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Standard on Auditing (SA) 510* (Revised) Initial Audit Engagements - Opening Balances Standard on Auditing (SA) 510 (Revised), "Initial Audit Engagements - Opening Balances" should be read in the context of the "Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services1," which sets out the authority of SAs. Introduction Scope of this SA 1. This Standard on Auditing (SA) deals with the auditor's responsibilities relating to opening balances when conducting an initial audit engagement. In addition to financial statement amounts, opening balances include matters requiring disclosure that existed at the beginning of the period, such as contingencies and commitments. When the financial statements include comparative financial information, the requirements and guidance in [proposed] SA 710 (Revised)2 also apply. SA 300 (Revised)3 includes additional requirements and guidance regarding activities prior to starting an initial audit. Effective Date 2. This SA is effective for audits of financial statements for periods beginning on or after April 1, 2010. Objective 3. In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether:
Definitions 4. For the purposes of the SAs, the following terms have the meanings attributed below: (a) Initial audit engagement An engagement in which either:
(b) Opening balances Those account balances that exist at the beginning of the period. Opening balances are based upon 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 matters requiring disclosure that existed at the beginning of the period, such as contingencies and commitments. (c) Predecessor auditor The auditor from a different audit firm, who audited the financial statements of an entity in the prior period and who has been replaced by the current auditor. Requirements Audit Procedures Opening Balances 5. The auditor shall read the most recent financial statements, if any, 6. The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances 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, any adjustments have been disclosed as prior period items in the current year's Statement of Profit and Loss4; (b) Determining whether the opening balances reflect the application of appropriate accounting policies; and (c) Performing one or more of the following: (Ref: Para. A1-A4)
7. If the auditor obtains audit evidence that the opening balances contain misstatements that could materially affect the current period's financial statements, the auditor shall perform such additional audit procedures as are appropriate in the circumstances to determine the effect on the current period's financial statements. If the auditor concludes that such misstatements exist in the current period's financial statements, the auditor shall communicate the misstatements with the appropriate level of management and those charged with governance in accordance with SA 4505. Consistency of Accounting Policies 8. The auditor shall obtain sufficient appropriate audit evidence about whether the accounting policies reflected in the opening balances have been consistently applied in the current period's financial statements, and whether changes in the accounting policies have been properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework. Relevant Information in the Predecessor Auditor's Report Audit Conclusions and Reporting Opening Balances 10. If the auditor is Unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with Proposed SA 7057. (Ref: Para. A5) 11. 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 properly accounted for or not adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion, as appropriate, in accordance with Proposed SA 705. Consistency of Accounting Policies 12. If the auditor concludes that:
the auditor shall express a qualified opinion or an adverse opinion as appropriate in accordance with Proposed SA 705. Modification to the Opinion in the Predecessor Auditor's Report 13. If the predecessor auditor's opinion regarding the prior period's financial statements included a modification to the auditor's opinion that 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 statements in accordance with Proposed SA 705 and [Proposed] SA 710 (Revised). (Ref: Para. A6) Application and Other Explanatory Material Audit Procedures (Ref: Para.6) Opening Balances (Ref: Para. 5(c)) A1. The nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances depend on such matters as:
A2. 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 perusing the copies of the audited financial statements including the other relevant documents relating to the prior period financial statements such as supporting schedules to 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 opening balances is indicated. A3. 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, 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:
A4. 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. Audit Conclusions and Reporting Opening Balances (Ref: Para. 10) A5. Proposed SA 705 establishes requirements and provides guidance on circumstances that may result in a modification to the auditor's opinion on the financial statements, the type of opinion appropriate in the circumstances, and the content of the auditor's report when the auditor's opinion is modified. The inability of the auditor to obtain sufficient appropriate audit evidence regarding opening balances may result in one of the following modifications to the opinion in the auditor's report:
The Appendix includes illustrative auditor's reports. Modification to the Opinion in the Predecessor Auditor's Report (Ref: Para. 13) A6. In some situations, a modification to the predecessor auditor's opinion may not be relevant and material to the opinion on the current period's financial statements. This may be the case where, for example, there was a scope limitation in the prior period, but the matter giving rise to the scope limitation has been resolved in the current period. Material Modifications to ISA 510, "Initial Audit Engagements - Opening Balances" Deletions 1. Paragraph 6 (a) of ISA 510 dealt with the procedure for obtaining sufficient appropriate audit evidence about the opening balances which contain misstatements that materially affect the current period's financial statements by determining whether the prior period's closing balances have been correctly brought forward to the current period or, when appropriate, have been restated. Since in India Accounting Standard (AS) 5, "Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies" requires that prior period items should be separately disclosed in the Statement of Profit and Loss in a manner that their impact on the current profit or loss can be perceived, the restatement of the