Upon appointment to a new engagement, ASA 510 requires the auditor to obtain sufficient appropriate audit evidence that:
- the opening balances (account balances which exist at the beginning of the period) do not contain misstatements that materially affect the current period’s financial report;
- the prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, have been restated (prior year audited figures are restated if a prior year error is material); and
- 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.
When the prior period’s financial report was audited by another auditor, the current auditor may be able to obtain sufficient appropriate audit evidence by reviewing the predecessor auditor’s working papers. In these circumstances, the current auditor considers the professional competence and independence of the predecessor auditor. If the prior period’s auditor’s opinion was modified, under ASA 705, the auditor pays particular attention in the current period to the matter which resulted in the prior period modification.
Prior to communicating with the predecessor auditor, under ASA 220, the current auditor is required to consider the relevant ethical requirements which includes client consent. It is common practice for a successor auditor to issue a letter to the predecessor auditor to understand whether there may be threats to compliance with ethical requirements.
GS 011 Third Party Access to Audit Working Papers provides Example Letter E as a guide for auditors when wanting to access the working papers of a predecessor auditor. GS 011 provides guidance in the case of voluntary co-operation. There is no legislative requirement for successor auditors to provide access to their working papers.
Ordinarily, some audit evidence for opening balances may be obtained as part of the current period’s audit procedures on current assets and liabilities. Performing audit procedures on the on the opening bank account and other material items may provide sufficient appropriate audit evidence. For investments and material balances, the auditor examines the accounting records and other information underlying the investments which may contain the opening balances of such investments. In certain cases, the auditor may be able to obtain confirmation of opening balances with third parties such as share registries or fund managers. When the auditor cannot obtain this information, the auditor considers carrying out additional audit procedures relating to the opening balances to ascertain whether they contain material misstatements, are correctly brought forward and that the accounting policies have been consistently applied in the current period.
If audit procedures do not result in sufficient appropriate audit evidence concerning opening balances, ASA 510 requires that the auditor’s report is modified. This would be a Part A qualification. Further guidance on modifications to the auditor’s report is provided in paragraphs 298 to 302.