Opening balances

ISA 510 Initial Engagements – Opening Balances requires that when auditors take on a new client, they must ensure that:

  1. Opening balances do not contain misstatements that materially affect the current period financial statements.

  2. Prior period closing balances have been correctly brought forward or restated

  3. Appropriate accounting policies have been consistently applied, or changes adequately disclosed.

Where the prior period was audited by another auditor the current auditor may be able to gain sufficient appropriate evidence from a review of his working papers.

He should obviously consider the professional competence and independence of the predecessor auditor. The predecessor may or may not be willing to cooperate in practice and is under no ethical obligation to open his file to another auditor. If the prior period audit report was modified with an emphasis of matter or a qualification, particular attention should be paid to the modification.

Where the prior period was not audited or was not adequately audited, some evidence can be obtained from current audit procedures such as the checking of receipts and payments of cash to substantiate receivables and payable figures. Inventories are more difficult, additional procedures maybe necessary. These may include the observation of current physical inventory taking and reconciliation back to opening quantities testing of opening figures and the review of gross margins. For non current assets and liabilities, underlying documentation can be checked.

Where there is insufficient evidence, the auditor issues an ‘except for’ or disclaimer of opinion similar to the following:

‘We did not observe the counting of the physical inventory stated at XXX as at December 31, 20x1 since that date was prior to our appointments as auditors. We were unable to satisfy ourselves as to the inventory quantities at that date by other audit procedures.

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary has we been able to observe the continuing of physical inventory and satisfy ourselves as to the opening balance of inventory, the financial statements give a true and fair view of (or ‘present fairly, in all material respects.’) the financial position of …. As at December 31, 20x2 and the results of its operations and its cash flows for the year then ended in accordance with …’.

Where misstatements on opening balances are not properly accounted for or adequately disclosed, and where accounting polices have not been consistently applied or restated an ‘except for’ or adverse opinion is issued.


ISA 710 Comparatives requires that comparatives comply in all material respects with the identified financial reporting framework. The IASB’s Framework for the Preparationand Presentation of Financial Statements and IAS 1 Presentation of Financial Statements both require that financial statements show comparatives.

Two categories of comparatives exist:

  1. Corresponding figures – which are an integral part of the current period’s financial statements and are not intended to stand alone. The audit report in this case only refers to the financial statements of the current period which encompasses the prior period figure, and does not refer specifically to corresponding figures.

Audit work in respect of corresponding figures is significantly less than that required for the current period. It is limited to ensuring that corresponding figures have been correctly reported or restated and appropriately classified.

If a matter in respect of which the prior period audit report was qualified is unresolved, the current report should also be qualified in respect of corresponding figures. Where the matter is resolved, an emphasis of matter paragraph may still be appropriate.

If prior period financial statements turn out to be materially misstated, and the corresponding figures are property restated in the current period, an ‘emphasis matter’ paragraph may also be appropriate.

Local regulations sometimes permit a reference to the fact that the prior period was audited by another auditor. If prior period financial statements were not audited at all, the audit report should state that fact.

If the corresponding figures are materially misstated, a qualified audit report should be given.

  1. Comparative financial statements – which are included for comparison with the current period but do not form part of the current period’s financial statements. The audit report here refers specifically to each period presented (as is in the US, three years for the income statement and two years for the balance sheet.)

The auditors assess whether the accounting polices are consistent with the prior period or have been properly adjusted and disclosed. They also ensure that prior period figures agree with prior period financial statements or have been properly adjusted.

It is perfectly possible for the opinion on one set of financial statements to be different from that on the others. If an opinion different to one previously issued is given in any year, an ‘emphasis of matter’ paragraph should be given.

When prior periods were audited by another auditor, the predecessor auditor may reissue the audit report on the prior year in the current year, or the incoming auditor should indicate that the prior period was audited by another auditor and give details of the report issued.

Where prior period financial statements audited by another auditor require restatement, either the predecessor auditor issues a report on the revised financial statements, or, the incoming auditor state in his report that adjustments to the prior period financial statements have been made and that they have been audited.

Where prior financial statements have not been audited the audit repot should state that fact.