Application and Other Explanatory Material

Includes: Audit Procedures, Audit Conclusions and Reporting, Illustrations of Auditors’ Reports with Modified Opinions

Audit Procedures

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


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.


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))


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.


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.


Relevant ethical and professional requirements[*] guide the current auditor’s communications with the predecessor auditor. 


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.


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)


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)


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.


See ASA 102 Compliance with Ethical Requirements when Performing Audits, Reviews and Other Assurance Engagements.

Illustrations of Auditors’ Reports with Modified Opinions