Copyright © 2018 Authors. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. International Journal of Engineering & Technology, 7 (3.30) (2018) 30-32 International Journal of Engineering & Technology Website: www.sciencepubco.com/index.php/IJET Research paper First Time Reporting of Key Audit Matters (KAM) by Malaysian Auditors Hashanah Ismail 1* , Asna Abdullah Atqa 2 , Hamimah Hassan 3 1,2,3 Faculty of Economics & Management, Universiti Putra Malaysia, Malaysia *Corresponding author E-mail: pengsenam@gmail.com; asnaatqa@upm.edu.my Abstract This paper reports on the early first cohort of Audit Reports issued by external auditors in response to the requirement of ISA 701, Com- munication of Key Audit Matters (KAM) in the Auditor’s Report, which became effective for audits of financial statements on o r after 15 December 2016. Based on 15 Audit Reports of financial statements for year ending 31 December 2016 available in early 2017, this paper reports that only one out of 15 had a disclaimer and no KAM reported for the audit as ISA 701 specifies that no KAM should be reported following a disclaimer. The other fourteen audit reports were all clean reports with the number of KAMs reported ranging from one to five. The highest most significant audit matter reported was revenue recognition and inventory valuation followed by asset im- pairments of both tangible and intangible assets. Justifications by auditors of matters considered most significant ranged from no addi- tional information (it is most significant because it is material) to articulate explicit link with business model and industry specific factors thus compliance with disclosure of KAM may be compliance de jour rather than compliance de facto. Despite the additional requirement to disclose KAM, this study finds no evidence of audit delays. All KAMs disclosed are elaborations of and related to a client’s significant accounting policies choice. From KAM disclosures, readers of audit reports now are informed of the audit risk areas where estimates were made and judgments prevailed challenging auditors to exercise greater skepticism. This preliminary finding provides pointers for greater research into the cost benefits and communicative value of KAM disclosure in the Audit Reports of Listed companies in Malaysia. Keywords: Key Audit Matters; Professional Skepticism; Revenue Recognition; Asset Impairment 1. Introduction The auditor’s report accompanying the financial statements issued in a company’s annual report gives assurance to users of financial statements as to whether the audited financial statements are free from material misstatements or not. Materiality is determined by the auditor based on the auditor’s assessment using the audit risk model. The materiality threshold set will define the boundary of how much evidence is needed and how much work needs to be performed. Such assurance gives credibility to the audited finan- cial statements and therefore deemed useful for decision making by users of financial statements. In Malaysia, the Malaysian Insti- tute of Accountants (MIA) mandates that audits must be per- formed in accordance with approved auditing standards to ensure minimum quality of work performed. The audit process of as- sessing risk of material misstatements and the appropriate re- sponse to the risks identified makes auditing a critical rather than difficult process involving judgment and the exercise of profes- sional skepticism (1). What happens in the entire audit process must be documented as required by the standard on Audit Work- ing Papers. These papers are not accessible to the users of audit reports. What users get is only an audit report with the auditor concluding in the form of an opinion following a standardized template issued by MIA. This practice will now change when MIA issued ISA 701, Communication of Key Audit Matters (KAM) in the Auditors’ Report whereby the auditors are now required to include a new additional paragraph in the audit report, issues deemed as of the greatest significance during the audit dis- cussed and reported to those in charge of governance. The audi- tors are now required to be transparent to intended users of the audit report on key or critical areas of the audit. ISA701 therefore creates a new reporting regime to external auditors whereby for the first time auditors must disclose in a separate paragraph of the audit report matters limited only to those identified as most signif- icant to the audit and why and how auditors responded. The changes are expected to bring benefits not only to auditors but also to auditees and users of audited financial statements. Although the audit report is now providing a lot more information as directed by ISA 701, not much coverage has been given by the media despite the claims that the market wants auditors to be more transparent. Given this new reporting regime to be effective for periods ending on or after 15 December 2016 what were the first reported KAMs identified by Malaysian external auditors and why? It is the objective of this paper to examine the nature and extent of KAMs in the early batch of the pioneering audit report cohort for year ended 31 December 2016 and whether selecting KAMs, pre- senting it without a boiler plate template and reporting the re- sponses to the KAMs lengthened the audit process thereby jeop- ardizing the timeliness of audit reports. To date there is no pub- lished study on KAMs and its impact in Malaysia. We believe this is the first study. It is exploratory and paves the way for more research in the near future. The paper is organized as follows: the next section presents the literature review followed by the meth- odology of the study. Results and discussion of the results are then presented before the paper concludes.