Definition
A first-year, or initial, audit engagement is one where the financial statements for the prior period were unaudited or audited by another auditor. AU-C 510 requires the auditor to obtain sufficient appropriate evidence that opening balances do not contain misstatements that materially affect the current period, and that prior period closing balances were properly brought forward and policies consistently applied.
Why it matters in an audit or review
Opening balances affect current-year results: an error in opening inventory flows into cost of sales. Procedures include reading the last financial statements and the predecessor's report, reviewing the predecessor's workpapers where available, testing current-period activity for balance sheet items, and performing specific procedures for those balances. If evidence is insufficient, the opinion can be modified.
Example
Illustrative: a new client's prior-year statements were reviewed, not audited. The auditor confirms the opening bank balances with the banks, observes the current-year inventory count and rolls it back to the opening date, and tests opening receivables through later collections.
Common mistakes
Budgeting first-year hours as if opening balances were already supported.
FAQ
Does the report mention the predecessor?
If the prior period was audited by another auditor, an other-matter paragraph may note that. Details depend on the facts.
Sources
- AICPA, AU-C Section 510, Opening Balances-Initial Audit Engagements, Including Reaudit Engagements
- AICPA, AU-C Section 705, Modifications to the Opinion in the Independent Auditor's Report
- AICPA, AU-C Section 710, Comparative Information-Corresponding Figures and Comparative Financial Statements
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error