ISA (UK) 510: Initial Audit Engagements—Opening Balances

 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An auditor from a separate audit firm who audited an entity's financial statements in a previous period and has been replaced by the present auditor.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.

 

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