The auditor's objective with respect to opening balances during an initial audit engagement is to obtain sufficient appropriate audit evidence about whether: (a) opening balances contain misstatements that materially affect the current period's financial statements; and (b) appropriate accounting policies reflected in the opening balances have been consistently applied in the current period's financial statements, or changes thereto are appropriately accounted for.
Initial audit engagement: An engagement in which either the
prior period's financial statements were not audited or the prior period's
financial statements were audited by a predecessor auditor.
Opening balances: Account balances at the start of the
term are known as opening balances. Opening balances are calculated using the
prior period's closing balances and reflect the effects of past period
transactions and events, as well as accounting policies used in the prior
period. Contingencies and obligations, for example, are included in opening
balances as items that need to be disclosed at the start of the period.
Predecessor auditor: An auditor from a separate audit firm
who audited an entity's financial statements in a previous period and has been
replaced by the present auditor.
When
auditors take on a new client, according to ISA 510 Initial Engagements -
Opening Balances, they must ensure that:
§ There are no major misstatements in the
opening balances;
§ Prior period closing balances have been
accurately brought forward or, where necessary, restated; and
§ Acceptable accounting policies have been
consistently used, or changes have been adequately disclosed.
The
kind and scope of audit processes required to gather adequate appropriate audit
evidence about opening balances are determined by factors such as:
§ The entity's accounting policies.
§ The nature of account balances,
transaction types, and disclosures, as well as the risks of substantial
misstatement in the financial statements for the current period.
§ The importance of the opening balances
in relation to the financial statements for the current period.
§ Whether the financial statements from
the previous period were audited and, if so, whether the previous auditor's
opinion was modified.
If
the auditor is unable to gather sufficient appropriate audit evidence on the
opening balances, ISA (UK) 705 requires the auditor to offer a qualified
opinion or disclaim an opinion on the financial statements. If the auditor
concludes that the opening balances contain a misstatement that materially
affects the current period's financial statements, and the effect of the misstatement
is not properly accounted for, presented, or disclosed, the auditor shall
express a qualified or adverse opinion, as appropriate, in accordance with ISA
(UK) 705.
Practice:
If
the previous period was audited by another auditor or was not audited at all,
the auditors will need to do more work to satisfy themselves on the opening
position. If auditors are unable to satisfy themselves on the previous period,
they may have to revise the present audit report.
Reference:
https://bit.ly/37IhyxG
