SA 510 Initial Engagements
SA 510*
Initial Audit Engagements -
Opening Balances
(Effective for audits of financial statements for periods
beginning on or after April 1, 2010)
Contents
Paragraph(s)
Introduction
Scope of this SA ....................................................................................... 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-A4
Audit Conclusions and Reporting ..................................................... A5-A6
Material Modifications vis-a-vis ISA 510, “Initial Audit Engagements–
Opening Balances”
Appendix: Illustrations of Auditors’ Reports with Modified Opinions
Standard on Auditing (SA) 510, “Initial Audit Engagements—Opening
Balances” should be read in the context of the “Preface to the
Standards on Quality Control, Auditing, Review, Other Assurance and
Related Services,” which sets out the authority of SAs and SA 200,
“Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing”.
* Published in March, 2009 issue of the Journal.
Handbook of Auditing Pronouncements-I.A
Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditor’s responsibilities
relating to opening balances when conducting 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 statements include
comparative financial information, the requirements and guidance in SA 7101 also
apply. SA 3002 includes additional requirements and guidance regarding
activities prior to starting an initial audit.
Effective Date
2. This SA is effective for audits of financial statements for periods
beginning on or after April 1, 2010.
Objective
3. In conducting an initial audit engagement, the objective of the auditor with
respect to opening balances is to obtain sufficient appropriate audit evidence
about whether:
(a) Opening balances contain misstatements that materially affect the current
period’s financial statements; and
(b) Appropriate accounting policies reflected in the opening balances have
been consistently applied in the current period’s financial statements, or
changes thereto are properly accounted for and adequately presented and
disclosed in accordance with the applicable financial reporting framework.
Definitions
4. For the purposes of the SAs, the following terms have the meanings
attributed below:
(a) Initial audit engagement – An engagement in which either:
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a
predecessor auditor.
1 SA 710, “Comparative Information-Corresponding Figures and Comparatives Financial
Statements”.
2
SA 300, “Planning an Audit of Financial Statements”.
SA 510 2
(b) Opening balances – 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.
(c) Predecessor auditor – The auditor from a different audit firm, who audited
the financial statements of an entity in the prior period and who has been
replaced by the current auditor.
Requirements
Audit Procedures
Opening Balances
5. The auditor shall read the most recent financial statements, if any, and
the predecessor auditor’s report thereon, if any, for information relevant to
opening balances, including disclosures.
6. The auditor shall obtain sufficient appropriate audit evidence about
whether the opening balances contain misstatements that materially affect the
current period’s financial statements by:
(a) Determining whether the prior period’s closing balances have been
correctly brought forward to the current period or, when appropriate, any
adjustments have been disclosed as prior period items in the current year’s
Statement of Profit and Loss3;
(b) Determining whether the opening balances reflect the application of
appropriate accounting policies; and
(c) Performing one or more of the following: (Ref: Para. A1–A4)
(i) Where the prior year financial statements were audited, perusing the
copies of the audited financial statements including the other relevant
documents relating to the prior period financial statements;
(ii) Evaluating whether audit procedures performed in the current period
provide evidence relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the
opening balances.
3 Accounting Standard (AS) 5, “Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies” requires that prior period items should be separately disclosed in the
Statement of Profit and Loss in a manner that their impact on the current profit or loss can be
perceived.
3 SA 510
Handbook of Auditing Pronouncements-I.A
7. If the auditor obtains audit evidence that the opening balances contain
misstatements that could materially affect the current period’s financial
statements, the auditor shall perform such additional audit procedures as are
appropriate in the circumstances to determine the effect on the current period’s
financial statements. If the auditor concludes that such misstatements exist in the
current period’s financial statements, the auditor shall communicate the
misstatements with the appropriate level of management and those charged with
governance in accordance with SA 4504.
Consistency of Accounting Policies
8. 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 statements, and whether
changes in the accounting policies have been properly accounted for and
adequately presented and disclosed in accordance with the applicable financial
reporting framework.
Relevant Information in the Predecessor Auditor’s Report
9. If the prior period’s financial statements were 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 statements in accordance
with SA 315.5
Audit Conclusions and Reporting
Opening Balances
10. If the auditor is unable to obtain sufficient appropriate audit evidence
regarding the opening balances, the auditor shall express a qualified opinion or a
disclaimer of opinion, as appropriate, in accordance with SA 705(Revised).6 (Ref:
Para. A5)
11. If the auditor concludes that the opening balances contain a misstatement
that materially affects the current period’s financial statements, and the effect of
the misstatement is not properly accounted for or not adequately presented or
disclosed, the auditor shall express a qualified opinion or an adverse opinion, as
appropriate, in accordance with SA 705(Revised).
