Clarified Auditing Standards: Opening Balances (AU-C Section 510) – Part 1
AU-C Section 510 states that the objectives of the auditor in conducting an initial audit or reaudit is to obtain sufficient evidence regarding opening balances to determine they are free of misstatements that materially affect the current period's financial statements. It is also the auditor's objective to determine that appropriate accounting policies â€“ or any changes â€“ have been consistently applied in the current period's financial statements, along with proper footnote disclosures.
Audit procedures in AU-C Section 510 include the following:
1. Financial statements, footnotes, and the auditor's report, if any, from the prior period should be read for information relevant to the opening balances and disclosures, as well as the consistent application of accounting principles.
2. When the prior period was audited by a predecessor CPA, the auditor should request management for authorization to review the predecessor's documentation and for the predecessor to respond to the current auditor's inquiries to obtain information for use in planning and performing the engagement. If the predecessor's report is modified, the auditor should evaluate the effects on the current financial statements to comply with AU-C Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.
3. Opening balances should be evaluated to determine if they contain any material misstatements that affect the current period's financial statements and footnotes. This evaluation should include:
- Determining if closing balances from the prior period have been brought forward to the current period and, when necessary, have been restated.
- Evaluating the opening balances to determine appropriate accounting policies have been applied.
- Determining the extent to which evidence obtained from the current period's audit procedures affect opening balances, and considering either evidence obtained from reviewing the predecessor's audit documentation or performing additional audit procedures for opening balances.
- Considering any misstatements discovered in the opening balances, performing any additional substantive procedures, and proposing adjustments as necessary.
- Communicating any material misstatements that are discovered to management and persons charged with governance of the entity as required in AU-C Section 260, The Auditor's Communication with Those Charged with Governance.
- Deciding whether prior-period financial statements reported on by the predecessor may require revision and, if so, arranging for a meeting with management and the predecessor auditor to resolve the matter in accordance with AU-C Section 560, Subsequent Events and Subsequently Discovered Facts. If management refuses to inform the predecessor auditor of the misstatements or if the matter is not resolved to the auditor's satisfaction, the auditor should consider withdrawing from the engagement or issuing a disclaimer of opinion.
Audit Conclusions and Reporting
Specific matters to be considered are:
- The successor auditor should not make reference to the predecessor's report or audit procedures as a basis for the auditor's report on current-period financial statements.
- If sufficient substantive evidence cannot be obtained for opening balances, the auditor should express a qualified opinion or disclaim an opinion in accordance with AU-C Section 705, Modifications to the Opinion in the Independent Auditor's Report.
- If a material misstatement in the opening balances affects current-period financial statements or disclosures and has not been corrected, if accounting principles have not been consistently applied, or if a change in accounting policies is not adequately presented or disclosed, a qualified or adverse opinion should be expressed in accordance with AU-C Section 705.
Part 2 of this article will overview the audit process that is applicable to initial audits of opening balances.
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