When a company changes auditors, the two firms have to communicate, and the sequence matters. The successor needs to know whether it should accept the engagement and how reliable the opening balances are. The predecessor holds confidential information about the client and cannot hand it over without the client's consent. Getting the sequence wrong creates risk for both firms: an acceptance decision made without inquiry, or a disclosure made without permission.
This guide covers the usual sequence, what to ask, how access to workpapers works, how AU-C 510 applies to opening balances, and where the professional literature sits. The requirements for the communication itself are in AU-C 210 (as amended by SAS 147), opening balances are in AU-C 510, and confidentiality comes from the AICPA Code of Professional Conduct.
Where the requirements come from
- AU-C 210, Terms of Engagement. Covers acceptance and the preconditions for an audit. For an initial audit, including a reaudit, where a predecessor exists, it requires the auditor to ask management to authorize the predecessor to respond fully to inquiries, and, if management authorizes it, to inquire of the predecessor about matters that will assist the acceptance decision. SAS 147 (issued June 2022) added two required inquiries, about identified or suspected fraud and about noncompliance with laws and regulations, and a requirement to document the inquiries and their results once the engagement is accepted. It is effective for audits of financial statements for periods beginning on or after June 30, 2023.
- AU-C 510, Opening Balances: Initial Audit Engagements, Including Reaudit Engagements. Sets out what the auditor does to obtain sufficient appropriate evidence about opening balances, including the use of the predecessor's report and, where appropriate, the predecessor's audit documentation.
- AICPA Code of Professional Conduct. The Confidential Client Information Rule (ET 1.700.001) prohibits a member in public practice from disclosing confidential client information without the specific consent of the client, subject to stated exceptions. The General Standards Rule (ET 1.300.001) requires competence, due professional care, planning and supervision, and sufficient relevant data. The confidentiality rule is why the predecessor needs the client's consent before responding.
The Code of Professional Conduct also contains independence requirements that the successor must satisfy before accepting.
Definitions
- Predecessor auditor: the auditor who previously audited the financial statements and has resigned, declined to stand for reappointment or been replaced.
- Successor auditor: the auditor who has been invited to audit, or has accepted the engagement.
- Initial audit engagement: one where the prior period financial statements were not audited, or were audited by a predecessor.
- Reaudit: an audit of financial statements that were previously audited by another auditor, where the predecessor's report is not reissued.
The sequence for a successor auditor
Step 1: ask the client for permission
The successor starts with the prospective client, not the predecessor. Ask management to authorize the predecessor to respond fully to the successor's inquiries. The predecessor cannot disclose without that consent. If management refuses, or limits the response, AU-C 210 requires the successor to inquire about the reasons and consider the implications for the decision to accept. Treat a refusal as a significant warning and weigh whether the explanation is credible and the risk can be managed.
Keep the request in writing and keep a copy.
Step 2: make inquiries of the predecessor
With consent, the successor contacts the predecessor, usually by phone with a written follow-up. Two inquiries are required once management authorizes the response:
- Fraud. Identified or suspected fraud involving management, employees with significant roles in internal control, or others where the fraud resulted in a material misstatement.
- Noncompliance with laws and regulations. Matters that came to the predecessor's attention during the audit, other than clearly inconsequential ones.
The application material lists other matters that may be inquired about:
- Integrity of management. Any information that bears on whether management is honest.
- Disagreements with management about accounting policies, auditing procedures or other similarly significant matters.
- Communications to those charged with governance about fraud and noncompliance.
- Internal control. Communications about significant deficiencies and material weaknesses.
- The reasons for the change as the predecessor understands them.
The successor may also ask about going concern concerns and the state of the prior audit, such as open items, unadjusted differences or scope restrictions.
The communication can be written or oral.
Once management has authorized the response, the predecessor is expected to respond on a timely basis and on the basis of known facts, absent unusual circumstances such as pending, threatened or potential litigation or disciplinary proceedings. If the predecessor does not respond fully, it should clearly state that the response is limited, and the successor considers the implications. When the engagement is accepted, the successor documents the inquiries and the results.
Step 3: evaluate the answers
The successor evaluates what the predecessor said and did not say. A limited or evasive reply is itself information. Consider the effect on engagement acceptance, the risk assessment, the engagement team's skepticism and planned procedures. Document the date, the person contacted, the inquiries and the conclusion.
Step 4: read the financial statements and report
AU-C 510 asks the auditor to read the most recent financial statements and the predecessor's report, if any, for information relevant to opening balances, including disclosures. A modified predecessor report, emphasis paragraph or going concern paragraph deserves follow-up.
Access to the predecessor's workpapers
Access is the area where practice varies most.
- Access to the predecessor's audit documentation is a matter of the predecessor's professional judgment, and it requires the client's consent. The documentation belongs to the predecessor's firm.
- Where access is given, the usual arrangement is an access letter between the two firms, often with a client consent letter. It sets out which workpapers will be reviewed, how (inspection, copies), the purpose, and that the successor will treat them as confidential.
- The successor's purpose is to obtain evidence about opening balances and consistency of accounting principles, and to gain an understanding of the entity. It is not to reperform the predecessor's work or to evaluate its quality.
- Typical workpapers requested: the permanent file, planning and risk assessment, lead schedules and workpapers for balance sheet accounts that carry forward (fixed assets, debt, equity, intangibles, deferred taxes), significant estimates, the summary of uncorrected misstatements, the representation letter, and the communication with those charged with governance.
- Since the successor must exercise its own judgment on reliance, the review of workpapers provides evidence for opening balances but does not replace the successor's procedures. The extent depends on the risk.
