Key Audit Matters: Selection, Content, and Common Topics

Key Audit Matters are the issues an auditor judged most significant during the current-year audit of a company’s financial statements. Under International Standard on Auditing (ISA) 701, they appear in a dedicated section of the auditor’s report for listed entities, giving investors a window into the specific areas that demanded the heaviest audit attention. Most reports contain roughly two to three, though the number varies by company complexity and industry.

Why the Standard Was Introduced

Before ISA 701 took effect for audits of periods ending on or after December 15, 2016, the standard auditor’s report was essentially a pass-or-fail document. Investors got an opinion on whether the financials were fairly stated, but almost no insight into what the auditor actually wrestled with along the way.¹ The KAM requirement changed that by asking the auditor to identify and describe the matters that, in their professional judgment, were of most significance to the audit.

The goal is entity-specific transparency. A well-written KAM section tells readers which accounts or estimates posed the greatest risk of being materially wrong, what made those areas difficult, and what the auditor did about them. Shareholders, analysts, and creditors can then focus their own scrutiny on the parts of the financial statements where judgment and uncertainty ran highest.

Which Audits Have to Include KAMs

ISA 701 applies to audits of complete sets of general purpose financial statements of listed entities. If a company’s shares or debt trade on a public exchange and the audit follows International Standards on Auditing, the auditor must include a KAM section.²

Two other situations bring KAM reporting into play. Local law or regulation in some jurisdictions extends the requirement beyond listed entities, sometimes covering public-interest entities such as banks or insurers. And an auditor can voluntarily include KAMs for any engagement, including a private company audit, if doing so would add value for users. Once the auditor opts in or is required to comply, all of ISA 701’s requirements apply in full.²

How Auditors Choose Which Matters Qualify

Selecting KAMs is not mechanical. The auditor starts with every matter communicated to those charged with governance, typically the audit committee, and narrows from there using professional judgment and three criteria from the standard.

The Three Selection Criteria

The first criterion looks at areas where the auditor assessed a higher risk of material misstatement. These often involve complex or unusual transactions, significant related-party arrangements, or accounts that historically carry greater uncertainty.³

The second targets areas where the auditor had to exercise significant judgment about management’s own significant judgments. Accounting estimates with high estimation uncertainty are the classic example: goodwill impairment testing, valuation of complex financial instruments, or expected credit loss models where small changes in assumptions produce large swings in the reported number.³

The third captures significant events or transactions during the period that affected the audit. A major acquisition, a corporate restructuring, or first-time adoption of a new accounting standard can each generate substantial incremental work and new judgment calls that would not exist in a routine year.³

Narrowing the List

The engagement partner weighs each communicated matter against these criteria and asks which ones required the most significant audit attention. “Most significant” is inherently subjective. A matter that consumed hundreds of audit hours and required a third-party valuation specialist carries more weight than one that looked complex on paper but resolved with straightforward testing.

The final selection is documented in the audit file, including why each chosen matter qualifies and why excluded matters did not. That documentation is subject to internal quality review and, in many jurisdictions, regulatory inspection. The KAMs in the report should mirror the areas flagged as highest-risk at the planning stage.

What Cannot Be Reported as a KAM

Not every significant audit issue belongs in the KAM section. ISA 701 carves out two categories that get their own treatment elsewhere in the report.

If the auditor’s opinion is modified (qualified, adverse, or disclaimed), the matter causing that modification is described in the Basis for Opinion section, not as a KAM. Reporting it in both places would create redundancy and could confuse readers about severity. When the auditor issues a disclaimer of opinion, no KAMs are communicated at all, unless local law requires otherwise, because doing so could undermine the disclaimer itself.

A material uncertainty related to going concern is handled the same way. It gets a separate Going Concern section under ISA 570, not a KAM. Going concern uncertainty already receives prominent standalone disclosure, and duplicating it would dilute rather than sharpen the message.

In rare cases, no matters qualify as KAMs once these exclusions are applied. When that happens, ISA 701 still requires a KAM section, but the auditor includes a statement explaining that no key audit matters were identified, or that the only significant matters were those already addressed in the Basis for Opinion or Going Concern sections.

