Question Bank - SA 510 Compiled by Neeraj Arora and TEAM

SA 510 “Initial Audit Engagements -Opening Balances”

Q1. CORRECT / INCORRECT
An auditor is not concerned with consistency of accounting policies relating to opening balances.
(SA, Nov 2018, 2 Marks)

The statement is incorrect.

In conducting an initial audit engagement, one of the objective of the auditor with respect to opening
balances is to obtain sufficient appropriate audit evidence about whether appropriate accounting policies
reflected in the opening balances have been consistently applied in the current period’s financial
statements, or changes thereto are properly accounted for and adequately presented and disclosed in
accordance with the applicable financial reporting framework.

Comments and Feedback:

● Direct and moderate question
● Important keywords: sufficient appropriate audit evidence, accounting policies reflected in the
opening balances, consistently applied, properly accounted, presented and disclosed, applicable
financial reporting framework.

Q2. M/s Pankaj & Associates, Chartered Accountants, have been appointed as an auditor of ABC Limited. CA Pankaj
did not apply any audit procedures regarding opening balances. He argued that since financial statements
were audited by the predecessor auditor therefore he is not required to verify them. Is CA Pankaj correct in his
approach?
(SA, Nov 2018, 5 Marks) (ICAI study mat)

Meaning of Initial audit engagement

Initial audit engagement is an engagement in which either :
● The financial statements for the prior period were not audited; or
● The financial statements for the prior period were audited by a predecessor auditor.

Relevant SA
SA 510, “Initial Audit Engagements—Opening Balances”

Audit Procedures regarding Opening Balances

The auditor shall read the most recent financial statements, if any, and the predecessor auditor’s report
thereon, if any, for information relevant to opening balances, including disclosures.

The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period’s financial statements by:
a) Determining whether the prior period’s closing balances have been correctly brought forward to
the current period or, when appropriate, any adjustments have been disclosed as prior period items
in the current year’s Statement of Profit and Loss;
b) Determining whether the opening balances reflect the application of appropriate accounting
policies; and
c) Performing one or more of the following:
➢ Where the prior year financial statements were audited, perusing the copies of the audited
financial statements including the other relevant documents relating to the prior period
financial statements;
➢ Evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or
➢ Performing specific audit procedures to obtain evidence regarding the opening balances

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Question Bank - SA 510 Compiled by Neeraj Arora and TEAM

Conclusion
Thus, we can conclude that CA Pankaj is not correct in his approach and therefore would be required to
follow the initial audit engagement and also apply audit procedures regarding opening balances.

Comments and Feedback:

● Indirect and moderate question
● Important keywords:
➢ From the meaning: FS were not audited or audited by a predecessor auditor
➢ From the audit procedures: read the most recent financial statements, predecessor auditor’s
report, prior period’s closing balances have been correctly brought forward, adjustments have
been disclosed as prior period items, application of appropriate accounting policies, copies of
the audited financial statements, audit procedures performed in the current period provide
evidence relevant to the opening balances, specific audit procedure
➢ From the conclusion: CA Pankaj is not correct in his approach
● Do mention the conclusion as it is a case study based question.
● Quote SA 510 along with SA name.

Q3. If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances,the
auditor shall express :
a. a disclaimer opinion
b. a qualified opinion
c. a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
d. unmodified opinion
(MTP2, May 2019, 1 Mark) (RTP, Nov 2019) (MTP1, May 2020, 2 Marks) (ICAI MCQs)

Correct answer : (c) a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.

Comments and Feedback:

● Direct and easy question
● For a student’s understanding,
➢ The auditor shall express a qualified opinion when the auditor is unable to obtain sufficient
appropriate audit evidence and concludes that the possible effects on the financial statements
of undetected misstatements, if any, could be material but not pervasive.
➢ The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence and concludes that the possible effects on the financial statements
of undetected misstatements, if any, could be both material and pervasive.

Q4. Auditors of M/s Tender India (P) Ltd. were changed for the accounting year 2016-17. The closing inventory of the
company as on 31.3.2016 amounting to Rs. 100 lacs continued as it is and became closing inventory as on
31.3.2017. The auditors of the company propose to exclude from their audit programme the audit of closing
inventory of Rs. 100 lacs on the understanding that it pertains to the preceding year which was audited by
another auditor.
(MTP1, Nov 2019, 4 Marks)

Objective of auditor with respect to opening balances

As per SA 510 “Initial Audit Engagements – Opening Balances”, in conducting an initial audit engagement,
the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit
evidence about whether-
● Opening balances contain misstatements that materially affect the current period’s financial
statements; and
● Appropriate accounting policies reflected in the opening balances have been consistently applied in
the current period’s financial statements, or changes thereto are properly accounted for and

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Question Bank - SA 510 Compiled by Neeraj Arora and TEAM

adequately presented and disclosed in accordance with the applicable financial reporting
framework.