prior period financial statements does not exist in the Indian scenario. Hence, to align with the requirements of AS 5, the requirement of restatement of prior period items has been replaced with the requirement to disclose the prior period items in the current year's Statement of Profit & Loss. 2. Paragraph 6(c)(i) of ISA 510 dealt with the procedure for obtaining sufficient appropriate audit evidence about the opening balances which contain misstatements that materially affect the current period's financial statements by reviewing the predecessor auditor's working papers, where the prior year financial statements were audited. Since in India Clause 1 of Part I of the Second Schedule to the Code of Ethics provides that a Chartered Accountant in Practice shall be deemed to be guilty of professional misconduct if he discloses information acquired in the course of his professional engagement to any person other than his client, an auditor cannot provide access to his working paper to the another auditor. Therefore, keeping in view the requirements of Code of Ethics, the requirement of reviewing the predecessor auditor's working papers has been replaced with the requirement of perusing the copies of the audited financial statements including the other relevant documents relating to the prior period financial statements. Corresponding change has also been made in the paragraph A4 of ISA 510 and Paragraphs At and A5 have been deleted. 3. Paragraph A2 of ISA510 dealt with the outsourcing of an audit of a public sector entity by the statutorily appointed auditor to a private sector audit firm. Since in the Indian context such situation does not exist, the paragraph A2 of the application part has been deleted completely. Appendix Illustrations of Auditors' Reports with Modified Opinions* Illustration 1: Circumstances described in paragraph A5 (a) include the following:
INDEPENDENT AUDITOR'S REPORT Report on the Financial Statements9 We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at March 31, 20X1, and the Statement of Profit and Loss, and the cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the Financial Statements Management is responsible for the preparation and presentation of financial statements that give a true and fair view in accordance with applicable Accounting Standards10. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures
selected depend on the auditor's judgment, including the assessment of the
risks of material misstatement of the financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and presentation11 of
financial statements that give a true and fair view in order to design
audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity's
internal control12. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the
financial statements. Basis for Qualified Opinion We were appointed as auditors of the company on June 30, 20X0 and thus did not observe the counting of the physical inventories at the beginning of the year. We were unable to satisfy ourselves by alternative means concerning inventory quantities held at March 31, 20X0. Since opening inventories enter into the determination of the results of operations and cash flows, we were unable to determine whether adjustments might have been necessary in respect of the profit for the year reported in the Statement of Profit and Loss and the net cash flows from operating activities reported in the cash flow statement. Qualified Opinion In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give a true and Fairview of the State of Affairs of ABC Company as of March 31, 20X1, and of its Results of Operations and its cash flows for the year then ended in accordance with applicable Accounting Standards. Other Matters The financial statements of the Company for the year ended March 31, 20X0, were audited by another auditor whose report dated July 1, 20X0 expressed an unmodified opinion on those statements. Report on Other Legal and Regulatory Requirements [Form and content of this section of the auditor's report will vary depending on the nature of the auditor's other reporting responsibilities]. For ABC and Co. Place of Signature Illustration 2: Circumstances described in paragraph A5(b) include the following:
INDEPENDENT AUDITOR'S REPORT Report on the Financial Statements15 We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at March 31, 20X1, and the Statement of Profit and Loss, and the cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the Financial Statements Management is responsible for the preparation and presentation16 of financial statements that give a true and fair view in accordance with applicable Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures
selected depend on the auditor's judgment, including the assessment of the
risks of material misstatement of the financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and presentation17 of
financial statements that give a true
and fair view in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control18. An audit also includes
evaluating the appropriate ness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements. Basis for Qualified Opinion on the results of operations and Cash Flows We were appointed as auditors of the company on June 30, 20X0 and thus did not observe the counting of the physical inventories at the beginning of the year. We were unable to satisfy ourselves by alternative means concerning inventory quantities held at March 31, 20X0. Since opening inventories enter into the determination of the results of operations and cash flows, we were unable to determine whether adjustments might have been necessary in respect of the profit for the year reported in the Statement of Profit and Loss and the net cash flows from operating activities reported in the cash flow statement. Qualified Opinion on the results of operations and Cash Flows In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the Statement of Profit and Loss and Cash Flow Statement give a true and fair view of the results of operations and cash flows of ABC Company for the year ended March 31, 20Xl in accordance with applicable Accounting Standards. Opinion on the State of Affairs In our opinion, the balance sheet gives a true and Fairview of the State of Affairs of ABC Company as of March 31, 20Xl in accordance with applicable Accounting Standards. Other Matters The financial statements of the Company for the year ended March 31, 20X0, were audited by another auditor whose report dated July 1, 20X0 expressed an unmodified opinion on those statements. Report on Other Legal and Regulatory Requirements [Form and content of this section of the auditor's report will vary depending on the nature of the auditor's other reporting responsibilities.] For ABC and Co.
