Introduction
SA 510 explains the auditor’s responsibility in an initial audit engagement. The auditor verifies the opening balances of the current period. These balances come from the closing balances of the previous period. Therefore, the auditor ensures that the balances are correctly carried forward and free from material misstatements.
Verification of Opening Balances
First, the auditor obtains sufficient and appropriate audit evidence. This evidence confirms that the closing balances of the preceding period are correctly brought forward to the current period.
Further, the auditor checks whether the entity has disclosed any previous period adjustments properly. If the entity makes such adjustments, it should report them as prior period items in the current year’s Statement of Profit and Loss.
In addition, the auditor ensures that the opening balances do not contain misstatements. Such misstatements may materially affect the financial statements of the current period.
Consistency of Accounting Policies
Next, the auditor evaluates the accounting policies used in the preceding period. The auditor confirms whether these policies were appropriate.
Moreover, the auditor verifies that the entity applies the same accounting policies consistently in the current period. Consistent policies improve comparability and reliability of financial statements.
However, if the auditor finds inconsistent or improper application of accounting policies, the auditor may express a qualified opinion or an adverse opinion, depending on the circumstances.
Reliance on Previous Financial Statements
Generally, the current auditor relies on the closing balances reported in the financial statements of the preceding period.
However, the auditor performs additional audit procedures if any indication of misstatement appears in the opening balances during the current audit.
When Previous Financial Statements Were Not Audited
Sometimes the financial statements of the preceding period were not audited. In such cases, the auditor cannot rely on previous audit reports.
Therefore, the auditor performs alternative audit procedures. For example, the auditor verifies current assets and current liabilities during the current period audit.
Similarly, the auditor examines supporting records for non-current assets and liabilities. These may include fixed assets, investments, and long-term debt. This examination helps confirm the accuracy of opening balances.
Conclusion
SA 510 requires the auditor to verify opening balances carefully. The auditor also checks accounting policy consistency and prior period adjustments. These procedures help ensure that the financial statements present a true and fair view and remain free from material misstatements.