Auditing Standard ASA 510
Initial Audit Engagements—Opening Balances

Issued by the Auditing and Assurance Standards Board

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ISSN 1833-4393

CONTENTS

PREFACE

AUTHORITY STATEMENT

Paragraphs

Application............................... Aus 0.1-Aus 0.2

Operative Date............................. Aus 0.3

Introduction

Scope of this Auditing Standard.................. 1

Effective Date.............................. 2

Objective................................. 3

Definitions................................ 4

Requirements

Audit Procedures............................ 5-9

Audit Conclusions and Reporting................. 10-13

Application and Other Explanatory Material

Audit Procedures............................ A1-A7

Audit Conclusions and Reporting................. A8-A9

Conformity with International Standards on Auditing

Appendix 1: Illustrations of Auditors’ Reports with Modified Opinions

Preface

Reasons for Issuing Auditing Standard ASA 510 Initial Audit Engagements—Opening Balances

The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 510 Initial Audit Engagements—Opening Balances pursuant to the requirements of the legislative provisions and the Strategic Direction explained below.

The AUASB is an independent statutory board of the Australian Government established under section 227A of the Australian Securities and Investments Commission Act 2001, as amended (ASIC Act).  Under section 336 of the Corporations Act 2001, the AUASB may make Australian Auditing Standards for the purposes of the corporations legislation.  These Auditing Standards are legislative instruments under the Legislative Instruments Act 2003.

Under the Strategic Direction given to the AUASB by the Financial Reporting Council (FRC), the AUASB is required to have regard to any programme initiated by the International Auditing and Assurance Standards Board (IAASB) for the revision and enhancement of the International Standards on Auditing (ISAs) and to make appropriate consequential amendments to the Australian Auditing Standards.  Accordingly, the AUASB has decided to revise and redraft the Australian Auditing Standards using the equivalent redrafted ISAs.

Main Features

This Auditing Standard establishes requirements and provides application and other explanatory material regarding the auditor’s responsibilities relating to opening balances in an initial audit engagement.

This Auditing Standard:

1.                  establishes requirements and provides guidance regarding opening balances when the financial report for the prior period was not audited, or the financial report for the prior period was audited by a predecessor auditor;
2.                 provides audit procedures for the auditor to obtain audit evidence about:

• whether the opening balances contain misstatements;
• 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 properly accounted for and adequately presented and disclosed; and

1.                  establishes requirements and provides guidance on audit conclusions and the auditor’s report.

Dated: 27 October 2009 M H Kelsall
 Chairman - AUASB

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 commencing on or after 1 January 2010.

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 purposes of the Australian Auditing Standards, 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.

1.                  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)

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 Illustration 2]

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.

Conformity with International Standards on Auditing

This Auditing Standard conforms with International Standard on Auditing ISA 510 Initial Audit Engagements—Opening Balances, issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard-setting board of the International Federation of Accountants (IFAC).

Paragraphs that have been added to this Auditing Standard (and do not appear in the text of the equivalent ISA) are identified with the prefix “Aus”.

Compliance with this Auditing Standard enables compliance with ISA510.

Appendix 1

(Ref: Para. A8)

Illustrations of Auditors’ Reports with Modified Opinions
 

                     Illustration 1: An auditor’s report containing a qualified opinion due to the inability of the auditor to obtain sufficient appropriate audit evidence regarding opening balances—the financial report is not prepared under the Corporations Act 2001.

                     Illustration 2: [Example Auditor’s Report deleted by the AUASB—not applicable in Australia.]

                     [Aus] Illustration 2A: An auditor’s report containing a qualified opinion due to the inability of the auditor to obtain sufficient appropriate audit evidence regarding opening balances—the financial report is prepared under the Corporations Act 2001.

Example Auditor’s Report
Qualified Opinion—Jurisdiction Prohibits a Qualified Opinion on Performance and Cash Flows and an Unmodified Opinion on Financial Position

INDEPENDENT AUDITOR’S REPORT

[Appropriate Addressee]

Report on the Financial Report[7]

We have audited the accompanying financial report of ABC Entity, which comprises the statement of financial position as at 30 June 20X1, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and management’s assertion statement.

Management’s[8] Responsibility for the Financial Report

Management is responsible for the preparation and fair presentation[9] of the financial report in accordance with Australian Accounting Standards, and for such internal control as management determines is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial report based on our audit.  We conducted our audit in accordance with Australian Auditing Standards.  Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report.  The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation[10] of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.[11]  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Basis for Qualified Opinion

We were appointed as auditors of the entity on 31 December 20X0 and thus did not observe the counting of the physical inventories at the beginning of the year.  We were unable to satisfy ourselves by alternative means concerning inventory quantities held at 30 June 20X0.  Since opening inventories enter into the determination of the financial performance and cash flows, we were unable to determine whether adjustments might have been necessary in respect of the income for the year reported in the statement of comprehensive income and the net cash flows from operating activities reported in the statement of cash flows.

