of United
Overseas Bank Limited for the year ended 31 December 2019 (source: 2019 Annual
Report)
Key Audit Matter

Stage 3 expected credit loss for credit impaired loans to customers
(Refer to Notes 2d(vi), 2s(i), 11 and 27(d) to the consolidated financial statements)
Stage 3 expected credit loss (ECL) for loans to customers is considered to be a matter of
a significance as it requires the application of judgement and use of subjective
assumption by management.
For Group Wholesale Banking’s loan portfolio, management is required to monitor

borrowers’ repayment abilities individually based on their knowledge of any allowance for
impairment.
28
We assessed the design and operating effectiveness of the key controls over the Stage 3 ECL estimation
process by performing the following:
• Obtained an understanding of the Group’s Credit Policy and evaluated the processes for identifying
impairment indicators and consequently, the grading of loans;
• Reviewed the Group Credit Committee meeting minutes;
• Considered the magnitude of the credit exposures, macroeconomic factors and industry trends in our
audit sampling and focused our audit coverage over customers that are assessed to be of higher risk;
and
• Assessed, for a sample of impaired loans:
➢ management’s forecast and inputs of recoverable cash flows, valuation of collaterals, estimates of
recoverable amounts on default and other sources of repayment, and where possible, compared
these key assumptions to external evidence such as valuation reports.
➢ whether impairment events had occurred and whether impairments had been identified in a timely
manner.
Overall, the results of our evaluation of the Group’s Stage 3 ECL for loans to customers were within a
reasonable range of expectations.
29
Example 4: Information System – reported as KAM due to the heavily reliance on
complex, automated process
Key Audit Matter

IT Systems and controls over financial reporting
The Company’s key financial accounting and reporting processes are highly depended on the
automated control over the Company’s information systems. As such, there is a risk that exist
in the IT control environment, including automated accounting procedures. IT dependent
manual controls and controls preventing unauthorized access to systems and data could result
in the financial accounting and reporting records being materially misstated. The IT systems
and controls, as they impact the financial reporting and reporting of transactions, is a key audit
matter and our audit approach could significantly differ depending on the effective operation of
the Company’s IT controls.
30
We used our internal IT specialist to perform audit procedures to assess IT systems and
controls over financial reporting, which included the following:
• General IT controls design, implementation and operation:
➢ Testing the sample of key controls over the information technology in relation to
financial accounting and reporting systems, including system access and system
change management, program development and computer operations.
• User access control operation:

➢ Accessing the management evaluation of access rights granted to applicants relevant
to financial accounting and reporting systems and tested resolution of exceptions
noted.
➢ Assessing the operation effectiveness of controls over granting, removal and
appropriateness of access rights.
➢ Testing specific application controls for key financial reporting controls.
31
Value of Communicating KAMs helps better communication between the auditors
Communicating and those charged with governance, this in turn contributes to better
KAMs governance.
Reporting KAMs in the auditors report opens up transparency on the
audit process relating to the auditors professional judgment.
KAMs help the auditor to focus on the areas of the audit requiring the
most careful judgment. This in turn contributes to higher audit quality.
KAMs give preparers incentives to revisit financial reporting and

disclosures in areas related to those KAMs. This in turn contributes to
higher quality financial reporting.
KAM is expected to provide additional information that may assist users
in understanding the entity and areas of significant management judgment
in the audited financial statements.
32
Who is affected by the Changes?
1. Audit Committee Audit Committee are suggested to:

• Oversee financial reporting process of the listed
entities more closely, especially the matters that
could be key audit matters.
• Engaging in early and open communication with
auditors, particularly on key audit matters issues.
• Consider whether disclosures in the financial
statements or elsewhere in the annual report
and/or other investor communications need
refreshing so that they are in line with key audit
matters.
33
2. Investor • Be able to learn in detail on the issues discussed

between auditors, management and those charged
with governance, in relation to key audit matters.
• Know the audit procedures for each key audit
matters.
• Investor will have access to information that was
previously only available in the Boardroom.
• Investor can incorporate this information in the
evaluation of individual company.
34
3. Member of the • It is important to note that the new style enhanced

Management auditor's reports will also include more detailed
Team description of the auditor's and management
responsibilities with respect to the financial
statements as well as commentary on KAMs.
4. Regulators • Regulators will be able to see greater transparency

and independence about the audit that was
performed.
35
The Roadmap of Adopting KAMs in Indonesia
The new requirements are
expected to be effective for the
audit financial statements
Now how much do (applicability to entities to be
you know about “Key determined) for the periods
Audit Matters”? ending on or after December
31, 20XX (TBD)
Socialization of new SA
700 series, including
KAM – SA 701
36
Thank You
37

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Webinar IAPI - ACCA

Key Audit Matters

Jakarta - June 30, 2020

7. Emphasis of matters (if any) 7. Other information

For audits of When we are

Key Audit Matters are selected from matters

It provides additional information to users to

May encourage users to further engage with the audit

It is important to note that communicating KAMs in the

The matters giving rise to a qualified or adverse

In case a matter is not determined to be a KAM as per ISA 701 / ED SA 701:

We shall communicate with those charged

If applicable, depending on the facts and

KEY AUDIT MATTERS

The auditor is required to consider the following:

Refer to Note [X] to the financial statements

Boilerplate text would not meet the

Key Audit Matter

Key Audit Matter

Key Audit Matter

For Group Wholesale Banking’s loan portfolio, management is required to monitor

Key Audit Matter

• User access control operation:

KAMs give preparers incentives to revisit financial reporting and

1. Audit Committee Audit Committee are suggested to:

2. Investor • Be able to learn in detail on the issues discussed

3. Member of the • It is important to note that the new style enhanced

4. Regulators • Regulators will be able to see greater transparency

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