4 SA 450, “Evaluation of Misstatements Identified During the Audit”, paragraphs 8 and 12.
5 SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding
the Entity and Its Environment”.
6 SA 705(Revised), “Modifications to the Opinion in the Independent Auditor’s Report”.
SA 510 4
Consistency of Accounting Policies
12. If the auditor concludes that:
(a) the current period’s accounting policies are not consistently applied in
relation to opening balances in accordance with the applicable financial
reporting framework; or
(b) a change in accounting policies is not properly 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 SA 705(Revised).
Modification to the Opinion in the Predecessor Auditor’s Report
13. If the predecessor auditor’s opinion regarding the prior period’s financial
statements included a modification to the auditor’s opinion that remains relevant
and material to the current period’s financial statements, the auditor shall modify
the auditor’s opinion on the current period’s financial statements in accordance
with SA 705(Revised) and SA 710. (Ref: Para. A6)
***
Application and Other Explanatory Material
Audit Procedures (Ref: Para. 6)
Opening Balances (Ref: Para. 6(c))
A1. 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 statements.
The significance of the opening balances relative to the current period’s
financial statements.
Whether the prior period’s financial statements were audited and, if so,
whether the predecessor auditor’s opinion was modified.
A2. If the prior period’s financial statements were audited by a predecessor
auditor, the auditor may be able to obtain sufficient appropriate audit evidence
regarding the opening balances by perusing the copies of the audited financial
5 SA 510
Handbook of Auditing Pronouncements-I.A
statements including the other relevant documents relating to the prior period
financial statements such as supporting schedules to the audited financial
statements. Ordinarily, the current auditor can place reliance on the closing
balances contained in the financial statements for the preceding period, except
when during the performance of audit procedures for the current period the
possibility of misstatements in opening balances is indicated.
A3. 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.
A4. 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)
A5. SA 705(Revised) establishes requirements and provides guidance on
circumstances that may result in a modification to the auditor’s opinion on the
financial statements, 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 one of the following modifications to the opinion
in the auditor’s report:
SA 510 6
(a) A qualified opinion or a disclaimer of opinion, as is appropriate in the
circumstances; or
(b) Unless prohibited by law or regulation, an opinion which is qualified or
disclaimed, as appropriate, regarding the results of operations, and cash
flows, where relevant, and unmodified regarding State of Affairs.
The Appendix includes illustrative auditor’s reports.
Modification to the Opinion in the Predecessor Auditor’s Report (Ref: Para.
13)
A6. 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
statements. 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.
Material Modifications vis a vis ISA 510, “Initial Audit
Engagements - Opening Balances”
Deletions
1. Paragraph 6(a) of ISA 510 (Para 6(a) of SA 510) dealt with the procedure
for obtaining sufficient appropriate audit evidence about the opening balances
which contain misstatements that materially affect the current period’s financial
statements by determining whether the prior period’s closing balances have been
correctly brought forward to the current period or, when appropriate, have been
restated. Since in India Accounting Standard (AS) 5, “Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies” requires that
prior period items should be separately disclosed in the Statement of Profit and
Loss in a manner that their impact on the current profit or loss can be perceived,
the restatement of the prior period financial statements does not exist in the
Indian scenario. Hence, to align with the requirements of AS 5, the requirement
of restatement of prior period items has been replaced with the requirement to
disclose the prior period items in the current year’s Statement of Profit & Loss.
2. Paragraph 6(c) (i) of ISA 510 (Paragraph 6(c) (i) of SA 510) dealt with the
procedure for obtaining sufficient appropriate audit evidence about the opening
balances which contain misstatements that materially affect the current period’s
financial statements by reviewing the predecessor auditor’s working papers,
where the prior year financial statements were audited. Since in India Clause 1 of
Profit & Loss Account.
Balance Sheet.
7 SA 510
Handbook of Auditing Pronouncements-I.A
Part I of the Second Schedule to the Chartered Accountants Act, 1949 provides
that a Chartered Accountant in Practice shall be deemed to be guilty of
professional misconduct if he discloses information acquired in the course of his
professional engagement to any person other than his client, an auditor cannot
provide access to his working paper to the another auditor. Therefore, keeping in
view the requirements of the Chartered Accountants Act, 1949, the requirement
of reviewing the predecessor auditor’s working papers has been replaced with
the requirement of perusing the copies of the audited financial statements
including the other relevant documents relating to the prior period financial
statements. Corresponding change has also been made in the Paragraph A4 of
ISA 510 (A2 of SA 510) and Paragraphs A1 and A5 of ISA 510 have been
deleted.
3. Paragraph A2 of ISA 510 dealt with the outsourcing of an audit of a public
sector entity by the statutorily appointed auditor to a private sector audit firm.
Since in the Indian context such situation does not exist, the paragraph A2 of ISA
510 has been deleted completely.