Qualified Opinion

In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial report presents fairly, in all material respects, (or gives a true and fair view of) the financial position of ABC Entity as at 30 June 20X1 and (of) its financial performance and its cash flows for the year then ended in accordance with Australian Accounting Standards.

Other Matter

The financial report of ABC Entity for the year ended 30 June 20X0 was audited by another auditor who expressed an unmodified opinion on the financial report on 30 September 20X0.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other reporting responsibilities.]

[Auditor’s signature]

[Date of the auditor’s report]

[Auditor’s address]

Example Auditor’s Report
An Opinion that is Qualified Regarding the Financial Performance and Cash Flows and Unmodified Regarding Financial Position

Example Auditor’s Report
Qualified Opinion—Jurisdiction Prohibits a Qualified Opinion on Performance and Cash Flows and an Unmodified Opinion on Financial Position
—Corporations Act 2001

INDEPENDENT AUDITOR’S REPORT

[Appropriate Addressee]

Report on the Financial Report

We have audited the accompanying financial report of ABC Company Ltd., which comprises the statement of financial position as at 30 June 20X1, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration.

Directors’ Responsibility for the Financial Report

The directors of the company [registered scheme/disclosing entity] are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001, and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error.  

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards.  Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report.  The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the company’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.  We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of ABC Company Ltd., would be in the same terms if given to the directors as at the time of this auditor’s report.

Basis for Qualified Opinion

We were appointed as auditors of the company on 31 December 20X0 and thus did not observe the counting of the physical inventories at the beginning of the year.  We were unable to satisfy ourselves by alternative means concerning inventory quantities held at 30 June 20X0.  Since opening inventories enter into the determination of the financial performance and cash flows, we were unable to determine whether adjustments might have been necessary in respect of the income for the year reported in the statement of comprehensive income and the net cash flows from operating activities reported in the statement of cash flows.

Qualified Opinion

In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial report of ABC Company Ltd. is in accordance with the Corporations Act 2001, including:

1.                 giving a true and fair view of the company’s [registered scheme/disclosing entity]’s financial position as at 30 June 20X1 and of its performance for the year ended on that date; and
2.                 complying with Australian Accounting Standards and the Corporations Regulations 2001.

Other Matter

The financial report of ABC Company Ltd. for the year ended 30 June 20X0 was audited by another auditor who expressed an unmodified opinion on the financial report on 30 September 20X0.

Report on the Remuneration Report

We have audited the Remuneration Report included in [paragraphs a to b or pages x to y] of the directors’ report for the [period] ended 30 June 20X1.  The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001.  Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Opinion

In our opinion the Remuneration Report of ABC Company Ltd. for the year [period] ended 30 June 20X1, complies with section 300A of the Corporations Act 2001.

[Auditor’s signature] 

[Date of the auditor’s report] [†]

[Auditor’s address]

[1] See ASA 710 Comparative Information—Corresponding Figures and Comparative Financial Reports.

[2] See ASA 300 Planning an Audit of a Financial Report.

[3] See ASA 450 Evaluation of Misstatements Identified during the Audit, paragraphs 8 and 12.

[4] See ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.

[5] See ASA 705 Modifications to the Opinion in the Independent Auditor’s Report.

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

[6] [Footnote deleted by the AUASB—not applicable in Australia.]

[7] The sub-title “Report on the Financial Report” is unnecessary in circumstances when the second sub-title “Report on Other Legal and Regulatory Requirements” is not applicable.

  Or other appropriate term.

[8]  Or other term that is appropriate in the context of the legal framework in the particular jurisdiction.

[9]  Where management’s responsibility is to prepare a financial report that give a true and fair view, this may read: “Management is responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards, and for such ...”

[10] In the case of footnote 9, this may read: “In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.”

[11] In circumstances when the auditor also has responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial report, this sentence would be worded as follows: “In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances.”  In the case of footnote 9, this may read: “In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances.”

  The auditor’s report needs to be signed in one or more of the following ways: name of the audit firm, the name of the audit company or the personal name of the auditor as appropriate.

  The date of the auditor’s report is the date the auditor signs the report.

[12-17]  [Footnotes deleted by the AUASB.  Refer text box above.]

  The sub-title “Report on the Financial Report” is unnecessary in circumstances when the second sub-title “Report on Other Legal and Regulatory Requirements”, or other appropriate sub-title, is not applicable.

  Or, alternatively, include statements (a) to the effect that circumstances have changed since the declaration was given to the relevant directors; and (b) setting out how the declaration would differ if it had been given to the relevant directors at the time the auditor’s report was made.

  The Report on the Remuneration Report is an example of “other reporting responsibilities”.  Any additional “other reporting responsibilities” that the auditor needs to address, will also be included in a separate section of the auditor’s report following the opinion paragraph on the financial report.  Under paragraph 38 of ASA 700, the sub-title “Report on Other Legal and Regulatory Requirements” or other sub-title as appropriate to the section, is used.

  The auditor’s report needs to be signed in one or more of the following ways: name of the audit firm, the name of the audit company or the personal name of the auditor as appropriate.

[†]  The date of the auditor’s report is the date the auditor signs the report.