Audit procedures
When the financial statements for the preceding period were audited by predecessor auditor, the current
auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by perusing
the copies of the audited financial statements including the other relevant documents relating to the prior
period financial statements such as supporting schedules to the audited financial statements. Ordinarily,
the current auditor can place reliance on the closing balances contained in the financial statements for the
preceding period, except when during the performance of audit procedures for the current period the
possibility of misstatements in opening balances is indicated.

General principles governing verification of assets require that the auditor should confirm that assets have
been correctly valued as on the Balance Sheet date. The contention of the management that the inventory
has not undergone any change cannot be accepted, it forms part of normal duties of auditor to ensure that the
figures on which he is expressing opinion are correct and properly valued.

Moreover, it is also quite likely that the inventory lying as it is might have deteriorated and the same need to be
examined.

Conclusion
The auditor is advised not to exclude the audit of closing inventory from his audit programme.

Comments and Feedback:

● Indirect and moderate question
● Important keywords: SA 510, sufficient appropriate audit evidence, misstatements that materially
affect the current period’s financial statements, accounting policies, consistently applied, properly
accounted, presented and disclosed, applicable financial reporting framework, copies of the audited
financial statements, supporting schedules to the audited financial statements, reliance on the closing
balances except possibility of misstatements in opening balances is indicated, correctly valued, figures
on which he is expressing opinion are correct and properly valued, not to exclude the audit of closing
inventory from his audit programme.
● Do write conclusion in the end and quote SA 510

Q5. Discuss the objective of Auditor with respect to Opening balances in conducting an initial audit engagement.
(ICAI study mat)
OR
M/s PQR and associates are the statutory auditors of TUV Ltd. for the FY 2020- 21-. They have been appointed as
statutory auditors of TUV Ltd. for the first time. What is the objective of the engagement partner in terms of SA
510?
(ICAI study mat)

Objective of auditor with respect to opening balances

As per SA 510 “Initial Audit Engagements – Opening Balances”, in conducting an initial audit engagement,
the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit
evidence about whether-
● Opening balances contain misstatements that materially affect the current period’s financial
statements; and
● Appropriate accounting policies reflected in the opening balances have been consistently applied in
the current period’s financial statements, or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting
framework.

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Question Bank - SA 510 Compiled by Neeraj Arora and TEAM

Comments and Feedback:

● Direct and easy question
● Important keywords: SA 510, sufficient appropriate audit evidence, misstatements that materially
affect the current period’s financial statements, accounting policies, consistently applied, properly
accounted, presented and disclosed, applicable financial reporting framework.

Q6. The nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence regarding
opening balances depend upon some matters. Explain those matters.
(SELF)

The nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence regarding
opening balances depend on such matters as:
● The accounting policies followed by the entity.
● The nature of the account balances, classes of transactions and disclosures and the risks of
material misstatement in the current period’s financial statements.
● The significance of the opening balances relative to the current period’s financial statements.
● Whether the prior period’s financial statements were audited and, if so, whether the predecessor
auditor’s opinion was modified

Comments and Feedback:

● Direct and moderate question
● Important keywords are highlighted in the above answer.

Q7. In the case of inventories, the current period’s audit procedures on the closing inventory balance provide little
audit evidence regarding inventory on hand at the beginning of the period. Suggest some additional audit
procedures that may provide sufficient appropriate audit evidence to the auditor.
(SELF)

Additional audit procedures may be necessary, and one or more of the following may provide sufficient
appropriate audit evidence:
● Observing a current physical inventory count and reconciling it to the opening inventory quantities.
● Performing audit procedures on the valuation of the opening inventory items.
● Performing audit procedures on gross profit and cut-off.

Comments and Feedback:

● Direct and moderate question
● Important keywords: current physical inventory count, valuation of the opening inventory items, gross
profit and cut-off.

