Key Audit Matters Under ASA 701: What Australian Businesses Must Know About Auditor Reporting in 2026

For Australian listed entities and their boards, the auditor's report is far more than a sign-off on the financial statements. Since the introduction of Key Audit Matters (KAMs) under Auditing Standard ASA 701, the audit report has become a window into the most complex, high-risk, and judgment-intensive areas of the audit. In 2026, with ASIC intensifying its audit quality surveillance program and sustainability reporting obligations adding new layers of complexity, understanding KAMs has never been more important for directors, audit committees, and investors.

What Are Key Audit Matters?

Key Audit Matters are those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial report for the current period. They are selected from matters communicated to those charged with governance — typically the audit committee or board — and represent the areas where the auditor exercised the greatest scrutiny.

Under ASA 701 Communicating Key Audit Matters in the Independent Auditor's Report, auditors of listed entities in Australia are mandatorily required to identify and report KAMs. For non-listed entities, reporting KAMs is optional, though auditors may elect to do so voluntarily while still adhering to the full requirements of the standard.

The objective of KAM reporting is to enhance the communicative value of the auditor's report by providing greater transparency about the audit itself — not just its outcome. This helps investors and other stakeholders understand where the auditor focused their attention and why.

Why KAMs Matter for Australian Businesses in 2026

ASIC has confirmed it will review 25 audit files during the 2026–27 financial year as part of its ongoing audit quality surveillance program. Selection criteria include instances of material corrections to financial reports, data-driven indicators of threats to audit quality, and concerns about auditor independence.

This heightened scrutiny means that the quality of KAM disclosures is under the regulatory microscope. ASIC has previously found that some KAM disclosures are too generic — failing to explain the specific risks identified or how the auditor addressed them. In 2026, boards and audit committees should expect their auditors to produce KAM disclosures that are specific, substantive, and genuinely informative.

Additionally, the introduction of mandatory sustainability reporting for Group 1 entities has created a new category of potential KAMs. Auditors are now engaging with large firms on assurance methodologies for climate-related disclosures, and sustainability-related KAMs are expected to become more prevalent in audit reports over the coming years.

Common KAM Subject Areas in Australian Audits

Research into KAM reporting by Australian listed entities reveals consistent patterns in the subject matter auditors identify as most significant. Understanding these common areas helps boards anticipate where their auditor is likely to focus.

• Asset impairments — Approximately 17–18% of KAMs relate to impairment assessments, particularly goodwill and intangible assets where management judgment is significant
• Exploration and evaluation assets — Approximately 18% of KAMs, predominantly in the resources and mining sector, where capitalisation decisions involve significant estimation uncertainty
• Revenue recognition — A recurring KAM area due to the complexity of AASB 15 Revenue from Contracts with Customers, particularly for entities with multi-element arrangements or variable consideration
• Going concern assessments — Elevated in significance following ASIC's 2026–27 focus on going concern disclosures, particularly for entities with tight liquidity or covenant pressures
• Financial instrument valuations — Common in financial services entities where Level 3 fair value measurements involve unobservable inputs
• Sustainability and climate disclosures — An emerging KAM area as Group 1 entities begin mandatory climate reporting under the new framework

On average, Australian listed entities have approximately 1.84 KAMs per audit report, with larger companies averaging 2.32 and smaller companies averaging 1.46. The number and nature of KAMs vary significantly by industry and entity size.

How KAMs Are Identified and Reported

The process of identifying KAMs is an end-of-audit exercise, though auditors are encouraged to initiate discussions with those charged with governance early in the audit cycle. The auditor considers all matters communicated to the audit committee and selects those of most significance based on factors including:

• Areas of higher assessed risk of material misstatement, including significant risks identified under ASA 315
• Areas involving significant management judgment, including accounting estimates with high estimation uncertainty
• The effect of significant events or transactions that occurred during the period
• Areas where the auditor encountered significant difficulty in obtaining sufficient appropriate audit evidence

For each KAM, the auditor's report must explain why the matter was considered a KAM and how it was addressed during the audit. This "how addressed" section is where ASIC has found the most room for improvement — generic descriptions of standard audit procedures do not meet the spirit of ASA 701.

