The Opening Balances

Some questions may arise when we are appointed to replace the former auditor of a company or when the previously financial statements were not audited. What kind of audit procedures have to be conducted by the auditor at the initial audit engagement within this condition ? If the auditor did not apply any audit procedure regarding on the opening balance of the current period’s financial statements, would it be affected to the audit opinion ?

International Standard on Auditing (ISA) 510 Initial Audit Engagements – Opening Balances rules this conditions clearly. This ISA is effective for audits of financial statements for periods beginning on or after December 15, 2009.

Para.3 of this ISA states that in conducting an initial audit engagement (wherein the financial statements for the prior period were not audited, or were audited by a predecessor auditor), the objective of the auditor with respect to opening balance 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 and adequately presented and disclosed in accordance with the applicable financial reporting framework.

Following are several audit procedures that should be done by the successor auditor regarding the opening balance of financial statements :

1. the auditor shall read the most recent financial statements, if any, and the predecessor auditor’s report thereon, if any, for information relevant to opening balances, including disclosures.

2. the auditor shall obtain sufficient appropriate audit evidence about whether the opening balance contain misstatements that materially affect the current period’s financial statements by :

(a) determining whether the prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, have been restated;

(b) determining whether the opening balance reflect the application of appropriate accounting policies, and

(c) performing one or more of the following : (i) where the prior year financial statements were audited, reviewing the predecessor auditor’s working papers to obtain evidence regarding the opening balances, (ii) evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balance, or (iii) performing specific audit procedures to obtain evidence regarding the opening balances.

If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified opinion or disclaim an opinion on the financial statements, as appropriate, in accordance with ISA 705.

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 appropriately accounted for or not adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion.

If the auditor concludes that : (a) the current period’s accounting policies are not consistently applied in relation to opening balances in accordance with the applicable financial reporting framework, or (b) a change in accounting policies is not appropriately accounted for or not adequately presented or disclosed in accordance with the applicable financial reporting framework, the auditor shall express a qualified opinion or an adverse opinion (Hrd).

Reference : ISA 510 Initial Audit Engagements – Opening Balances