ISA 510

Initial Audit Engagements: Opening Balances

1Objective and scope

ISA 510 deals with the auditor's responsibilities relating to opening balances in an initial audit engagement: one where the financial statements for the prior period were not audited, or were audited by a predecessor auditor. 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. Where the financial statements include comparative information, ISA 710 also applies, and the ISA 300 requirements on initial engagements (professional clearance, communication with the predecessor) precede this standard.

The objective is to obtain sufficient appropriate audit evidence about whether opening balances contain misstatements that materially affect the current period's financial statements, and whether appropriate accounting policies reflected in the opening balances have been consistently applied in the current period, or changes to them are appropriately accounted for and adequately presented and disclosed.

2Key definitions

3Requirements

Audit procedures on opening balances

• Read the most recent financial statements, if any, and the predecessor's report on them, for information relevant to opening balances, including disclosures and any modification.
• Obtain sufficient appropriate evidence about whether the opening balances contain misstatements that materially affect the current period by determining whether the prior period's closing balances have been correctly brought forward or, where appropriate, restated; determining whether the opening balances reflect the application of appropriate accounting policies; and performing one or more of: reviewing the predecessor's working papers where permitted (the predecessor is not obliged to grant access, and the successor remains responsible for evaluating what is relied on); evaluating whether procedures performed in the current period provide evidence relevant to opening balances (subsequent receipts confirm opening receivables, subsequent payments confirm opening payables, the current-year count and roll-back tests opening inventory); and performing specific procedures on opening balances (confirmation of opening bank and loan balances, inspection of title documents for non-current assets, reperformance of the opening depreciation and provision computations).
• If the auditor obtains evidence that the opening balances contain misstatements that could materially affect the current period, perform additional procedures appropriate in the circumstances to determine the effect, and if such misstatements exist in the current period's statements, communicate them to the appropriate level of management and those charged with governance under ISA 450.

Consistency of accounting policies

The auditor obtains sufficient appropriate 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 appropriately accounted for and adequately presented and disclosed in accordance with the applicable framework (IAS 8: retrospective application, restatement of comparatives, and disclosure of the nature, reasons and effect of the change).

Modification in the predecessor's report

If the predecessor auditor's report was modified, the auditor evaluates the effect of the matter giving rise to the modification in assessing the risks of material misstatement in the current period. A limitation on scope over opening inventory in the prior period may resolve itself (the current auditor attended this year's count, so closing inventory is fine, but opening inventory and therefore cost of sales and profit remain unverifiable); a disagreement about a policy the entity has since corrected may need only a disclosure check.

4Documentation and reporting

The file records the procedures performed on opening balances and their results, any review of the predecessor's working papers and the extent of reliance placed on it, the evaluation of consistency of policies, the consideration of any prior modification, and the conclusions. ISA 300's documentation of communication with the predecessor sits alongside.

5Examinable focus