ACC30010 Auditing: Analysis of Key Audit Matters (KAM) in Australia

This report provides an overview of Key Audit Matters (KAM) as defined by ASA 701, focusing on their significance in auditing financial statements of Australian companies. It includes a discussion of the criteria auditors consider when determining KAMs, such as areas with high risks of misstatement, management's accounting estimates, and the impact of significant events. The report then presents five examples of KAMs reported by different ASX-listed companies (Wesfarmers, Woolworths, Commonwealth Bank, Newcrest Mining, and Seek Limited) during the 2017-2018 financial year, covering issues like asset impairment, accounting for rebates, loan provisions, taxation, and revenue recognition. Each example includes a summary of the KAM and the reasons why the auditors considered it a key matter, highlighting the judgments and potential impacts on the companies' financial positions. The report concludes by emphasizing the importance of designing appropriate audit procedures based on the nature of the identified KAMs.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

1AUDITING
From: [e-mail]
To: [e-mail]
Subject: Key Audit Matters (KAM)
The main reason behind writing this email is to express the needed understanding on
one important topic of auditing, Key Audit Matters (KAM). In addition, this email also
includes the summary table of the five different KAMs of different ASX listed companies.
The discussion is shown below:
Kay Audit Matters (KAM): In Australia, the auditors are needed to consider the standards
of ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report.
According to the Section 8 of ASA 701, KAMs can be considered as the matters or
substances, in the professional judgements of the auditors, were of greatestimportance in the
audit procedures of the financial statements of the current period. For this reason, the
selection of the KAM needs to be done from the matters or substances communicated with
the employees or staffs responsible with governance (auasb.gov.au 2019).
At the time of the determination of KAM, it is needed for the auditors to take into
consideration three major requirements. The first requirement is to take into consideration the
specific areas of the financial statements with greatest risk of material misstatements. The
second requirement for the auditors is to take into consideration the judgements and
accounting estimates used by the management for the preparation of financial statements. The
third requirement for the auditors is to consider the effects of important events or transactions
on the audit of the company (Sirois, Bédard and Bera 2018). In addition, it is the
responsibility of the auditors to ensure the proper communication of the KAMs in the proper
section of the auditor’s report.
The following table discusses about 5 examples of KAMs reported in the different
Australian companies for 2017 to 2018.
Company Name KAM Summary of KAM
Wesfarmers Limited Non-current assets
Impairment that includes
intangible assets in Target
Wesfarmers recognized $306 million as
impairment charges in relation to the non-
current assets of Target during the year 2018
(wesfarmers.com.au 2019). The company has
used significant judgements for the

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determination of recoverable amounts of
property, plant and equipment (PPE). In
addition, the company ensures the testing of
impairment indicators for the presence of
impairments. The auditor has considered this
as KAM as the assessment of impairment is
complex as well as judgmental in the presence
of certain assumptions; and due to the
presence of any errors in these assumptions,
there can be material impact on the financial
statements and financial position of the
company. For these reason, the auditors of the
company has considered this as a KAM.
Woolworths Limited Accounting for rebate It can be seen from the provided information
that Woolworths use to receive certain major
rebates, incentives as well as discount from
their big suppliers. The companies does the
recognition of these rebates, incentives and
discounts as a fall in the inventory value or as
sales decrease on the basis of the nature of
these rebates, discounts or other
(woolworthsgroup.com.au 2019). The main
reason for the auditor of the company to
consider this as KAM is the requirement of
judgements for the difficulty of the non-
standard rebates with the aim to ensure the
fact that they are not exaggerated as
overstatement can create material impact on
the company’s financial position. In addition,
errors in ascertaining the accuracy and
timeliness can materially affect the result of
the company. Hence, this is a major KAM.
Commonwealth Bank Loan impairment
provisions
The auditors of Commonwealth Bank has
considered this as KAM as the bank has made
certain judgements which are subjective in
nature at the time of the recognition of the
provision for impairment against the loaning

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assets and in the approximation of the
provision size. It is the responsibility of the
company to assess the provision for
impairment of the loans that surpasses the
specific threshold. The presence of
subjectivity states that the bank has not
assessed the loan impairment provisions in the
correct manner and this can have material
impact on the financial performance and
financial position of the bank
(commbank.com.au 2019). For this reason, it
is needed for the auditors to consider this as
KAM.
Newcrest Mining Taxation It needs to be mentioned that Newcrest
Mining Limited has operations in numerous
taxation authority and this aspect creates
major difficulties for the application of
signification judgements to determine the tax
rate. The business of the company in
Indonesia need to apply the taxation rules
under Indonesian Taxation Office (ITO)
(newcrest.com.au 2019). The company has
done major dispute in the application of tax
rate for the year 2016 and the company has to
pay $96 million for this dispute. It needs to be
mentioned that this is a huge amount and the
application of wrong tax rate has created
material impact on the financial performance
as well as financial position of the company.
These are the reasons for considering this as
KAM.
Seek Limited Revenue Recognition The revenue of Seek Limited in 2018 is
$1294.5 million. The most important source
of revenue of the company is the revenue
from online employment marketplace that is
$900 million. In addition, the company has
recognized services sold to customers as a

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liability that is worth $356.8 million
(wcsecure.weblink.com.au 2019). The auditor
of the company has considered this as a key
audit matter as the company has high value of
revenue for the year along with the high
volume of transactions across many locations.
Errors in this large revenue value can lead to
material misstatements. In addition, the
adoption of the AASB 15 Revenue will have
material impact on the revenue of the
company and the company needs to assess
this impact. For these reason, it has to be
considered as KAM.
Hence, it can be seen from the above discussion that KAMs can be found in different
aspects of the financial reporting of the companies started from revenue recognition to
impairment of the non-current assets. It is needed for the auditors to design the necessary
audit procedures based on the nature of the KAMs.
Yours Sincerely
Jack Smith

5AUDITING
References
Auasb.gov.au. 2019. Auditing Standard ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 27 Jan.
2019].
Commbank.com.au. 2019. Annual Report 2018. [online] Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf [Accessed 27 Jan. 2019].
Newcrest.com.au. 2019. 2018 Annual Report. [online] Available at:
http://www.newcrest.com.au/media/annual_reports/Newcrest_Annual_Report_2018_1.pdf
[Accessed 27 Jan. 2019].
Sirois, L.P., Bédard, J. and Bera, P., 2018. The informational value of key audit matters in the
auditor's report: evidence from an Eye-tracking study. Accounting Horizons.
Wcsecure.weblink.com.au. 2019. 2018 Annual Report. [online] Available at:
https://wcsecure.weblink.com.au/pdf/SEK/02040158.pdf [Accessed 27 Jan. 2019].
Wesfarmers.com.au., 2019. Annual Report 2018. [online] Available at:
https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-
report.pdf?sfvrsn=4 [Accessed 27 Jan. 2019].
Woolworthsgroup.com.au,. 2019. 2018 Annual Report. [online] Available at:
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf [Accessed
27 Jan. 2019].