z
KA
CAPITAL
MARKETS AUTHORITY
Circular No. as/2036
Noverbers0, 2036
To: Chief Executives of
Investment Banks, Investment Advisers,
Fund Managers, REITTrustees,
Collectiveinvestment Schemes; _REITManagers,
‘Authorised Security Dealers Stock Brokers,
Central Depository and Settlement Corporation (DSO),
‘Authorised Real Estate Investment Trusts (RENTS),
{and Any Other New License Categories that shall be Regulated by the
Authority
[APPLICATION OF NEW INTERNATIONAL STANDARD ON AUDITING (ISA) NO. 702
= COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR'S
REPORT
BACKGROUND
In line with the curcent auditor's reporting standard, auditors have for many years,
provided a binary “patsfal” opinion on a company’s financal statements. Ether the
financil statements fairy present (true and fair view) the cempary’'s financial position
and operations in accordance with applicable accounting standards, oc they do not
While the “traditional approach” remains valuable, many beleve iis no longer enough,
‘auditors have more insights to shave, and investors are eager to be informed more on
the operations of an entity
‘The standard setters on aueiting and assurance took nate ond commenced &
consultative project in 2006 a5 a joint intative of the lternational Auditing and
Assurance Standards Board (VAASB) and the Auditing Standards Board (ASB) of the
‘American Insitute of Cerified Public Accountants (AICPA) in the form of an academic
research to identify, and provide information and insights. on sset perceptions regarding‘the financial statement audit and the auditor's report among different classes of
financial statement users.
The objective ofthe project was twofold as indicated belowe-
‘+ {0 appropriately enhance the communicative value and relevance of the
auditor's report through proposed revisions tolnternational Standards on
‘Auditing (ISAs) requirements that addrezsitestrucure and content and
‘+ to determine whether and how the IAASB'S reporting ISAs n their design, can
bbe modified to accommodate evelving national nancial reporting regimes,
while 2t the same time ensuring that common and essential content if being
‘communicate.
Arising from this research and engagements with stakeholders (where several
regulators and standard setters responded with measures that would require auditors
to say mor), the JAASB approved the following standards and a numberof conforming
amendments to other standards in January 2035:
‘+ (54700 (Revised), Forming an Opinien and Reparing on Financial Statements
‘+ 5A 70 Communicating Key Audit Matters in the Independent Auditor's
Report
‘+ (5A260 (Revised), Communication with Those Charged with Governance
1+ A570 (Revised, Going Concern
1+ (5A 705 (Revised), Modifications to the Opinion nthe Independent Auditor's
Report
1+ (SA 706 (Revized), Emphasis of Matter Pargraphs and Other Matter
paragraphs in the Independent Auditor's Report
‘+ (5A720 Revised), The Auditors Responsibilities Relating to Other Information
JURISDICTIONAL APPLICATION,
‘These standards were formally adopted by the Council ofthe Insitute of Certified
Public Accountants of Kenya (\CPAK) in April 2ca5 in eecerdance with Section 9 (3) of
‘the Accountants Act No. 25 of 2008 which provides that “The Cound! shall sve
standards of professional practice, including accounting ard aueliting standards, which
hall form the basis of accountancy practice for memters of the Insitute In the
preparation, verfication and auditing of financial statements.” in adopting these
standards, the Council noted that whereas ISA 7ox was mandatory for listed entities
‘only, certain regulators would require the communication of Key Aucit Matters (KAM)
In the auctor report in the public interest. The councl further noted tha ts current
mandate was to the members and resolved to engage regulators of public interest
‘entities wih the objective of informing them of the new developments and jonthy
agree onthe applicability of ISA 7on,
1570: defines KAM as those matters that, nthe auditors professional judgment, were
of most significance inthe audit ofthe financial statements ofthe current period. KAMare selected from matters communicated wit those charged with governance. ISA 702
is mandatory for audits of complete sets of financial statements of listed entities, with
voluntarily application allowed for entities other than listed entities. Ths (SA also
‘applies when the auditor i required by law or regulation to communicate KAM in the
auators report
‘The CMA and the ICPAK have held consultative meetings onthe application of ISA 70
‘The CMA noted that majority of the entities it regulates hold assets in a fiduciary
capacity for abroad group of outsiders (hold and manage firancal resources entrusted
to them by clients, customers or members not involved in the management of the
entity) and therefore required a greater need for public accountailty, There is need for
consistency and comparably in the financial reporting and audit of regulated entities
to.ensure proper understanding and identification ofthe true and air postion of subject
entities by wsers of annual report and audited financial statements to suppor informed
decision making,
‘The purpose of this circular i to inform Authorised Real Estate Investment Trusts
(REITS), Investment Advisers, Central Depository and Settlement Corporation (CDSQ),
REIT Trustees, Authorised Security Dealers, Stockbrokers, Investment Banks, REIT
‘Managers, Fund Managers, Collective Investment Schemes; and any ather new icense
Categories that shal be regulated bythe Authorty:-
1 that ISA 7o2 ~ Communicating Key Audlt Matters inthe Independent Auditor's
Report is applicable to all such erties whether ited or non-isted and become
effective for audits of financial statements for peiods ending on or after
December, 2036.
2. that early application is encouraged,
thatthe CMA and ICPAK will equire that a key audit matters section is included
Inthe report of the independent auditor;
‘4 that the entities engage with the Authority on any significant issues which may
negatively impact on their business whenever they encounter such issues
For further enquiries, please do not hesitate to contact:
The Director,
Markets Operations
Capital Markets Authority
Embankment Plaza, 37 Floor
LLongonot Road, off Kilimanjaro Avenwe, Upperhil
P.0 Box 74800-00200,
[NAIROBI KENYA,
Tel: +254 202264400
pS —
50M mutoura
(CHIEF EXECUTIVE(CPADr. Patrick Nou
(Chief Executive Oficor
Institute of Certified Public Accountant of Kenya
(CPACentre, Ruarake, Tha Road
.0..8ax 59963-20200
‘NAIROBI
Kenya Association of Stock Brokers & Investment Banks
City House 6th Floor, Wabera Street
‘NAIROBI
Nalrabi Securities Exchange
‘The Exchange
5 Westlands Road
NAIROBI