Introduction of ‘Key Audit Matters’ Communication

On July 5, 2018, the Business Accounting Council of the Financial Services Agency of Japan (‘FSA’) published the “Opinion on the Revision of the Auditing Standards” that contains the introduction of ‘Key Audit Matters (KAM)’ communication.

KAM is the matter that is of most significance in the audit of the financial statements for a certain period, based on the auditor’s professional judgement. The auditor should include the description of each KAM, along with the explanation about its nature, on their auditor’s report. The practice is already in place in various countries, mainly due to the recent revision and introduction of the International Standard on Auditing (‘ISA’) No.700 and 701, and the practice in Japan will be very close to those of the ISAs.

Mandatory application is from the audits for the year ending on March 31, 2021, and early application from the audits for the year ending on March 31, 2020, is also admitted. The Japanese Institute of Certified Public Accountants (‘JICPA’), a professional body of Certified Public Accountants in Japan, encourages its members for early application, especially the audits of the companies listed on tier 1 of Tokyo Stock Exchange, aiming to accumulate the practice.

The Japanese Institute of Certified Public Accountants (‘JICPA’) already conducted ‘Trial Run of KAM Communication’during the year 2017, with the cooperation of 7 audit firms (including the BIG 4 firms) and 26 companies. This trial run was intended to identify practical issues related to the adoption of communicating KAM. Based on the replies from both audit firms and companies, KAM communication is expected to achieve benefits such as:

• Improved transparency of audits.
• Deeper communication between the auditor and management/those charged with governance relating to the impact of higher risks on financial statements.
• A positive impact on the companies’ public reporting and corporate governance; for example, disclosures in annual securities reports and IR, dialogue with shareholders and reports from those charged with governance.

On the other hand, the following issues were addressed in achieving the intended purpose:

• An understanding of the purpose of KAM must be established and promoted.
• The awareness of each stakeholder must be raised to improve auditor reporting.