SA 701 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
SA 701 requires the auditor to say, in the report itself, which matters were of most significance in the audit. These key audit matters give readers a view into the audit, so they know where the auditor spent the most effort and judgement.
SA 701, as effective for audits of financial statements for periods beginning on or after 1 April 2018, applies to audits of complete sets of general purpose financial statements of listed entities, and wherever the auditor decides, or law requires, that key audit matters be communicated. ICAI may revise standards, so check icai.org for the current text. Audit committee papers prepared with compliance advisory support help management see which matters may be reported.
Key audit matters are those that, in the auditor's professional judgement, were of most significance in the audit of the current period, selected from matters communicated with those charged with governance (paragraph 8). The auditor describes each under its own subheading in a section headed "Key Audit Matters", saying why it was significant and how it was addressed. A matter that causes a modified opinion or a going concern material uncertainty is not described there. Key audit matters are not a separate opinion and do not replace a modification or a disclosure.
Purpose and scope (paragraphs 1-6)
The purpose is greater transparency about the audit performed, helping users understand the matters of most significance and areas of significant management judgement (paragraph 2). It may also give users a basis to engage with management and those charged with governance (paragraph 3). Significance is judged in context using quantitative and qualitative factors (A1).
Communicating key audit matters is not a substitute for disclosures the framework requires, for a modified opinion under SA 705, for reporting a going concern material uncertainty under SA 570, or a separate opinion on individual matters (paragraph 4). The standard applies to listed entities' complete sets of general purpose statements and where the auditor otherwise decides, or law requires, to communicate them; but when the auditor disclaims an opinion, key audit matters are not communicated unless law requires (paragraph 5). Law may extend them to other entities such as public interest entities, and the auditor may choose them for entities with many stakeholders, such as banks, insurers and charities (see SA 700 part 2).
Determining key audit matters (paragraphs 8-10)
The process is a funnel from the matters communicated with those charged with governance (see SA 260).
| Step | What the auditor does | Paragraph |
|---|---|---|
| 1 | Start with matters communicated to those charged with governance | 8 |
| 2 | Pick out those that needed significant auditor attention, considering: areas of higher assessed risk or significant risks; significant judgements in areas of significant management judgement, including estimates with high estimation uncertainty; and the effect on the audit of significant events or transactions in the period | 9 |
| 3 | From these, decide which were of most significance and so are key audit matters | 10 |
The decision is meant to produce a smaller number of matters (A9). The extent of interaction with governance, such as more in-depth or frequent discussion of difficult matters, often shows which are the most significant (A27). The matters are specific to the entity and the audit, and a judgement is made about importance relative to others (A28). The number depends on size, complexity, nature of the business and the facts of the engagement; generally the more matters first identified, the more careful the weighing needed (A30). Related-party transactions and significant transactions outside the normal course may be areas of significant attention (A25).
Describing a key audit matter (paragraphs 11-13)
Each matter is described under an appropriate subheading in a separate section headed "Key Audit Matters". The introduction states that key audit matters are those of most significance in the audit of the current period, and that they were addressed in the context of the audit of the statements as a whole and in forming the opinion, with no separate opinion on them (paragraph 11).
Each description must include a reference to the related disclosure in the financial statements, if any, and address:
- why the matter was one of most significance and therefore a key audit matter; and
- how it was addressed in the audit (paragraph 13).
The description is not a repeat of what the notes say (A40). For the "how", the auditor may describe aspects of the response specific to the assessed risk, give a brief overview of procedures, indicate the outcome, or give key observations (A46). Care is needed so that the language does not imply the matter was not properly resolved, or give the impression of a separate opinion on the matter (A47, A51). The auditor may mention the use of an auditor's expert; this does not reduce responsibility (A49; see SA 620). The description should avoid giving original information about the entity, which is management's responsibility, although it may sometimes need extra information to explain significance (A35-A36). Management may enhance its own disclosures in light of a key audit matter (A37).
When a matter is not communicated (paragraph 14)
The auditor describes each key audit matter unless:
- law or regulation precludes public disclosure about the matter, such as a prohibition on communication that might prejudice an investigation of an actual or suspected illegal act (A52); or
- in extremely rare circumstances, the auditor determines that the adverse consequences of communicating would reasonably be expected to outweigh the public interest benefits. This does not apply if the entity has publicly disclosed the matter.
It will be extremely rare, since there is a presumption of public interest in transparency (A53). The auditor may consider legal advice and ethical requirements (A55-A56).
Interaction with modifications and going concern (paragraphs 12, 15-16)
A matter giving rise to a modified opinion must not be communicated in the Key Audit Matters section (paragraph 12). Such a matter, and a going concern material uncertainty, are by nature key audit matters, but they are reported in their own sections under SA 705 and SA 570, with a reference in the Key Audit Matters section to the Basis for Qualified (Adverse) Opinion section or the Material Uncertainty Related to Going Concern section (paragraph 15; see SA 705).
If there are no key audit matters, or the only ones are those addressed by paragraph 15, the auditor includes a statement to that effect in the same-headed section (paragraph 16). A58 illustrates the presentation. Emphasis of Matter paragraphs under SA 706 are separate from this section and are not a substitute for a key audit matter description (A8).
Communication and documentation (paragraphs 17-18)
The auditor communicates with those charged with governance the key audit matters, or the determination that there are none (paragraph 17). The file records the matters that needed significant attention and the reasoning on whether each is a key audit matter, the reasoning for finding none, and the reasoning for any decision not to communicate a matter (paragraph 18; see SA 230).
Illustrative example
Summit Retail Ltd is an invented listed company; all figures are illustrative. The auditor identifies three matters for governance: valuation of inventory, a new ERP go-live and a property revaluation. After judging which needed the most attention, it decides inventory valuation and the ERP are key audit matters. For inventory, the report gives the subheading "Valuation of inventory", refers to the note on inventory, explains that the matter was significant because of the volume of slow-moving items and management's judgement on write-downs, and describes the response: testing ageing data, challenging write-down assumptions and re-performing a sample of calculations. A separate qualification for a missing disclosure on a related party is not described in this section, but the section refers to the Basis for Qualified Opinion.
Need help preparing for the discussion with the auditor?
The matters that become key audit matters usually appear in the audit committee communications earlier in the year. TaxClue's compliance advisory team can help you prepare disclosures, assumptions and supporting papers on judgemental areas so that the audit committee discussion is informed.
Key takeaways
- Key audit matters are drawn from matters communicated with governance and judged most significant.
- Each description says why the matter mattered and how the audit dealt with it.
- Matters causing a modification or going concern uncertainty are reported in their own sections.
- Non-communication is allowed only where law prevents it or in extremely rare public interest cases.
- Key audit matters are not a separate opinion.
Read next
- SA 700 part 2: elements of the auditor's report
- SA 260: communication with governance
- SA 705: modifications to the opinion
- SA 706: emphasis of matter
Disclaimer: Based on the Standards on Auditing and quality standards issued by the Institute of Chartered Accountants of India, in the versions named in the article, and ICAI's announcement of 31 March 2026 on SQM 1 and SQM 2, as consulted on 3 October 2026. ICAI revises standards from time to time; check the current text and effective dates on icai.org. This article is general information, not legal advice; check the official text before acting.