What a High-Quality KAM Disclosure Looks Like

A well-crafted KAM disclosure will identify the specific risk or judgment area, explain the accounting policy or estimate involved, describe the audit procedures performed in response to that risk, and summarise the auditor's findings or conclusions. It should be entity-specific, not boilerplate language that could apply to any company in the sector.

ASIC's surveillance has found that the best KAM disclosures read as a genuine narrative of the audit's most challenging moments — giving readers real insight into where the auditor pushed back on management and what evidence they obtained to reach their conclusions.

Common Deficiencies in KAM Reporting

Despite the improvements KAM reporting has brought to audit transparency, ASIC and the AUASB have identified recurring deficiencies that boards and audit committees should be aware of when reviewing their auditor's report.

• Generic "how addressed" sections — Describing standard audit procedures without explaining how they were tailored to the specific risk identified
• Insufficient linkage to financial statement disclosures — Failing to cross-reference the relevant notes to the financial statements where the accounting judgments are disclosed
• Boilerplate language — Using identical or near-identical KAM descriptions across multiple clients in the same industry, suggesting a lack of genuine engagement with entity-specific risks
• Omission of significant matters — Failing to identify as a KAM a matter that clearly involved significant auditor judgment, potentially because it was contentious or involved a disagreement with management
• Inadequate description of estimation uncertainty — Not clearly explaining the range of possible outcomes and the sensitivity of the financial statements to changes in key assumptions

Australian Regulatory Context: ASIC, AUASB, and Audit Quality

The regulatory framework governing KAM reporting in Australia involves several key bodies. The Auditing and Assurance Standards Board (AUASB) sets the auditing standards, including ASA 701, and conducts post-implementation reviews to assess their effectiveness. Following a review in 2022–23, the AUASB decided not to extend mandatory KAM reporting to non-listed entities at that time, though this position may be revisited as the regulatory landscape evolves.

ASIC enforces compliance with auditing standards through its audit quality surveillance program. ASIC can take action against registered company auditors (RCAs) who fail to comply with auditing standards, including referral to the Companies Auditors Disciplinary Board (CADB). ASIC's annual financial reporting and audit focus areas provide important guidance on where the regulator expects auditors to exercise heightened scrutiny.

For 2026–27, ASIC has specifically flagged the following as audit focus areas:

• Going concern assessments and the adequacy of related disclosures
• Asset values, including impairment of non-financial assets
• Revenue recognition under AASB 15
• Sustainability reporting assurance for Group 1 entities
• Auditor independence and conflict-of-interest management

Boards and audit committees should use these focus areas as a checklist when reviewing their auditor's proposed KAMs and the quality of the disclosures in the final audit report.

Questions to Ask Your Auditor About KAMs

Audit committees play a critical role in the KAM process. The following questions will help you engage meaningfully with your auditor and ensure the KAM disclosures in your audit report are of the highest quality.

• Which matters did you consider for KAM status, and why did you include or exclude each? — Understanding the auditor's selection process reveals their risk assessment priorities
• How are the "how addressed" sections specific to our entity? — Push back on generic language and ask for entity-specific descriptions of audit procedures
• What evidence did you obtain in relation to each KAM, and were there any limitations? — Understanding the evidence base helps assess the robustness of the audit conclusions
• Did you encounter any disagreements with management in relation to any KAM area? — Significant disagreements that were resolved should be reflected in the KAM disclosure
• Are there any emerging areas — such as sustainability disclosures — that may become KAMs in future periods? — Forward-looking discussions help the board prepare for evolving audit requirements
• How do our KAMs compare to those of similar entities in our industry? — Benchmarking helps identify whether the auditor's risk assessment is appropriately calibrated

How MyMoney® Can Help

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