Scope and objectives
The Auditing standards are a guideline that outlines the responsibilities of auditors when conducting an initial audit engagement. An initial audit engagement refers to an audit of financial statements that have not been audited before, or were audited by a different auditor in the prior period. The SA sets out the requirements for auditors to examine opening balances, which include financial statement amounts, contingencies, and commitments, that existed at the beginning of the period being audited.
The SA 510 applies to audits of financial statements for periods beginning on or after April 1, 2010. The objective of the auditor is to obtain sufficient and appropriate audit evidence about whether opening balances contain misstatements that could materially affect the current period’s financial statements. The auditor must also determine whether the accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, or changes thereto have been properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.
The SA 510 provides definitions for terms used in the guideline. For example, an initial audit engagement is defined as an engagement where either the financial statements for the prior period were not audited or were audited by a predecessor auditor. Opening balances are defined as those account balances that exist at the beginning of the period, which are based on 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. Finally, the predecessor auditor is defined as the auditor from a different audit firm who audited the financial statements of an entity in the prior period and has been replaced by the current auditor.
Audit Procedures
The audit procedures related to opening balances in financial statements. These balances represent the amounts carried forward from the prior year’s financial statements to the current year’s financial statements. The auditor’s objective is to obtain sufficient appropriate audit evidence to determine whether opening balances contain misstatements that materially affect the current period’s financial statements.
The auditor should read the most recent financial statements and the predecessor auditor’s report to gather relevant information about opening balances. The auditor should then perform specific audit procedures to obtain evidence that the opening balances are correct, reflect the application of appropriate accounting policies, and do not contain material misstatements.
The nature and extent of the audit procedures depend on the accounting policies followed by the entity, the nature of the account balances and transactions, the significance of the opening balances relative to the current period’s financial statements, and whether the predecessor auditor’s opinion was modified.
If the prior period’s financial statements were audited by a predecessor auditor, the current auditor may be able to rely on the closing balances contained in those statements. However, the current auditor should still perform additional audit procedures if there are indications of misstatements in the opening balances.
For current assets and liabilities, some audit evidence about opening balances may be obtained as part of the current period’s audit procedures. However, for non-current assets and liabilities, additional audit procedures may be necessary, such as examining accounting records, confirming balances with third parties, or performing specific audit procedures to obtain evidence regarding the opening balances.
If the auditor discovers misstatements in the opening balances that could materially affect the current period’s financial statements, they must perform additional audit procedures to determine the effect on the current period’s financial statements. The auditor must also ensure that accounting policies have been consistently applied and that changes in policies have been properly accounted for and adequately disclosed.
Finally, if the prior period’s financial statements were audited by a predecessor auditor and there was a modification to the opinion, the current auditor must evaluate the effect of the matter giving rise to the modification when assessing the risks of material misstatement in the current period’s financial statements.
Audit Conclusions and Reporting
The auditing standards provide guidance for auditors on how to conclude and report on their audit of a company’s financial statements. The focus is on three key areas: opening balances, consistency of accounting policies, and modifications to the opinion in the predecessor auditor’s report.
Regarding opening balances, the auditor is required to obtain sufficient appropriate audit evidence to ensure the opening balances are accurate. If they are unable to obtain sufficient evidence, the auditor must express a qualified opinion or a disclaimer of opinion in accordance with SA 705(Revised), which outlines the circumstances that may result in a modification to the auditor’s opinion on the financial statements.
If the auditor discovers a material misstatement in the opening balances that affects the current period’s financial statements, and it is not properly accounted for or adequately presented or disclosed, the auditor must express a qualified opinion or an adverse opinion in accordance with SA 705(Revised).
In the case of consistency of accounting policies, the auditor must ensure that the company has consistently applied its accounting policies from the opening balances to the current period’s financial statements, in accordance with the applicable financial reporting framework. If there is a change in accounting policies that is not properly accounted for or disclosed, the auditor must express a qualified opinion or an adverse opinion as appropriate.
Finally, if the predecessor auditor’s opinion in the prior period’s financial statements included a modification that is still relevant and material to the current period’s financial statements, the auditor must modify their opinion on the current period’s financial statements in accordance with SA 705(Revised) and SA 710. However, in some cases, the modification may not be relevant and material to the current period’s financial statements, and in such cases, the auditor may not need to modify their opinion.
The guidance outlined in the certain objectives is aimed at ensuring that auditors express appropriate opinions on a company’s financial statements based on the evidence they have obtained during their audit.
Initial Audit Engagements
The modifications made to ISA 510 in India. This standard deals with the auditor’s procedures for obtaining sufficient and appropriate audit evidence regarding the opening balances that materially affect the current period’s financial statements.
One significant change made in India is the replacement of the requirement to restate prior period financial statements with the need to disclose prior period items in the current year’s Statement of Profit & Loss. This modification aligns with the requirements of AS 5, which states that prior period items should be disclosed separately in a manner that reflects their impact on the current period’s profit or loss.
Another change relates to the auditor’s procedure for reviewing the predecessor auditor’s working papers. In India, the Chartered Accountants Act, 1949, prohibits auditors from disclosing information acquired during their professional engagements to anyone other than their clients. Therefore, the requirement to review the predecessor auditor’s working papers has been replaced with perusing the copies of the audited financial statements and relevant documents.
