ACCA Advanced Audit and Assurance (AAA) Practice Exam

According to ISA 701, what should be communicated in the independent auditor's report?

1. Only the financial performance of the entity

2. Only significant threats to audit independence

3. Key audit matters identified during the audit

4. Recommendations for improving financial reporting

The correct answer is: Key audit matters identified during the audit

The correct answer focuses on the importance of communicating key audit matters identified during the audit within the independent auditor's report as required by ISA 701. This standard emphasizes transparency and provides valuable insights to users of the financial statements regarding areas that required significant auditor attention. Key audit matters are defined as those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. By communicating these matters, the auditor enhances the understanding of the audit process and the challenges faced, thus adding value to the report for stakeholders, such as management, the board of directors, and investors. This communication serves multiple purposes: it helps to instill confidence in the audit process, provides clarity about the areas that are complex or involve significant estimates and judgments, and addresses the concerns of stakeholders who may be interested in how those areas were handled. As a result, it aligns with the overarching goal of enhancing the quality and relevance of financial reporting. Other options, while they may be relevant to financial reporting and auditing practices, do not specifically address the mandate of ISA 701. For instance, discussing financial performance or threats to audit independence does not provide the same level of direct insight into the audit process. Recommendations for improving financial reporting