Initial Audit Engagements‑Opening BalancInitial Audit Engagements‑Opening Balances

Auditing Standard ASA 510

The Auditing and Assurance Standards Board (AUASB) made Auditing Standard ASA 510 Initial Audit Engagements‑Opening Balances pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001, on 27 October 2009.

This compiled version of ASA 510 incorporates subsequent amendments contained in other Auditing Standards made by the AUASB up to and including 15 March 2023 (see Compilation Details).

Auditing Standard ASA 510

Initial Audit Engagements‑Opening Balances

Application

Aus 0.1 This Auditing Standard applies to:

(a) an audit of a financial report for a financial year, or an audit of a financial report for a half‑year, in accordance with the Corporations Act 2001; and

(b) an audit of a financial report, or a complete set of financial statements, for any other purpose.

Aus 0.2 This Auditing Standard also applies, as appropriate, to an audit of other historical financial information.

Operative Date

Aus 0.3 This Auditing Standard is operative for financial reporting periods ending on or after 1 January 2010. [Note: For operative dates of paragraphs changed or added by an Amending Standard, see Compilation Details.]

Introduction

Scope of this Auditing Standard

1. This Auditing Standard deals with the auditor’s responsibilities relating to opening balances in 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 report includes comparative financial information, the requirements and guidance in ASA 710[1] also apply. ASA 300[2] includes additional requirements and guidance regarding activities prior to starting an initial audit.

Effective Date

1. [Deleted by the AUASB. Refer Aus 0.3]

Objective

1. In conducting an initial audit engagement, the objective of the auditor is to obtain sufficient appropriate audit evidence about whether:
   1. Opening balances contain misstatements that materially affect the current period’s financial report; and
   2. Appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial report, or changes thereto are appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

Definitions

1. For the purposes of this Auditing Standard, the following terms have the meanings attributed below:
   1. Initial audit engagement means an engagement in which either:
      1. The financial report for the prior period was not audited; or
      2. The financial report for the prior period was audited by a predecessor auditor.
   2. Opening balances means 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.
   3. Predecessor auditor means the auditor from a different audit firm, who audited the financial report of an entity in the prior period and who has been replaced by the current auditor.

Requirements

Audit Procedures

Opening Balances

1. The auditor shall read the most recent financial report, if any, and the predecessor auditor’s report thereon, if any, for information relevant to opening balances, including disclosures.
2. The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period’s financial report by: (Ref: Para. A1‑A2)
   1. Determining whether the prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, have been restated;
   2. Determining whether the opening balances reflect the application of appropriate accounting policies; and
   3. Performing one or more of the following: (Ref: Para. A3‑A7)
      1. Where the prior year financial report was audited, reviewing the predecessor auditor’s working papers to obtain evidence regarding the opening balances;
      2. Evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances; or
      3. Performing specific audit procedures to obtain evidence regarding the opening balances.
3. If the auditor obtains audit evidence that the opening balances contain misstatements that could materially affect the current period’s financial report, the auditor shall perform such additional audit procedures as are appropriate in the circumstances to determine the effect on the current period’s financial report. If the auditor concludes that such misstatements exist in the current period’s financial report, the auditor shall communicate the misstatements with the appropriate level of management and those charged with governance in accordance with ASA 450.[3]

Consistency of Accounting Policies

1. 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 report, and whether changes in the accounting policies have been appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

Relevant Information in the Predecessor Auditor’s Report

1. If the prior period’s financial report was audited by a predecessor auditor and there was a modification to the opinion, the auditor shall evaluate the effect of the matter giving rise to the modification in assessing the risks of material misstatement in the current period’s financial report in accordance with ASA 315.[4]

Audit Conclusions and Reporting

Opening Balances

1. If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified opinion or disclaim an opinion on the financial report, as appropriate, in accordance with ASA 705.[5] (Ref: Para. A8)
2. If the auditor concludes that the opening balances contain a misstatement that materially affects the current period’s financial report, and the effect of the misstatement is not appropriately accounted for or not adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion, as appropriate, in accordance with ASA 705.

Consistency of Accounting Policies

1. If the auditor concludes that:
   1. the current period’s accounting policies are not consistently applied in relation to opening balances in accordance with the applicable financial reporting framework; or
   2. a change in accounting policies is not appropriately accounted for or not adequately presented or disclosed in accordance with the applicable financial reporting framework,

the auditor shall express a qualified opinion or an adverse opinion as appropriate in accordance with ASA 705.

Modification to the Opinion in the Predecessor Auditor’s Report

1. If the predecessor auditor’s opinion regarding the prior period’s financial report included a modification to the auditor’s opinion that remains relevant and material to the current period’s financial report, the auditor shall modify the auditor’s opinion on the current period’s financial report in accordance with ASA 705 and ASA 710. (Ref: Para. A9)

* * *

Application and Other Explanatory Material

Audit Procedures

Considerations Specific to Public Sector Entities (Ref: Para. 6)

1. In the public sector, there may be legal or regulatory limitations on the information that the current auditor can obtain from a predecessor auditor. For example, if a public sector entity that has previously been audited by a statutorily appointed auditor (for example, an Auditor‑General, or other suitably qualified person appointed on behalf of the Auditor‑General) is privatised, the amount of access to working papers or other information that the statutorily appointed auditor can provide a newly appointed auditor that is in the private sector may be constrained by privacy laws or regulations. In situations where such communications are constrained, audit evidence may need to be obtained through other means and, if sufficient appropriate audit evidence cannot be obtained, consideration given to the effect on the auditor’s opinion.
2. If the statutorily appointed auditor outsources an audit of a public sector entity to a private sector audit firm, and the statutorily appointed auditor appoints an audit firm other than the firm that audited the financial report of the public sector entity in the prior period, this is not usually regarded as a change in auditors for the statutorily appointed auditor. Depending on the nature of the outsourcing arrangement, however, the audit engagement may be considered an initial audit engagement from the perspective of the private sector auditor in fulfilling their responsibilities, and therefore this Auditing Standard applies.

Opening Balances (Ref: Para. 6(c))

1. The nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances depend on such matters as:

 The accounting policies followed by the entity.

 The nature of the account balances, classes of transactions and disclosures and the risks of material misstatement in the current period’s financial report.

 The significance of the opening balances relative to the current period’s financial report.

 Whether the prior period’s financial report was audited and, if so, whether the predecessor auditor’s opinion was modified.

1. If the prior period’s financial report was audited by a predecessor auditor, the auditor may be able to obtain sufficient appropriate audit evidence regarding the opening balances by reviewing the predecessor auditor’s working papers. Whether such a review provides sufficient appropriate audit evidence is influenced by the professional competence and independence of the predecessor auditor.
2. Relevant ethical and professional requirements guide the current auditor’s communications with the predecessor auditor.
3. 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:

 Observing a current physical inventory count and reconciling it to the opening inventory quantities.

 Performing audit procedures on the valuation of the opening inventory items.

 Performing audit procedures on gross profit and cut‑off.

1. 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. 10-11)

1. ASA 705 establishes requirements and provides guidance on circumstances that may result in a modification to the auditor’s opinion on the financial report, 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 the following modifications to the opinion in the auditor’s report:
   1. A qualified opinion or a disclaimer of opinion, as is appropriate in the circumstances.
   2. [Deleted by the AUASB. Refer [Aus] Illustration 2A]

Appendix 1 includes illustrative auditors’ reports.

Modification to the Opinion in the Predecessor Auditor’s Report (Ref: Para. 13)

1. 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 report. 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.