Place of Signature * Hitherto known as Standard on Auditing (SA) 510 (AAS 22), "Initial Engagements - Opening Balances". 1 Published in the July, 2007 issue of the Journal. 2 Currently, SA 710 (AAS 25), “Comparatives” is in force. The Standard is being revised in the light of the corresponding International Standard. 3 SA 300 (Revised), “Planning an Audit of Financial Statements” has been published in the December, 2007 issue of the Journal 4 Accounting Standard (AS) 5, “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” requires that prior period items should be separately disclosed in the Statement of Profit and Loss in a manner that their impact on the current profit or loss can be perceived. 5 The Auditing and Assurance Standards Board (AASB) has issued the Exposure Draft of the Standard on Auditing (SA) 450, “Evaluation of Misstatements Identified During the Audit” in the January, 2009 issue of the Journal for public comments. 6 SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment”. 7 At present, there is no separate Standard
on Auditing (SA) corresponding to International Standard on Auditing (ISA)
705, “Modifications to the Opinion in the Independent Auditor’s Report”
and the concept of modified audit report has been discussed in SA 700,
“The Auditor’s Report on Financial Statements” (Hitherto known as AAS 28).
SA 700 is being revised in the light of the * The Reporting Standards may give rise to
conforming amendments to the illustrations of auditors’ reports. Further,
at present, there is no separate Standard on Auditing (SA) corresponding
to International Standard on Auditing (ISA) 705, “Modifications to the
Opinion in the Independent Auditors Report” and the concept of modified
audit report has been discussed in SA 700, “The 8 If the possible effects, in the auditor’s judgment, are considered to be material and pervasive to the entity’s results of operations and cash flows, the auditor would disclaim an opinion on the results of operations and cash flows. 9 The sub-title “Report on the Financial Statements” is unnecessary in circumstances when the second sub-title “Report on Other Legal and Regulatory Requirements” is not applicable. 10 Depending on the circumstances, this sentence may read: “Management is responsible for the preparation and fair presentation of these financial statements in accordance with applicable accounting standards”. 11 Depending on the circumstances, this sentence may read: “In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control”. 12 In circumstances when the auditor also
has responsibility to express an opinion on the effectiveness of internal
control in conjunction with the audit of the financial statements, this
sentence would be worded as follows: “In making those risk assessments,
the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements 13 Partner or Proprietor, as the case may be. 14 If the possible effects, in the auditor’s judgment, are considered to be material and pervasive to the entity’s results of operations and cash flows, the auditor would disclaim the opinion on the results of operations and cash flows. 15 The sub-title “Report on the Financial Statements” is unnecessary in circumstances when the second sub-title “Report on Other Legal and Regulatory Requirements” is not applicable. 16 Depending on the circumstances, this sentence may read: “Management is responsible for the preparation and fair presentation of these financial statements in accordance with applicable accounting standards”. 17 Depending on the circumstances, this sentence may read: “In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control”. 18 In circumstances when the auditor also
has responsibility to express an opinion on the effectiveness of internal
control in conjunction with the audit of the financial statements, this
sentence would be worded as follows: “In making those risk assessments,
the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements 19 Partner or Proprietor, as the case may be.
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