SA 510 INITIAL AUDIT ENGAGEMENTS OPENING BALANCES Whether

SA 510 INITIAL AUDIT ENGAGEMENTS- OPENING BALANCES

Whether to accept the engagement Whether the previous FS have been audited? Audited Perform Additional Procedures Not Audited Rely on Audit Report Perform Detail Audit Procedures

Relevance of Standard ◦ When is the standard relevant? ◦ Previous Year Financial Statements has not been audited ◦ Audited by predecessor auditor ◦ What is it relevant on? ◦ Accounting Balances existing at the beginning of the period ◦ Previous Year Closing Balance ◦ Accounting Policy ◦ Specific Nature of Standard ◦ Only used in certain scenarios unlike SA 710 Auditor

Auditor’s Objective ◦ Obtain SAAE* whether: ◦ Opening balances contain Material Misstatement that affect current year Financial Statements ◦ Accounting Policies are consistent and changes if any have been properly accounted for and disclosed *SAAE: Sufficient Appropriate Audit Evidence

If Opening Balance Contain no misstatement UNMODIFIED OPINION SAAE* not obtained Contain mis-statement DISCLAIMER OF OPINION Have impact on Current Year financials Prior Period items disclosed UNMODIFIED OPINION Prior Period items not disclosed Have no impact on Current Year financials UNMODIFIED OPINION *SAAE: Sufficient Appropriate Audit Evidence

When Previous Year Financial Statements are Audited RELY ON AUDIT REPORT

Audit Procedures ◦ Read the Audited Financial Statements and the Audit Report ◦ Obtain SAAE that: 1) Closing Balances of PY have been correctly Brought Forward 2) Determine the Accounting Policies consistency.

What Audit Procedures to be performed? ◦ Evaluate and Perform specific audit procedures during the current year to obtain evidence regarding opening balances ◦ Inventory: ◦ Observe a Physical Verification and perform Roll Backward procedures to reconcile it to opening balance to ensure Existence of Inventory ◦ Recompute the valuation of inventory and take into consideration important ratios such as Gross Profit Ratio, Inventory T/O ratio, COGS to Sales Ratio and others ◦ For Trade Receivables: ◦ Check Subsequent Receipt from the customers to ensure Rights and Obligation, Existence and Completeness

◦ For other Current and Non Current Assets: ◦ Bank Balances and Investments: Obtain External Confirmation ◦ Read Underlying Agreements ◦ Read Accounting Policies Thoroughly

CASE STUDIES

SCENARIO 1 Management As per the auditor, Opening Balance of Inventory is overstated. What should he do? The auditor shall determine the effect of the same in current year FS The auditor should communicate to appropriate level of management or TCWG The Audit Report may contain Modification in accordance with SA 705

Scenario 2 - Qualification in Predecessor Auditor’s Report Previous year auditor had made a qualification in the ICFR report relating to Material Weakness relating to attendance of workers Case 1: Material Weakness corrected: No modification in Audit Opinion Case 2: Material Weakness not corrected: Modified Audit Opinion

Scenario 3 - Misstatement Limited ◦ Case 1: The previous auditor of Misstatement Limited have mentioned a qualification regarding understatement of provisioning of Unmoved Inventory. In the current year, the scenario has not changed. What should be done? ◦ Modify report for both current year as well as previous year. ◦ Case 2: In view of the above example, if the company provides adequate provision for the unmoved stock and makes adequate disclosure, what should be done? ◦ In this case, the auditor will not be required to modify the opinion on the basis of previous year modification

Other Matter Paragraph ◦ Mention that the Previous Year Financials were audited by another auditor and particulars of the report including the opinion thereon or the fact that previous year financials have not been audited. ◦ Make the users of FS aware of the scope of audit of the opening balances.

SA 705 and 710 - Linked with SA 510 (After Initial Audit Engagement Procedures) ◦ Comparatives are true and fair ◦ Prior period items are adequately disclosed ◦ Changes in Accounting Policies if any are disclosed adequately ◦ Provide Modification if required

SA 300 and SA 315 - Linked with SA 510 (Prior to Initial Engagement) ◦ Risk Assessment- Internal Control Environment, WCGW, Timing and Planning of Audit ◦ Consideration of previous auditor modification in current year risk assessment ◦ Understanding of Legal and Regulatory Framework ◦ Involvement of Experts- Taxation, IT and others ◦ Identify Important Areas

When Previous Year Financial Statements are not Audited

◦ Perform Audit Procedures related to Opening Balance, Presentation and Disclosure and Accounting Policies ◦ Perform Risk Assessment including Test of Internal Controls ◦ Read underlying records such as agreements with bankers, customers and others ◦ Assess the proper disclosure of contingencies

◦ Mr A is the auditor of Vaidya Ltd. The Auditor Concluded that the opening balance contains a misstatement which materially affects the current period financial statements, and the effect of misstatement is not properly accounted for or not adequately presented or disclosed. Then Mr A shall ◦ a) issue qualified or Adverse report ◦ b) Issue a disclaimer of opinion ◦ c) Withdraw from audit engagement ◦ d) None of the above ◦ Ans: (a)

◦ Mr. A has been appointed as the auditor for the Great Ltd financial year 2018 -19. The auditor started performing audit procedures and obtaining audit evidence for the opening balances. The CFO of the company interrupted and asked the auditor not to perform such procedures as he has been appointed as auditor for FY 2018 -19 and not FY 2017 -18. What should be done? a) Mr. A should not perform such audit procedures and consider the contentions of the CFO b) Mr. A should explain that the work done is in accordance with SA 510 and if the CFO is still not allowing to perform such procedures then modify the opinion accordingly Ans: (b) Procedure based standard Reporting based standard