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Auditing and Assurance Standard (AAS)
22
Initial
Engagements - Opening Balance
The following is the text of the Statement on
Standard Auditing Practices (SAP) 22, "Initial Engagements - Opening
Balance", issued by the Institute of Chartered Accountants of India. This
Statement should be read in conjunction with the "Preface to the
Statements on Standard Auditing Practices", issued by the Institute1.
INTRODUCTION
- The purpose of this Statement
on Standard Auditing Practices (SAP) is to establish standards regarding
audit of opening balances in case of initial engagement, i.e. when the
financial statements are audited for the first time or when the
financial statements for the preceding period were audited by another
auditor. This Statement would also be considered by the auditor so that
he may become aware of contingencies and commitments existing at the
beginning of the current period.
- "Opening balances" means those
account balances which exist at the beginning of the period. Opening
balances are the closing balances of the preceding period brought
forward to the current period and reflect the effect of:
(a) transactions and other events of the preceding periods; and
(b) accounting policies applied in the preceding period.
- For initial audit
engagements, the auditor should obtain sufficient appropriate audit
evidence that:
(a) the closing balances of the preceding period have been correctly
brought forward to the current period;
(b) the opening balances do not contain misstatements that materially
affect the financial statements for the current period; and
(c) appropriate accounting policies are consistently applied.
- In an initial audit engagement,
the auditor will not have previously obtained audit evidence supporting
the opening balances
AUDIT PROCEDURES
- For the purpose of the
Statement, the sufficiency and appropriateness of the audit evidence the
auditor will need to obtain regarding opening balances would depend on
the following matters:
- The accounting policies
followed by the entity.
- Whether the auditor's report,
contained an unqualified opinion, a qualified opinion, adverse opinion
or disclaimer of opinion where the financial statements for the
preceding period were audited.
- The nature of the opening
balances, including the risk of their misstatement in the financial
statements for the current period.
- The materiality of the
opening balances relative to the financial statements for the current
period.
- The auditor will need to
consider whether the accounting policies followed in the preceding
period, as per which the opening balances have been arrived at, were
appropriate and that those policies are consistently applied in the
financial statements for the current period and where such accounting
policies are inappropriate, the same have been changed in the current
period and adequately disclosed.
- When the financial statements
for the preceding period were audited by another auditor, the current
auditor may be able to obtain sufficient appropriate audit evidence
regarding opening balances by perusing the copies of the audited
financial statements. Ordinarily, the current auditor can place reliance
on the closing balances contained in the financial statements for the
preceding period, except when during the performance of audit procedures
for the current period the possibility of misstatements in the opening
balances is indicated.
- When the financial statements
of the preceding period were not audited or the auditor is not satisfied
by using the procedures described in paragraph 7, the auditor will need
to perform other procedures such as those disclosed in paragraphs 9 and
10.
- For the current assets and
liabilities, some audit evidence can ordinarily be obtained as part of
the audit procedures performed during the current period. For example,
the collection / payment of opening accounts receivable / accounts
payable during the current period will provide some audit evidence as to
their existence, rights and obligations, completeness and valuation at
the beginning of the period.
- For other assets and
liabilities, such as fixed assets, investments and long-term debt, the
auditor will ordinarily examine the records underlying the opening
balances. In certain cases, the auditor may be able to obtain
confirmation of opening balances from third parties, for example, for
long-term debt and investments.
AUDIT CONCLUSIONS AND REPORTING
11.
If, after performing procedures including those
set out above, the auditor is unable to obtain sufficient appropriate
audit evidence concerning opening balances, the auditor should, as
appropriate, express:
(a) a qualified opinion, or
(b) a disclaimer of opinion.
The auditor may also express an opinion which is qualified or disclaimed
regarding state of affairs, as appropriate.
12.
If the opening balances contain misstatements
which materially affect the financial statements for the current period
and the effect of the same is not properly accounted for and adequately
disclosed, the auditor should express a qualified opinion or an adverse
opinion, as appropriate.
EFFECTIVE DATE
13.
This Statement on Standard Auditing
Practices becomes operative for all audits commencing on or after 1st
July, 2001.
1 With the formation of the
Auditing Practices Committee in 1982, the Council of the Institute has
been issuing a series of Statements on Standard Auditing Practices (SAPs).
Statements on Standard Auditing Practices lay down the principles
governing an audit. These principles apply whenever an independent audit
is carried out. Statements on Standard Auditing Practices become mandatory
on the dates specified in the respective SAPs. The mandatory status
implies that, while discharging their attest function, it will be the duty
of the members of the Institute to ensure that SAPs are following in the
audit of financial information covered by their audit reports. If, for any
reason, a member has not been able to perform an audit in accordance with
the SAPs, his report should draw attention to the material departures
therefrom.
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