What the KAM Section Must Contain

The KAM section appears in the auditor’s report under a clearly labeled heading. For each matter, the auditor must provide three elements that together link the issue, the audit response, and the financial statements:

A description of why the matter is a KAM, written in terms specific to the company and the current period. Generic industry boilerplate defeats the purpose.
A summary of how the auditor addressed it, such as engaging valuation specialists, testing key assumptions in management’s models, or expanding sample sizes. The description should convey the scope of the work without disclosing proprietary methodology.
A reference to the specific notes, account balances, or disclosures in the financial statements that relate to the matter, so readers can locate the underlying numbers and management’s own explanations.

The tailoring point matters. Regulators have repeatedly flagged KAM descriptions that read as though they were copied from a template and pasted across engagements. A well-written KAM section should be specific enough that a reader could identify which company the report belongs to from that section alone. Audit oversight bodies in several jurisdictions have made boilerplate KAM language a focus of inspection findings.

Which Topics Come Up Most Often

Certain categories of KAMs appear far more frequently than others, reflecting the areas of financial reporting that consistently involve the most judgment and estimation risk.

Revenue recognition is among the most common, especially when a company has complex contract structures, multiple performance obligations, or significant judgment around timing. Goodwill and intangible asset impairment testing also appears regularly, particularly during economic downturns when the assumptions underpinning recoverable amounts become harder to support. Tax provisions round out the top tier, especially for multinationals with uncertain tax positions across jurisdictions.

Other recurring topics include the valuation of financial instruments measured at fair value, expected credit loss provisions at banks and financial institutions, provisions for litigation or regulatory exposures, and the accounting for business combinations.

How KAMs Differ From Emphasis of Matter Paragraphs

Key Audit Matters are sometimes confused with Emphasis of Matter (EOM) paragraphs, which also draw attention to specific issues in the auditor’s report. The two do different jobs.

An EOM paragraph under ISA 706 highlights something already properly disclosed in the financial statements that the auditor believes is fundamental to readers’ understanding. A pending lawsuit or a catastrophic subsequent event is a typical example. The auditor is not saying the disclosure is wrong or that the accounting was especially difficult to audit. The message is simply: pay attention to this note.

A KAM, by contrast, reflects the auditor’s own experience with the engagement. It identifies where the audit itself was most demanding, whether because of significant judgment, complex procedures, or difficult evidence. KAMs are mandatory for listed-entity audits; EOM paragraphs are generally at the auditor’s discretion. Both can appear in the same report.

How KAMs Differ From Critical Audit Matters

Audits of U.S. public companies follow standards issued by the Public Company Accounting Oversight Board (PCAOB), not the International Standards on Auditing. The PCAOB’s equivalent of a KAM is called a Critical Audit Matter (CAM), introduced through Auditing Standard 3101.⁴ CAM reporting became effective for large accelerated filers in fiscal years ending on or after June 30, 2019, and for all other applicable companies in fiscal years ending on or after December 15, 2020.⁵

The two definitions overlap but are not identical. A CAM must meet two conditions: it relates to accounts or disclosures that are material to the financial statements, and it involved especially challenging, subjective, or complex auditor judgment.⁴ The IAASB’s framework for KAMs is broader, focusing on matters “of most significance” to the audit. That can include items significant for reasons beyond subjective judgment alone, such as a major transaction that required extensive testing but not necessarily complex estimation.

In practice, most CAMs would also qualify as KAMs, but a KAM would not always meet the PCAOB’s “especially challenging, subjective, or complex” threshold for a CAM. For companies cross-listed on U.S. and international exchanges, auditors typically address both frameworks, often producing disclosure that satisfies KAM and CAM requirements at the same time.

What KAMs Mean for Investors and Audit Committees

The practical value of a KAM section depends on how carefully readers use it. For institutional investors and analysts, it works as a prioritization tool. Rather than reading every footnote with equal attention, you can start with the areas the auditor flagged as most demanding and work outward.

Research on investor behavior suggests the effect is nuanced. When management has already disclosed a high-risk item prominently, a related KAM tends to confirm what investors already suspected. The more interesting dynamic arises with items management characterizes as low-risk. When a KAM highlights a financial item management presented as routine, investors tend to reassess and assign higher risk to that area. KAMs matter most where there is a gap between management’s characterization and the auditor’s experience.

For audit committees, the KAM section creates accountability pressure in a useful direction. Knowing that the auditor will publicly describe the most judgment-intensive areas encourages earlier and more detailed discussions between the committee, management, and the audit team about how those areas will be presented. Over time, that has produced a modest improvement in the quality of related financial statement disclosures as companies anticipate scrutiny and bolster their own explanations in advance.