audit reports - opening balances - initial audits

7/29/2019 Audit Reports - Opening Balances - Initial Audits

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Opening Balances - Initial Audits

I. Relevant AICPA Guidance

The relevant AICPA guidance is provided by AU 510: "Opening Balances — Initial Audit Engagements,

Including Reaudit Engagements." The standard states that the auditor's objective is to obtain sufficient

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 (or changes are appropriately accounted for

and adequately presented and disclosed).

II. Selected Definitions

Initial audit engagement : An engagement in which (a) the financial statements for the prior

period were not audited; or (b) the financial statements for the prior period were audited by a

predecessor auditor

Opening balances: Those account balances that exist at the beginning of the period. (also include

matters requiring disclosure that existed at the beginning of the period, such as contingencies

and commitments).

Predecessor auditor : The auditor from a different audit firm who has reported on the most recent

audited financial statements (or was engaged to perform, but did not complete, an audit of the

financial statements).

Reaudit : An initial audit engagement to audit financial statements that have been previously

audited by a predecessor auditor

III. Audit Procedures

A. The auditor should read the most recent financial statements and any predecessor's audit report

for information relevant to opening balances.

B. The auditor should request management to authorize the predecessor to respond fully to inquiries

by the auditor and to allow the auditor to review the predecessor auditor's audit documentation.

1. The predecessor may request a consent and acknowledgment letter from the entity to

document the authorization regarding the communication with the auditor. Such a letter is

not required, but the SAS provides an example.

2. The predecessor may also request a successor auditor acknowledgment letter to document

the auditor's agreement regarding the use of the predecessor auditor's audit

documentation before permitting access to it. Such a letter is not required, but the SAS

provides an example.

3. The extent to which th e predecessor permits access to the audit documentation is a

matter of professional judgment.

4. The auditor's use of the predecessor's information is influenced by the auditor's

assessment of the predecessor's competence and independence.

C. Evaluate the entity's opening balances --

1. Obtain sufficient appropriate audit evidence as to whether opening balances contain



misstatements affecting the current period financial statements by (a) determining

whether the prior closing balances have been properly brought forward; (b) determining

whether the opening balances reflect the application of appropriate accounting policies; and

(c) evaluating whether current period audit procedures provide evidence relevant to the

opening balances (such as reviewing the predecessor's audit documentation).

2. If the opening balances contain material misstatements affecting the current period, the

auditor should determine the effect on the current period's financial statements and

communicate the misstatements to the appropriate level of management and those

charged with governance.

D. Evaluate the consistency of accounting policies -- the auditor should obtain sufficient

appropriate audit evidence as to whether the accounting policies reflected in the opening balances

have been consistently applied in the current period (and whether any changes have been

properly reported).

E. Discovery of possible material misstatements in financial statements reported on by a predecessor

auditor.

1. The auditor should request management to inform the predecessor of the situation and

arrange a 3-way meeting to resolve the matter.

2. If management does not cooperate (or if the auditor is not satisfied with the resolution of

the matter), the auditor should evaluate the implications to the current engagement and

whether to withdraw. The auditor may also wish to consult with legal counsel for guidance.

IV. Audit Reporting Considerations

A. Reference to predecessor -- The auditor should not refer to the predecessor's work or report

as a partial basis for the auditor's opinion

B. Opening balances --

1. If unable to obtain sufficient appropriate audit evidence regarding the opening balances,the auditor should either express a qualified opinion or disclaim an opinion, as appropriate.

2. If there is a material misstatement in the opening balances, the auditor should either

express a qualified or adverse opinion, as appropriate

C. Consistency of accounting policies -- The auditor should either express a qualified or adverse

opinion (as appropriate) if the current period's accounting policies are not consistently applied in

relation to the opening balances (or if any material changes are not properly reported).

V. Sample Report

A sample report follows with a disclaimer of opinion on results of operations and cash flows and an

unmodified opinion on financial position (owing to the inability to verify opening inventory such that the

effect is deemed to be material and pervasive).

A. Modify introductory sentence — ". . . and were engaged to audit. . ."

B. Do not change to Management's Responsibility section.

C. Modify Auditor's Responsibility section—modify the first 2 paragraphs and comment on the "basis

for unmodified opinion on financial position" at the end.