If the predecessor refuses access, the successor performs other procedures on opening balances, which can be more extensive: confirmations, inspection of supporting documents, and tests of prior-year transactions that affect the opening balance.
Opening balances under AU-C 510
The objective is to obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period financial statements, whether the prior period closing balances have been correctly brought forward (or restated when appropriate), and whether accounting policies have been consistently applied or changes appropriately accounted for and disclosed.
Procedures commonly include:
- Read the predecessor's report and financial statements.
- Review the predecessor's audit documentation, where available.
- Test the opening balances. For current assets and liabilities, current-period procedures often provide evidence about opening balances. For example, collections of opening receivables, payments of opening payables and the cost of opening inventory flowing through cost of sales. For inventory in a first-year audit, where the successor was not present at the opening count, see inventory observation for alternative procedures. For noncurrent assets and liabilities such as fixed assets, debt and equity, review underlying records, confirm with third parties, or perform additional procedures.
- Evaluate consistency of accounting policies and any changes.
- Evaluate the prior-year uncorrected misstatements and their effect on current-period amounts.
If the successor cannot obtain sufficient appropriate evidence about opening balances, the effect on the report depends on the circumstances: the auditor expresses a qualified opinion or disclaims an opinion, as appropriate, under AU-C 510 and AU-C 705. See types of audit opinions. If the opening balances contain misstatements that materially affect the current period and have not been properly accounted for or disclosed, a qualified or adverse opinion is required.
First-year audits carry extra risk for the firm and should be planned as such. The audit planning memo and engagement letter should reflect the initial engagement, including time, staffing and fees.
Reaudits
If the successor is asked to reaudit financial statements already audited by someone else, the same inquiries apply, and the successor generally cannot rely on the predecessor's work as audit evidence in the same way. The successor performs its own procedures to support an opinion on the prior period. If the predecessor's report on the prior period has been or will be reissued, additional considerations apply, including the predecessor's responsibilities for subsequent events and subsequently discovered facts.
What the predecessor should do
For the predecessor, the position is the reverse:
- Do not respond until the client has consented, ideally in writing.
- Respond promptly and fully to the successor's reasonable inquiries within the scope of the consent. If the response is limited, say so.
- Be factual. The predecessor does not offer opinions on the client beyond the facts and the reasons for the change.
- Consider a request for workpaper access: get written consent, an access letter, and decide what to provide. Provide copies only after consideration; some firms allow inspection only.
- Consider the legal and risk exposure. A firm may involve its risk management function or counsel on difficult cases such as a dispute over fees or suspected fraud.
- If the client withholds consent, the predecessor can say only that it cannot respond, without further explanation.
Where a client has unpaid fees, the AICPA Code's records-request interpretation (ET 1.400.200) addresses the return of client-provided records.
Documentation
Under AU-C 230, a successor's file should show:
- the client's written consent
- the date, participants and substance of the inquiries to the predecessor, and the conclusion
- the review of the predecessor's report and financial statements
- the access letter and the workpapers reviewed, and how they were used
- the procedures on opening balances, tailored to the risks
- the effect on acceptance, planning and the opinion
The predecessor's file should show the consent, the communications and any information provided.
Problems to avoid
- Contacting the predecessor before consent.
- No inquiry because the client is "a friend of a friend."
- Accepting an unexplained refusal to authorize the predecessor.
- Treating workpaper review as the opening balance procedure without any current-period testing.
- No documentation of the call.
- Underestimating first-year hours, which leads to write-offs or shortcuts.
- Overlooking independence for the successor before acceptance.
FAQ
Does the successor auditor have to contact the predecessor?
For an initial audit where a predecessor exists, AU-C 210 requires the successor, before accepting, to ask management to authorize the predecessor to respond fully. If management authorizes it, the successor must inquire of the predecessor, including about fraud and noncompliance with laws and regulations (SAS 147, effective for periods beginning on or after June 30, 2023). If management refuses or limits the response, the successor inquires about the reasons and considers the implications. Document the communication.
Does the predecessor have to give the successor access to workpapers?
Access is a matter of the predecessor's professional judgment and requires the client's consent. It is usually arranged by an exchange of letters.
What if the client refuses to let the predecessor respond?
Treat it as a significant warning sign. AU-C 210 requires the successor to inquire about the reasons and consider the implications of the refusal in deciding whether to accept the engagement.
Can I rely on the predecessor's audit for opening balances?
You can use the predecessor's report and, where accessible, its workpapers as evidence, but you still need to perform procedures appropriate to the risk. AU-C 510 sets the framework.
What happens if I cannot get evidence on opening balances?
The effect depends on the matter and its materiality. It may lead to a qualified opinion or a disclaimer of opinion, as appropriate. See the AU-C 510 and opinion guidance.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- AICPA, AU-C Section 210, Terms of Engagement (communications with the predecessor auditor in an initial audit engagement)
- AICPA, SAS No. 147, Inquiries of the Predecessor Auditor Regarding Fraud and Noncompliance With Laws and Regulations (issued June 2022; effective for audits of financial statements for periods beginning on or after June 30, 2023): https://www.aicpa-cima.com/resources/download/aicpa-statement-on-auditing-standards-no-147
- AICPA, AU-C Section 510, Opening Balances: Initial Audit Engagements, Including Reaudit Engagements; AU-C Section 705; AU-C Section 230
- AICPA Code of Professional Conduct: ET 1.700.001 (confidential client information), ET 1.300.001 (general standards), ET 1.400.200 (records requests)
Part of CORAA University · Engagement and acceptance: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error