ISA 510 - INITIAL AUDIT ENGAGEMENTS - OPENING BALANCES

Question 1

ISA 510

INITIAL AUDIT ENGAGEMENTS - OPENING BALANCES

Answer 1

An INITIAL ENGAGEMENT is an engagement in which either:
- The FS for the prior period were NOT AUDITED; or

• The FS for the prior period were AUDITED BY A PREDECESSOR AUDITOR.

MAIN ISSUE:
Prior year closing balances may be misstated. These same balances will be brought down as opening balances for the current year F/S. If the opening balances are misstated, closing balances for the current year will also be misstated.

Question 2

ISA 510

AUDITOR’S Responsibilities & GENERAL Audit Procedures

Answer 2

1/ Whether prior period’s balances have been CORRECTLY BROUGHT FORWARD to the current period
− AGREE opening balances to prior year audited F/S to confirm they were correctly brought
forward to the current year.

2/ Whether the opening balances CONTAIN MISSTATEMENTS

− REVIEW prior year auditor’s report, (if any), to see whether it was modified.
− REVIEW the “accounting policy note” to see whether the policies followed by the entity last year were appropriate
− REVIEW CLIENT’S working papers (if any) to see how last year’s closing balances were derived are misstated.
(especially those requiring calculations like deferred tax, goodwill, impairment, depreciation)
− REVIEW PREDECESSOR AUDITOR’S working papers to obtain evidence regarding opening balances. (Unless prohibited by law or regulation)
− IN EXCEPTIONAL CASES, perform specific audit procedures to obtain evidence regarding the opening balances.

To know whether accounting policies are appropriate, you should consider whether they are in line with:
− Requirements of IAS / IFRS
− Industry norms

3/ Whether appropriate ACCOUNTING POLICIES ARE CONSISTENTLY APPLIED
− REVIEW THIS YEAR’S “accounting policy note” to see whether consistent with last year.

3 Areas of Responsibility

Question 3

ISA 510

Performing SPECIFIC audit procedures on Opening Balances

Answer 3

1/ OPENING accounts receivable

• REVIEW receipts in cash book in the first few months of the year to confirm recoverability of the receivables balance

2/ OPENING accounts payable
- REVIEW payments in cash book in the first few months of the year to confirm completeness of the payables balance

3/ OPENING inventory balance
- OBSERVE a physical inventory count (just after being appointed as auditor) & carry out a ROLL BACK to confirm quantity of inventory at the beginning of the year.

• REVIEW client’s working paper for the valuation of last year’s inventory to confirm quantities of inventory agree to the quantities rolled back
• REVIEW client’s working paper to confirm inventories were stated at the lower of cost & Net Realisable Value (IAS 2).
• CALCULATE the gross profit as at the beginning of the year & compare with gross profit from prior years. Enquire from client if there are significant anomalies.
• CARRY OUT the sales & purchases cut- off test at the beginning of the year to confirm cut off.

4/ OPENING non-current asset balance

• AGREE the opening balance of NCA in the General Ledger to the Non-Current Asset Register at the same date.

Question 4

ISA 510

Audit Report implications

Answer 4

**1/ Previous year’s audit done another auditor

PREVIOUS YEAR (2014):
- Unmodified Opinion (another auditor)

THIS YEAR (2015): Opening balance is OK
- Unmodified Opinion - Becasue we were able to obtain SAAE about the opening balance on Inventory.
- Other Matter- To include on OM paragraph to explain that previous year’s audit done by another auditor.

Per ISA 710 Other Matter paragraph is OPTIONAL if previous year’s FS were audited.

NEXT YEAR (2016): Comparative figures for 2014&2015 are OK > Unmodified Opinion

AUDIT REPORT: please refer to the notes for Example 1

Question 5

ISA 510

Audit Report implications

Answer 5

**2/ Previous year’s audit done another auditor

PREVIOUS YEAR (2014):
- Unmodified Opinion (another auditor)

THIS YEAR (2015): No SAAE to confirm Opening balance is ok
- Modified Opinion - Becasue we were NOT able to obtain SAAE about the opening balance on Inventory.
- Other Matter- To include on OM paragraph to explain that previous year’s audit done by another auditor.

Per ISA 710 Other Matter paragraph is OPTIONAL if previous year’s FS were audited.

NEXT YEAR (2016): Comparative figures for 2014&2015 are OK > Modified Opinion
Because we were STILL NOT able to obtain SAAE about the opening balance on inventory in 2015.

AUDIT REPORT: please refer to the notes for Example 2

Question 6

ISA 510

INITIAL ENGAGEMENTS

Answer 6

PLANNING - ISA 300 (relates to INITIAL ENGAGEMENTS)

ADDITIONAL matters to consider:
▪ Whether any matters were discussed with client’s management during firm’s initial meeting to see if any of these affect the overall audit strategy and audit plan. (Especially accounting matters.)

▪ Whether any matters raised when professional clearance was obtained from the predecessor auditor to see if any of these affect the overall audit strategy and audit plan. (Especially appropriateness of
the accounting policies & accounting treatment.)

INITIAL ENGAGEMENTS - ISA 510

Auditor’s responsibilities:
▪ Whether prior period’s balances have been correctly brought forward to the current period
▪ Whether the opening balances contain misstatements
▪ Whether appropriate accounting policies are consistently applied