SA 510 8
Appendix
(Ref: Para. A5)
Illustrations of Auditor’s Reports with Modified Opinions
Illustration 1:
For purposes of this illustrative auditor’s report, the following circumstances are
assumed:
Audit of a complete set of financial statements of a non-corporate entity
using a fair presentation framework. The audit is not a group audit (i.e., SA
600 does not apply).
The financial statements are prepared by management of the entity in
accordance with the Accounting Standards issued by ICAI.
The terms of the audit engagement reflect the description of management’s
responsibility for the financial statements in SA 210.
The auditor did not observe the counting of the physical inventory at the
beginning of the current period and was unable to obtain sufficient
appropriate audit evidence regarding the opening balances of inventory.
The possible effects of the inability to obtain sufficient appropriate audit
evidence regarding opening balances of inventory are deemed to be
material but not pervasive to the entity’s results of operations and cash
flows.7
The State of Affairs at year end gives a true and fair view.
In this particular jurisdiction, law and regulation prohibit the auditor from
giving an opinion which is qualified regarding the results of operations and
cash flows and unmodified regarding State of Affairs.
The relevant ethical requirements that apply to the audit are the Code of
Ethics issued by ICAI8.
Based on the audit evidence obtained, the auditor has concluded that a
material uncertainty does not exist related to events or conditions that may
7 If the possible effects, in the auditor’s judgment, are considered to be material and pervasive to
the entity’s results of operations and cash flows, the auditor would disclaim an opinion on the
results of operations and cash flows.
8 Specify any applicable ethical requirements under the relevant laws or regulations applicable to
the entity.
9 SA 510
Handbook of Auditing Pronouncements-I.A
cast significant doubt on the entity’s ability to continue as a going concern
in accordance with SA 570 (Revised)9.
The auditor is not required, and has otherwise not decided, to communicate
key audit matters in accordance with SA 70110.
Corresponding figures are presented, and the prior period’s financial
statements were audited by a predecessor auditor. The auditor is not
prohibited by law or regulation from referring to the predecessor auditor’s
report on the corresponding figures and has decided to do so.
Those responsible for oversight of the financial statements differ from those
responsible for the preparation of the financial statements.
The auditor has no other reporting responsibilities required under local law.
The auditor elects to refer to the description of the auditor’s responsibility
included on a website of an appropriate authority.
INDEPENDENT AUDITOR’S REPORT
[Appropriate Addressee]
Qualified Opinion
We have audited the financial statements of ABC & Associates (the entity), which
comprise the balance sheet as at March 31, 20X1, and the Statement of Profit
and Loss, and the cash flow statement for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies.
In our opinion, except for the possible effects of the matter described in the
“Basis for Qualified Opinion” section of our report, the accompanying financial
statements give a true and fair view of the State of Affairs of the entity as at
March 31, 20X1, and of its Results of Operations and its Cash Flows for the year
then ended in accordance with the Accounting Standards issued by ICAI.
Basis for Qualified Opinion
We were appointed as auditors of the entity on June 30, 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 March 31, 20X0. Since opening inventories enter into the
determination of the results of operations and cash flows, we were unable to
9 SA 570(Revised), Going Concern.
10 SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report.
SA 510 10
determine whether adjustments might have been necessary in respect of the
profit for the year reported in the Statement of Profit and Loss and the net cash
flows from operating activities reported in the Cash Flow Statement.
We conducted our audit in accordance with the Standards on Auditing (SAs)
issued by ICAI. Our responsibilities under those standards are further described
in the “Auditor’s Responsibilities for the Audit of the Financial Statements”
section of our report. We are independent of the entity in accordance with the
Code of Ethics issued by ICAI and we have fulfilled our other ethical
responsibilities in accordance with the Code of Ethics. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our
qualified opinion.
Other Matter
The financial statements of the entity for the year ended March 31, 20X0, were
audited by another auditor who expressed an unmodified opinion on those
statements on June 30, 20X0.
Responsibilities of Management and Those Charged with
Governance for the Financial Statements11
[Reporting in accordance with SA 700(Revised) – see illustration 4 in SA
700(Revised)]
Auditor’s Responsibilities for the Audit of the Financial Statements
[Reporting in accordance with SA 700(Revised) – see illustration 4 in SA
700(Revised)]
For XYZ and Co.
Chartered Accountants
Firm’s Registration Number
Signature
(Name of the Member Signing the Audit Report)
(Designation12)
(Membership Number)
Place of Signature
Date
11 Or other terms that are appropriate in the context of the legal framework of the particular entity.
12 Partner or Proprietor, as the case may be.
11 SA 510
Handbook of Auditing Pronouncements-I.A
Illustration 2:
For purposes of this illustrative auditor’s report, the following circumstances are
assumed:
Audit of a complete set of financial statements of a non-corporate entity
using a fair presentation framework. The audit is not a group audit (i.e., SA
600 does not apply).