D. Add a "Basis for Disclaimer" paragraph on results of operations and cash flows.

E. Disclaim an opinion on results of operations and cash flows.



F. Provide an opinion only on financial position.

G. Sample report with a disclaimer of opinion on results of operations and cash flows and

an unmodified opinion on financial position (owing to the inability to verify opening

inventory) --

Independent Auditor's Report

(Appropriate Addressee)

We have audited the accompanying balance sheet of ABC Company, as of December 31,

20X1, and were engaged to audit the related statements of income, changes in

stockholders' equity and cash flows for the year then ended, and the related notes to the

financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial

statements in accordance with accounting principles generally accepted in the United

States of America; this includes the design, implementation, and maintenance of internal

control relevant to the preparation and fair presentation of financial statements that are

free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on

conducting the audit in accordance with auditing standards generally accepted in the

United States of America. Because of the matters described in the Basis for Disclaimer of

Opinion paragraph, however, we were not able to obtain sufficient appropriate audit

evidence to provide a basis for an audit opinion on the income statement and the cash

flow statement.

We conducted our audit of the balance sheet in accordance with auditing standards

generally accepted in the United States of America. Those standards require that we plan

and perform the audit to obtain reasonable assurance about whether the balance sheet isfree of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and

disclosures in the consolidated financial statements. The procedures selected depend on

the auditor's judgment, including the assessment of the risks of material misstatement of

the consolidated financial statements, 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 of the consolidated financial statements 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. Accordingly, we

express no such opinion. An audit also includes evaluating the appropriateness of

accounting policies used and the reasonableness of significant accounting estimates made

by management, as well as evaluating the overall presentation of the financialstatements.

We believe that the audit evidence we have obtained is sufficient and appropriate to

provide a basis for our unmodified opinion on the financial position.

Basis for Disclaimer of Opinion on the Results of Operations and Cash Flows

We were not appointed as auditors of the company until after December 31, 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 December 31, 20X0. Since opening inventories enter into the determination of the

net income and cash flows, we were unable to determine whether adjustments might

have been necessary relating to the profit for the year reported in the income statement



and the net cash flows from operating activities reported in the cash flow statement.

Disclaimer of Opinion on the Results of Operations and Cash Flows

Because of the significance of the matter described in the Basis for Disclaimer of Opinion

paragraph, we have not been able to obtain sufficient appropriate audit evidence to

provide a basis for an audit opinion on the income statement and the cash flow

statement. Accordingly, we do not express an opinion on the results of operations and

cash flows for the year ended December 31, 20X1.

Opinion on the Financial Position

In our opinion, the balance sheet presents fairly, in all material respects, the financial

position of ABC Company, as of December 31, 20X1, in accordance with accounting

principles generally accepted in the United States of America.

(Auditor's signature)

(Auditor's city and state)

(Date of the auditor's report)



FlashcardsFlashcard #1 (FC7314)

What is meant by the term initial audit engagement ? An engagement in which (a) the financial statements

for the prior period were not audited; or (b) the

financial statements for the prior period were audited

by a predecessor auditor.

Flashcard #2 (FC7315)

What is meant by the term opening balances? Those account balances that exist at the beginning of

the period. (This also includes matters requiring

disclosure that existed at the beginning of the period,

such as contingencies and commitments.)


What is meant by the term consent and

acknowledgement letter ?

The predecessor auditor may request such a letter

from an entity to document the entity's authorization

regarding the predecessor auditor's communication

with the (successor) auditor. Such a letter is not

required, however.


What is meant by the term successor auditor

acknowledgment letter ?

The predecessor auditor may request such a letter

from the (successor) auditor to document the

auditor's agreement regarding the use of the

predecessor auditor's documentation as a precondition

for allowing access to it. Such a letter is not required,

however.


What are the auditor's responsibilities with respect to

opening balances, and whether they contain

misstatements affecting the current period financialstatements?

1. Determine whether the prior closing balances

have been properly brought forward.

2. Determine whether the opening balancesreflect the application of appropriate accounting

policies.

3. Evaluate whether audit procedures provide

evidence relevant to the opening balances (for

example, by reviewing the predecessor's audit

documentation).


What effect would it have on the auditor's report in an

initial audit if the auditor bases conclusions about the

opening balances of an entity's financial statementson a review of the predecessor's audit documentation?

None. The auditor should not refer to the predecessor

auditor as providing a partial basis for the auditor's

opinion.

audit reports - opening balances - initial audits

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