Q8. In an initial audit engagement the auditor will have to satisfy about the sufficiency and appropriateness of
‘Opening Balances' to ensure that they free from misstatements, which may materially affect the current
financial statements. Lay down the audit procedure, you will follow, when financial statements are audited for
the first time. If, after performing the procedure, you are not satisfied about the correctness of 'Opening
Balances', what approach you will adopt in drafting your audit report?
(CA Final)

Audit Procedure for ensuring correctness of Opening Balances: As per SA 510 “Initial Audit
Engagements-Opening Balances”, the auditor shall obtain sufficient appropriate audit evidence about
whether the opening balances contain misstatements that materially affect the current period’s financial
statements by -
i) Determining whether the prior period’s closing balances have been correctly brought forward to
the current period or, when appropriate, any adjustments have been disclosed as prior period items
in the current year’s Statement of Profit and Loss;
ii) Determining whether the opening balances reflect the application of appropriate accounting
policies; and

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iii) By evaluating whether audit procedures performed in the current period provide evidence relevant
to the opening balances; or performing specific audit procedures to obtain evidence regarding the
opening balances.

If the auditor obtains audit evidence that the opening balances contain misstatements that could materially
affect the current period’s financial statements, the auditor shall perform such additional audit procedures as
are appropriate in the circumstances to determine the effect on the current period’s financial statements. If the
auditor concludes that such misstatements exist in the current period’s financial statements, the auditor
shall communicate the misstatements with the appropriate level of management and those charged with
governance.

Approach for drafting Audit Report: If the auditor concludes that the opening balances contain a
misstatement that materially affects the current period’s financial statements and the effect of the
misstatement is not properly accounted for or not adequately presented or disclosed, the auditor shall
express a qualified opinion or an adverse opinion, as appropriate, in accordance with SA 705 and in case
where the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances,
the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA
705.

Comments and Feedback:

● Direct and moderate question
● Important keywords are highlighted in the above answer

Q9. CA. Jill, a recently qualified practicing Chartered Accountant got his first audit assignment of Natural (P) Ltd. for
the financial year 2021-22. He obtained all the relevant appropriate audit evidence for the items related to
Statement of Profit and Loss. However, while auditing the Balance Sheet items, CA. Jill left out obtaining
appropriate audit evidence, say, confirmations, from the outstanding Accounts Receivable amounting Rs. 190
lakhs, continued as it is from the last year, on the affirmation of the management that there is no receipts and
further credits during the year. CA. Jill, therefore, excluded from the audit programme, the audit of accounts
receivable on the understanding that it pertains to the preceding year which was already audited by
predecessor auditor. Comment.
(CA Final)

Verification of Accounts Receivable: As per SA 510 “Initial Audit Engagements – Opening Balances”, while
conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to
obtain sufficient appropriate audit evidence about whether-
I) Opening balances contain misstatements that materially affect the current period’s financial
statements; and
II) Appropriate accounting policies reflected in the opening balances have been consistently applied in
the current period’s financial statements, or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting
framework.

When the financial statements for the preceding period were audited by another auditor, the current auditor
may be able to obtain sufficient appropriate audit evidence regarding opening balances by perusing the
copies of the audited financial statements.

Ordinarily, the current auditor can place reliance on the closing balances contained in the financial
statements for the preceding period, except when during the performance of audit procedures for the
current period the possibility of misstatements in opening balances is indicated.

For current assets and liabilities, some audit evidence about opening balances may be obtained as part of the
current period’s audit procedures, say, the collection of opening accounts receivable during the current period
will provide some audit evidence of their existence, rights and obligations, completeness and valuation at the
beginning of the period.

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Question Bank - SA 510 Compiled by Neeraj Arora and TEAM

In addition, according to SA 580 “Written Representations”, the auditor may consider it necessary to request
management to provide written representations about specific assertions in the financial statements; in
particular, to support an understanding that the auditor has obtained from other audit evidence of
management’s judgment or intent in relation to, or the completeness of, a specific assertion. Although such
written representations provide necessary audit evidence, they do not provide sufficient appropriate audit
evidence on their own for that assertion.

In the given case, the management of Natural (P) Ltd. has restrained CA. Jill, its auditor, from obtaining
appropriate audit evidence for balances of Accounts Receivable outstanding as it is from the preceding year.
CA. Jill, on believing that the preceding year balances have already been audited and on the statement of the
management that there are no receipts and credits during the current year, therefore excluded the verification
of Accounts Receivable from his audit programme.

Thus, CA. Jill should have requested the management to provide written representation for their views and
expressions; and he should also not exclude the audit procedure of closing balances of Accounts
Receivable from his audit programme.

Comments and Feedback:

● Case study based and moderate question
● Important keywords are highlighted in the above answer

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