3052 Auditing procedures for opening balances

Oct-2012

OAG Guidance

Sufficient appropriate audit evidence may be obtained through a review of the predecessor auditor’s working papers, assuming that the predecessor auditor has not withdrawn its opinion and auditing standards do not preclude such an approach.

Reviews of predecessor auditor’s working papers are ordinarily performed by experienced members of the team, such as the team manager and/or engagement leader.

The nature and extent of the review procedures is a matter of professional judgment. The procedures are tailored for each situation depending on the specific circumstances of the entity, materiality, risk involved, and evaluation of the competence of the predecessor auditor. Examples of review procedures that may be performed:

• Review the documentation of identified significant risks, overall audit strategy, and audit plan, including the nature, timing, and extent of audit procedures performed.
• Review the understanding of the entity (including internal control and related party transactions, if they had a significant effect on the financial statements).
• Consider important and sensitive aspects of the engagement and reasons for the audit strategy selected, including the nature, timing, and extent of procedures performed in sensitive or high risk areas.
• Assess if the audit procedures performed were appropriate and sufficient for the identified significant risks.
• Review fraud procedures performed and conclusions drawn, including any summaries of discussions among the engagement team regarding the susceptibility of the entity’s financial statements to material misstatement due to error or fraud, and the significant decisions reached.
• Review the materiality levels used, including performance materiality.
• Review the controls testing procedures to verify that sufficient evidence of operating effectiveness of controls was obtained where appropriate.
• Confirm that substantive procedures for each material class of transactions, account balance, and disclosure have been performed.
• Review the assessment of uncorrected misstatements identified during the audit and any corrected misstatements.
• Review the documentation of the resolution of significant accounting, auditing, and financial reporting matters, including documentation of consultations with others.
• Review detailed working papers relating to significant matters and significant risks.
• Review procedures performed on inventory, including inventory counts.
• Review overall conclusion analytics.
• Consider the involvement of any auditor’s experts and specialists in accounting or auditing.
• Review documentation of any significant deficiencies in internal controls.
• Review communications with management and those charged with governance.
• Consider the appropriateness of work performed over related party transactions.
• Overall, consider whether they have obtained sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.
• Confirm with the predecessor engagement leader that there were no significant unresolved matters.
• Perform other procedures considered appropriate.

See OAG Audit 1031 for guidance on professional competence that is also relevant for predecessor auditors.

OAG Guidance

Procedures to determine whether the prior period’s closing balances have been correctly brought forward to the current period include tracing balances from the previous period’s trial balance to the current period’s accounting records, investigating any discrepancies, and examining the underlying accounting records, where appropriate.

If the prior period was not audited or sufficient appropriate audit evidence on opening balances was not obtained through the review of the predecessor auditor’s working papers and through the procedures performed in the current period, additional audit procedures that may be considered include the following:

• Performing procedures relating to material opening balances, including comparing the totals of the entity's detailed account listings with control accounts (particularly for accounts receivable, inventory, property, plant and equipment, and cash).
• Performing analytical procedures.
• Reviewing the results of physical inventories conducted by the entity.
• Reviewing reconciliations of the general ledger to the financial statements, including adjusting, consolidating, and elimination entries.
• Reviewing significant unusual adjustments, particularly those occurring in the early part of the current year, to determine if they are recorded in the correct period or represent potential adjustments to the prior year financial statements. Examples include large inventory adjustments; receivable write-offs, returns, and allowances; deferred charge write-offs; and write-down of assets for impairment.
• Reviewing accounting policies in effect in the prior year and their application, including the policies relating to revenue recognition, accruals, and deferral of costs, which may have significant cut-off effects.
• Obtaining and reading correspondence from attorneys and tax authorities in the prior year for the identification of any contingencies or need for loss provisions that related to the prior year.
• Other procedures considered appropriate for the entity.

OAG Guidance

We obtain some evidence regarding consistency of accounting policies through the procedures performed on comparative financial information. In order to obtain sufficient appropriate audit evidence about consistency of accounting policies, we consider what other procedures may need to be performed, having regard to materiality and inherent risk. For example:

• Review the results of current year audit procedures on classes of transactions and balances to identify whether there have been any changes in accounting policy,
• Use analytical procedures to identify any unexpected variances that may indicate changes,
• Review the entity's accounting manual or other similar documentation that includes details of accounting policies followed by the entity, and
• Inquire of the entity's personnel or the predecessor auditor to identify such changes.

Refer to OAG Audit 8020 for guidance on comparative information.