Audit of opening balances

 Opening balances is particularly important matter for the initial audit engagements. If auditors enter the initial audit engagement, they must audit financial statements opening balances.

Opening balances are account balances that exist at the beginning of the period. Opening balances are based on the closing balances of the prior period and reflect the effects of transactions and events of prior periods and accounting policies applied in the prior period. Opening balances also include issues requiring disclosure that existed at the beginning of the period, such as contingencies and commitments.

There exist two situations relating to the opening balances when assigning to the initial audit engagement:

·        The financial statements for the prior period were not audited.

·        The financial statements for the prior period were audited by a predecessor auditor.

If the financial statements for the prior period were audited by a predecessor auditor the auditor  may obtain predecessor auditor working papers, review them to obtain audit evidence about opening balances.

 If the financial statements for the prior period were not audited the auditor performs audit procedures to obtain audit evidence about opening balances by applying audit procedures to the financial information for the current period or to the financial information for the previous year.

Usually in conducting an initial audit engagement an auditor obtains sufficient appropriate audit evidence about whether:

·        the opening balances contain misstatements that materially affect the current period’s financial statements; and

·     appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statement or changes are proper presented and disclosed in accordance with the applicable financial reporting framework.

The nature and extent of audit procedures regarding the opening balances depends on such factors as:

·        The accounting policies followed by the entity.

·        The nature of the account balances, classes of transactions and disclosures.

·        The significance of the opening balances relative to the current period’s financial statements.

·        Whether the prior period’s financial statements were audited.

Audit procedures to obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period’s financial statements include:

(a) Reading the most recent financial statements (if available), and the predecessor auditor’s report (if available) for information relevant to opening balances, including disclosures

(b) Indicating whether the prior period’s closing balances have been correctly brought forward to the current period.

 (c) Determining whether the opening balances reflect the application of appropriate accounting policies; and

(d) Performing one or more of the following:

·      Where the prior year financial statements were audited, reviewing the predecessor auditor’s working papers to obtain evidence about the opening balances.

·      Evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances;

·        Performing specific audit procedures to obtain evidence regarding the opening balances.

For current assets and liabilities, some audit evidence about opening balances may be obtained as part of the current period’s audit procedures. For example, the collection (payment) of opening accounts receivable (accounts 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, such audit procedures may be necessary:

·        Observing a current physical inventory count and reconciling it to the opening inventory quantities.

·        Performing audit procedures on the valuation of the opening inventory items.

·        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. In some cases, evidence about opening balances could be obtained through confirmation with third parties.

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.

If financial statements for prior year were audited and the predecessor auditor’s opinion included a modification the auditor must determine whether:

·        Modification of audit opinion remains relevant and material to the current period’s financial statements.

·       Modification to the predecessor auditor’s opinion may not be relevant and material to the opinion on the current period’s financial statements.

If a modification remains relevant and material to the current period’s financial statements, the auditor shall modify the auditor’s opinion on the current period’s financial statement.

ISA 510

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