Furthermore, certain objectives of ISA 510 that were related to outsourcing audits for public sector entities have been deleted completely. This modification reflects the fact that such a situation does not exist in the Indian context.
Overall, these modifications were made to align the requirements of ISA 510 with the relevant regulations and standards in India
Quiz: Initial Audit Engagements—Opening Balances
1. What is an initial audit engagement?
a) An audit of financial statements that have been audited before by a different auditor.
b) An audit of financial statements that have not been audited before or were audited by a different auditor in the prior period.
c) An audit of financial statements conducted by the current auditor for the first time.
Answer: b)
2. What are opening balances?
a) Account balances that exist at the end of the period.
b) Account balances that exist at the beginning of the period.
c) Account balances that exist in the middle of the period.
Answer: b)
3. What is the objective of the auditor in relation to opening balances?
a) To determine whether the accounting policies have been consistently applied.
b) To ensure the opening balances are accurate and do not contain material misstatements.
c) To evaluate the effect of modifications made by the predecessor auditor.
Answer: c) Both a) and b).
4. What audit procedures should the auditor perform to obtain evidence about opening balances?
a) Read the most recent financial statements and the predecessor auditor’s report.
b) Examine accounting records and confirm balances with third parties.
c) Both a) and b).
Answer: b)
5. When may the current auditor rely on the closing balances from the prior period’s financial statements?
a) When there are no indications of misstatements in the opening balances.
b) When the prior period’s financial statements were audited by a predecessor auditor.
c) When the opening balances are not material to the current period’s financial statements.
Answer: b)
6. What additional audit procedures may be necessary for non-current assets and liabilities?
a) Reading the most recent financial statements and the predecessor auditor’s report.
b) Examining accounting records and confirming balances with third parties.
c) Performing specific audit procedures to obtain evidence regarding the opening balances.
Answer: c)
7. What should the auditor do if misstatements are discovered in the opening balances that could materially affect the current period’s financial statements?
a) Perform additional audit procedures to determine the effect on the current period’s financial statements.
b) Express a qualified opinion or an adverse opinion in the auditor’s report.
c) Both a) and b).
Answer: c)
8. What should the auditor ensure regarding accounting policies from the opening balances to the current period’s financial statements?
a) They have been consistently applied.
b) They have been properly accounted for and adequately disclosed.
c) Both a) and b).
Answer: c)
9. When should the auditor modify their opinion on the current period’s financial statements?
a) When the predecessor auditor’s opinion included a modification that is still relevant and material.
b) When there is a change in accounting policies that is not properly accounted for or disclosed.
c) Both a) and b).
Answer: c)
10. What is the purpose of the modifications made to ISA 510 in India?
a) To align the requirements of ISA 510 with the relevant regulations and standards in India.
b) To change the procedures for obtaining audit evidence regarding opening balances.
c) To remove the requirement to review the predecessor auditor’s working papers.
Answer: a)
Additional questions:
11. What is the role of SA 510 in audit engagements?
a) It provides guidelines for auditors on handling initial audit engagements.
b) It outlines the responsibilities of auditors in auditing financial statements.
c) It defines the terms used in the audit process.
Answer: a)
12. What are the key objectives of auditing opening balances?
a) To identify any misstatements in the opening balances.
b) To ensure consistency in the application of accounting policies.
c) To determine the effect of changes in accounting policies.
Answer: a)
13. What does the term “predecessor auditor” refer to?
a) The auditor who audits the financial statements for the current period.
b) The auditor from a different audit firm who audited the financial statements in the prior period.
c) The auditor responsible for reviewing the opening balances.
Answer: b)
14. What audit evidence should the auditor gather regarding opening balances?
a) Reviewing the most recent financial statements and the predecessor auditor’s report.
b) Analyzing the accounting records and confirming balances with third parties.
c) Both a) and b).
Answer: c)
15. When may the current auditor need to perform additional audit procedures for opening balances?
a) When there are indications of misstatements in the opening balances.
b) When the prior period’s financial statements were not audited.
c) When the opening balances are immaterial to the current period’s financial statements.
Answer: a)
16. How should the auditor evaluate the consistency of accounting policies in the current period’s financial statements?
a) By comparing the opening balances with the closing balances of the prior period.
b) By assessing whether changes in policies have been properly accounted for and disclosed.
c) By reviewing the predecessor auditor’s working papers.
Answer: b)
17. What action should the auditor take if there is a material misstatement in the opening balances?
a) Modify their opinion on the financial statements.
b) Request additional documentation from the client.
c) Consult with the predecessor auditor.
Answer: a)
18. What are the consequences of a modification to the predecessor auditor’s opinion on the current period’s financial statements?
a) The current auditor must modify their opinion accordingly.
b) The current auditor may disregard the modification if it is not relevant.
c) The current auditor should disclose the modification in their report.
Answer: a)
19. How can the current auditor use the closing balances from the prior period’s financial statements?
a) They can rely on the closing balances without performing additional audit procedures.
b) They must review the closing balances for indications of misstatements.
c) They can only use the closing balances if the predecessor auditor’s opinion was unmodified.
Answer: a)
20. What is the purpose of the modifications made to ISA 510 in India regarding prior period items?
a) To align with the requirements of AS 5 for disclosing prior period items in the current year’s Statement of Profit & Loss.
b) To provide additional guidance on how to audit prior period items.
c) To remove the need to disclose prior period items altogether.
Answer: a)
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