First-year audits: predecessor communication and opening balances

• Perform the required predecessor inquiries before accepting an initial audit.
• Plan procedures for opening balances under AU-C 510.08.
• Determine the reporting effect when opening balance evidence is insufficient.

Two stages, two sections

An initial audit engagement is one where the prior period statements were not audited, or were audited by a predecessor auditor (AU-C 510.05). SAS 147 moved the predecessor communications needed for acceptance into AU-C 210, effective for audits of periods beginning on or after June 30, 2023. AU-C 510 keeps the work on opening balances.

Before acceptance: AU-C 210.11-.15

When a predecessor exists, AU-C 210.11 requires you, before accepting, to request management to authorize the predecessor to respond fully to your inquiries. If management refuses or limits the authorization, inquire about the reasons and consider the implications for acceptance.

If authorized, AU-C 210.12 requires you to inquire about matters that assist the acceptance decision, including:

• identified or suspected fraud involving management, employees with significant roles in internal control, or others where the fraud caused a material misstatement; and
• matters involving noncompliance or suspected noncompliance with laws and regulations that came to the predecessor's attention, other than clearly inconsequential matters.

Practice adds questions on integrity of management, disagreements over accounting or auditing, communications about significant deficiencies, and the reason for the change. AU-C 210.14 requires you to evaluate the response, or the lack of one, and AU-C 210.15 requires you to document the inquiries and results once you accept. Our predecessor communication letters cover both the acceptance inquiry and the workpaper review request.

Note AU-C 510.02: the predecessor provisions do not apply if the most recent audited statements are more than one year prior to the beginning of the earliest period you are auditing.

After acceptance: opening balances under AU-C 510

AU-C 510.06 requires you to read the most recent financial statements and the predecessor's report for information relevant to opening balances. AU-C 510.07 requires you to request management to authorize the predecessor to allow a review of the predecessor's documentation.

AU-C 510.08 requires sufficient appropriate evidence about whether opening balances contain misstatements that materially affect the current period by:

• (a) determining whether prior closing balances were correctly brought forward or restated;
• (b) determining whether opening balances reflect appropriate accounting policies; and
• (c) evaluating whether current-period procedures provide evidence on opening balances, and either reviewing the predecessor's documentation, performing specific procedures, or both.

Current-period work often covers opening balances. Collection of opening receivables in January provides evidence of their existence. Opening inventory affects cost of sales, so it usually needs specific work: observation plus roll-back, or testing prior-year count records and costing. Long-lived assets may need testing of the underlying additions.

AU-C 510.10 requires evidence that accounting policies in opening balances have been applied consistently, or that changes are properly accounted for and disclosed. AU-C 510.14 prohibits referring to the predecessor's report or work as a basis, in part, for your own opinion.

When you cannot get there

AU-C 510.15 requires a qualified opinion or a disclaimer when you cannot obtain sufficient appropriate evidence on opening balances. A common pattern: a qualified or disclaimed opinion on results of operations and cash flows (opening inventory affects both), with an unmodified opinion on the year-end balance sheet. If opening balances contain an uncorrected material misstatement, AU-C 510.16 requires a qualified or adverse opinion.

See the first-year audits guide for procedure lists by account.

Opening inventory with no predecessor