What is ASA 510 for Auditing Opening Balances?
Learn how ASA 510 provides the framework for verifying opening balances, a critical step that ensures the integrity of a company's current financial audit.
ASA 510, Initial Audit Engagements—Opening Balances, is an Australian Auditing Standard that guides an auditor’s work on a company’s opening financial figures. It applies to an “initial audit engagement,” which occurs when the prior year’s financial statements were either not audited or were audited by a different accounting firm. The standard’s primary function is to ensure the financial year begins with a reliable foundation. Although this is an Australian standard, its principles are similar to the U.S. equivalent, AU-C Section 510.
Core Objective of the Standard
The objective of ASA 510 is for the auditor to obtain sufficient and appropriate evidence about the opening balances. First, the auditor must verify that the opening balances are free from misstatements that could materially impact the current year’s financial statements. An error in an opening balance, such as an overstated inventory value, could directly misstate the current year’s cost of goods sold and net income.
Second, the auditor must ensure that the accounting policies used for the opening balances have been consistently applied in the current period. If an accounting policy has changed, it must be properly accounted for and disclosed according to the relevant financial reporting framework.
Key Audit Procedures for Opening Balances
An auditor reads the company’s most recent prior-period financial statements and the report of the predecessor auditor, if one exists. This review provides context and determines if the prior period’s closing balances have been correctly brought forward. Where a predecessor auditor was involved, the new auditor may also review their workpapers for evidence on the opening balances.
The auditor also performs procedures in the current period that provide evidence on the opening figures. This could involve observing current physical inventory counts and reconciling them to opening quantities or confirming opening accounts receivable balances with customers. For assets like equipment or long-term debt, the auditor might examine underlying records to substantiate the opening balances.
Impact on the Auditor’s Report
If the auditor cannot obtain enough evidence about the opening balances, they must issue a modified opinion. This could be a “qualified opinion,” which states the financial statements are fairly presented except for the possible effects of the unverified opening balances. This opinion alerts readers to a limitation in the audit’s scope.
In more severe cases, the auditor may issue a “disclaimer of opinion,” which means the auditor does not express an opinion. This occurs when the inability to verify opening balances is so significant it prevents them from forming a conclusion on the financial statements as a whole. If the auditor finds a material misstatement in the opening balances that is not properly corrected, it can also lead to a qualified or an “adverse opinion,” signaling that the financial statements are not fairly presented.