The financial statements are prepared by management of the entity in
accordance with the Accounting Standards issued by ICAI.
The terms of the audit engagement reflect the description of management’s
responsibility for the financial statements in SA 210.
The auditor did not observe the counting of the physical inventory at the
beginning of the current period and was unable to obtain sufficient
appropriate audit evidence regarding the opening balances of inventory.
The possible effects of the inability to obtain sufficient appropriate audit
evidence regarding opening balances of inventory are deemed to be
material but not pervasive to the entity’s results of operations and cash
flows.13
The State of Affairs at year end gives a true and fair view.
An opinion that is qualified regarding the results of operations and cash
flows and unmodified regarding State of Affairs is considered appropriate in
the circumstances.
The relevant ethical requirements that apply to the audit are the Code of
Ethics issued by ICAI14.
Based on the audit evidence obtained, the auditor has concluded that a
material uncertainty does not exist related to events or conditions that may
cast significant doubt on the entity’s ability to continue as a going concern
in accordance with SA 570 (Revised).
The auditor is not required, and has otherwise not decided, to communicate
13 If the possible effects, in the auditor’s judgment, are considered to be material and pervasive to
the entity’s results of operations and cash flows, the auditor would disclaim the opinion on the
results of operations and cash flows.
14 Specify any applicable ethical requirements under the relevant laws or regulations applicable to
the entity.
SA 510 12
key audit matters in accordance with SA 701.
Corresponding figures are presented, and the prior period’s financial
statements were audited by a predecessor auditor. The auditor is not
prohibited by law or regulation from referring to the predecessor auditor’s
report on the corresponding figures and has decided to do so.
Those responsible for oversight of the financial statements differ from those
responsible for the preparation of the financial statements.
The auditor has no other reporting responsibilities required under local law.
The auditor elects to refer to the description of the auditor’s responsibility
included on a website of an appropriate authority.
INDEPENDENT AUDITOR’S REPORT
[Appropriate Addressee]
Opinions
We have audited the financial statements of ABC & Associates (the entity), which
comprise the balance sheet as at March 31, 20X1, and the Statement of Profit
and Loss, and the cash flow statement for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies.
Qualified Opinion on the Results of Operations and Cash Flows
In our opinion, except for the possible effects of the matter described in the
‘Basis for Qualified Opinion’ section of our report, the accompanying Statement
of Profit and Loss and Cash Flow Statement give a true and fair view of the
results of operations and cash flows of the entity for the year ended March 31,
20X1 in accordance with the Accounting Standards issued by ICAI.
Opinion on the State of Affairs
In our opinion, the accompanying balance sheet gives a true and fair view of the
State of Affairs of the entity as at March 31, 20X1 in accordance with the
Accounting Standards issued by ICAI.
Basis for Opinions, including Basis for Qualified Opinion on the
results of operations and Cash Flows
We were appointed as auditors of the entity on June 30, 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 March 31, 20X0. Since opening inventories enter into the
13 SA 510
Handbook of Auditing Pronouncements-I.A
determination of the results of operations and cash flows, we were unable to
determine whether adjustments might have been necessary in respect of the
profit for the year reported in the Statement of Profit and Loss and the net cash
flows from operating activities reported in the Cash Flow Statement.
We conducted our audit in accordance with the Standards on Auditing (SAs)
issued by ICAI. Our responsibilities under those standards are further described
in the “Auditor’s Responsibilities for the Audit of the Financial Statements”
section of our report. We are independent of the entity in accordance with the
Code of Ethics issued by ICAI and we have fulfilled our other ethical
responsibilities in accordance with the Code of Ethics. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our
unmodified opinion on the state of affairs and our qualified opinion on the results
of operations and cash flows.
Other Matter
The financial statements of the entity for the year ended March 31, 20X0, were
audited by another auditor who expressed an unmodified opinion on those
statements on June 30, 20X0.
Responsibilities of Management and Those Charged with
Governance for the Financial Statements15
[Reporting in accordance with SA 700(Revised) – see illustration 4 in SA
700(Revised)]
Auditor’s Responsibilities for the Audit of the Financial Statements
[Reporting in accordance with SA 700(Revised) – see illustration 4 in SA
700(Revised)]
For XYZ and Co.
Chartered Accountants
Firm’s Registration Number
Signature
(Name of the Member Signing the Audit Report)
(Designation16)
(Membership Number)
Place of Signature
Date
15 Or other terms that are appropriate in the context of the legal framework of the particular entity.
16 Partner or Proprietor, as the case may be.
SA 510 14