Audit the Opening Balances, how far should the Auditor go?

ISA 510 Initial Audit Engagements – Opening Balances para. A3 – A7 underlines the nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances which depend on such matters as follows :

(a) the accounting policies followed by the entity

(b) the nature of the account balances, classes of transactions and disclosures and the risks of material misstatement in the current period’s financial statements

(c) the significance of the opening balance relative to the current period’s financial statements

(d) whether the prior period’s financial statements were audited and, if so, whether the predecessor auditor’s opinion was modified

If the prior period’s financial statements were audited by a predecessor auditor, the auditor may be able to obtain sufficient appropriate audit evidence regarding the opening balances by reviewing the predecessor auditor’s working paper. Whether such a review provides sufficient appropriate audit evidence is influenced by the professional competence and independence of the predecessor auditor.

Audit evidence about opening balances for current assets and liabilities may be obtained as part of the current period’s audit procedures. For example, the collection (payment) of opening account receivable (account payable) during the current period will provide some audit evidence of their existence, rights and obligations, completeness and valuation at the beginning of the period.

In the case of inventories, however, the current period’s audit procedures on the closing inventory balance provide little audit evidence regarding inventory on hand at the beginning of the period. Therefore, additional audit procedures may be necessary, and one or more of the following may provide sufficient appropriate audit evidence : (1) observing a current physical inventory count and reconciling it to the opening inventory quantities, (2) performing audit procedures on the valuation of the opening inventory items, (3) performing audit procedures on gross profit and cutoff.

For non-current assets and liabilities, such as property, plant and equipment, investments and long-term debt, some audit evidence may be obtained by examining the accounting records and other information underlying the opening balances. In certain cases, the auditor may be able to obtain some audit evidence regarding opening balances through confirmation with third parties, for example, for long-term debt and investments. In other cases, the auditor may need to carry out additional audit procedures.

So, now can you figure it out how far should the auditor go for the audit of opening balances ?