Under international auditing standards, external auditors are required to report on key audit matters observed during the conduct of the annual financial statement audit of a clients financial statements. The requirement to report on key audit matters is contained in International Standards on Auditing ("ISA") 700, Forming an Opinion and Reporting on Financial Statements. Paragraph 30 of ISA 700 says, "For audits of complete sets of general purpose financial statements of listed entities, the auditor shall communicate key audit matters in the auditors report in accordance with ISA 701".

Paragraph 8 ISA 701 defines key audit matters as: "Those matters that, in the auditors professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance ".

ISA 701 guides auditors on identifying key audit matters and preparing their key audit matters (KAM) report.

Required:

Read the article titled, Auditor Reporting - Key Audit Matters, and answer the following questions.

1. What is the title of ISA 701, the auditing standard summarized in the article, and what organization issued the standard?

2. Briefly summarize the basic purpose of ISA 701.

3. What are the expected benefits of requiring auditors to report on key auditing matters?

4. In guiding auditors on the topics to include in their KAM reports, why does the standard have a judgement-based decision-making framework?

5. When the issue of requiring external auditors to report on the key audit matters observed during the conduct of the audit was debated, several critics of the proposed guidance indicated that they thought such guidance might:

a. Confuse users about the role of the auditors reporting and the information contained in the financial statements and related disclosures contained prepared by the company management.

b. Require the auditor to disclose information that the entity might believe is confidential or exposes the company or the auditing firm to litigation, and

c. Was inconsistent with the role of an external auditor, which is to issue a report on whether the financial statements fairly present the financial health and financial performance of the entity.

Briefly comment on whether you agree or disagree with the above criticisms and offer any other criticism (or support/agreement) you have with requiring external auditors to issue a separate report on KAM identified during the conduct of the financial statement audit.