Key Audit Matter
A key audit matter (KAM) is the international counterpart to the U.S. critical audit matter, required under International Standard on Auditing 701 for audits of listed entities, and describes those matters that, in the auditor's professional judgment, were of most significance in the audit of the current-period financial statements.
Key audit matters were introduced by the International Auditing and Assurance Standards Board through ISA 701, which became effective for periods ending on or after December 15, 2016 — several years before the PCAOB implemented its comparable critical audit matter requirement for U.S. public companies. While KAMs and CAMs share the same conceptual goal of improving the communicative value of the auditor's report, they differ in important technical respects that matter for investors who compare disclosures across international and domestic issuers.
Under ISA 701, auditors select key audit matters from those matters communicated with those charged with governance — the equivalent of the audit committee in most jurisdictions. The auditor selects matters that required significant auditor attention, with particular focus on areas involving significant management judgment, significant audit effort, significant unusual transactions, and material transactions that were especially difficult to audit. Unlike the PCAOB's CAM requirement, which specifies three objective criteria, ISA 701 gives auditors somewhat more latitude to exercise professional judgment in selecting which matters rise to KAM status, which can result in varying numbers of KAMs across similar companies audited under different national standards.
For each KAM, ISA 701 requires the auditor to describe why the matter was considered to be of most significance, how the matter was addressed in the audit, and where applicable to refer to related disclosures in the financial statements. The descriptions are intended to be entity-specific rather than generic, meaning boilerplate language describing a matter without explaining its particular nuances at the company under audit is not considered adequate.
From a practical standpoint, investors analyzing foreign private issuers listed on U.S. exchanges who file on Form 20-F will encounter KAMs rather than CAMs. European companies listed on their home exchanges and subject to EU audit regulations also report KAMs. The substantive content of KAMs is directly comparable to CAMs — both identify the hardest parts of the audit — but investors should be aware that the selection criteria differ slightly and that KAM disclosures vary somewhat more across jurisdictions due to the greater reliance on auditor judgment under ISA 701.
Both CAMs and KAMs represent a meaningful improvement in audit transparency over the legacy pass-fail binary report. Systematic reading of these disclosures across a sector allows analysts to identify which accounting areas generate the most audit complexity industrywide, supporting more targeted due diligence on the most judgment-intensive line items in financial statements.