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[Music] what's up with fans dr. Amanda white here with another video in our audit standards explained series in this time I'm looking at is a is a 510 which is about opening balances and thank you to the person that noted to me that I hadn't actually included this particular standard in my series I must have somehow skipped it when I made them but opening balances are really important because let's say you have financial year 2018 2019 over here and what you end up reporting as your closing balances in 2018 2019 when we come to 2019 2020 then those closing balances will become our opening balances and there are certain rules and requirements to use or to examine here now you might be wondering why I have if you are not an Australian student why have these unusual two-year financial years well our financial year here in Australia goes from for most companies 1st of July through to the 30th of June now of course there are different some companies report from a March here and there always a lot of differences but when I talk in general financial year terms I assume most people are on this sort of pattern but the same process occurs regardless of what the financial year start and end date is so let's jump into the actual standard let's dig into the table of contents so these are always structured in the same way we've got our application so when does it apply due date an introduction which talks about why we're interested in the standard what the objective is the definition and then the requirements now one thing to remember is that I don't usually talk about the explanatory material you can go ahead and read that but that's usually things like example and more detailed explanations and the reason those are there is because the requirements are the parts that are legally enforceable all right so let's look at the introduction and the objective of this standard its conforming with our international standard 510 so if you're studying the ISAs overseas and this video is suitable for you too so what does this apply to well it applies to audits for the financial report or for audits of a half-year report and for Australia that started on January 1 2010 we're well into that period right now so this is what we have to do in regards to those opening balances on an initial or an engagement I'm going to underline that bit the initial orden engagement because really this is the first time that you do the audit all right now previously it may be that let's say for example you have audit firm a over here does the audit for four years and then they hand off to you or at firm B well in your first year you'll need to think about a sa 510 all right now when you get to your second year of the audit is a 510 doesn't necessarily apply all the third year because you're relying on opening balances that you actually audited so the closing balances from this audit firm will become the audit opening balances here and so the requirements here we need to check these opening balances so when we're looking at our standard it starts off as saying the objective is to obtain sufficient appropriate audit evidence about whether opening balances have any misstatements that could material affect the current period financial so that's sufficient and appropriate evidence that's come up before in a essay is a 500 will be talked about this need to collect a sufficient remember sufficient is enough an appropriate which means the correct type of evidence so we need to make sure those opening balances is there anything that could materially affect our report also have the accounting policies in the opening balances being consistently applied in the financial statements so if we think about depreciation and this is a new one for our audit and this is from the previous Auditor if in depreciation they use straight line but then here they used reducing balance we've got an issue because that accounting policy is not the same between these years and it needs to be the same or we want it to be the same because we want to be able to compare and if it's not the same then we need to make sure that any changes are appropriately accounted for and disclosed now that could happen so for example leases is a new standard you might have old lease reporting here new lease reporting here yes there's going to be some differences but they're explained by changes in regulation so I'm going to get into the definitions and this is important so that we understand what the terms that are being used are so initial audit engagement is when the financial report for the prior period was not audited or it was audited by a predecessor auditor so this one is when the client has had no previous audit so you are the very first auditor or this one there's an auditor who's done it before them now what are the prior are the opening balances opening balances that exist at the beginning of the period and they're based on the closing bounces of the last period like I drew in the initial diagram it also includes matters to split requiring disclosure like contingencies or commitments so we need to think about are there any disclosures that I need to consider that might come to fruition my financial period now who exactly is the predecessor Auditor well that's all disclosed down here the Auditor from a different order firm now what you have to be careful of here is it's not what if you have order partners who are from the same firm well that's not counted as a predecessor ordered up we have to have a different firm when they refer to the predecessor auditor AES a 5/10 wouldn't apply if it was audit partners from the same firm switching over to each other so now let's start on the requirements and remember the requirements other bits that are legally enforceable these are the bits that we have to follow within our audit so the requirements start off with a nice and easy component which says read the most recent financial report and the predecessors audit report for any information about opening balances including disclosures then what I have to do is get sufficient appropriate evidence about whether the opening balances contain any misstatements that could materially affect the financial report now how will you know whether there are any material misstatements or missed statements from the previous audit all right because you've got from order to a over there and you've got order to be over here we need to is order to be go back and somehow check this work so what we have down here are some actual instructions so have the prior periods closing balances being correctly for brought forward so that's just checking the number if it was five hundred over here is it recorded correctly as five hundred over there then are the balances reflective of the appropriate accounting policies so like how depreciation does if this was depreciation at straight-line is it straight line is this straight line are they using the same method check all right so that's our second one now our third item is so where the prior financial period was audited we have to review the predecessor auditors working papers so we make a request to talk to this auditor and look at all of their documentation from the audit now remember that could be paper documents or it could be documents on some sort of computer or database and we're looking to see whether this audit work seems to support these balances so we're looking at the auditors files so here we're looking at the previous audit files and saying well did they use the right procedures and was the evidence correct to confirm those balances then the ordinate might need to do some specific procedures to get evidence about the opening balances now that specific procedures for example if we're auditing infantry might be their requirement to go and observe the stocktake to make sure that you can confirm that opening balance if it's transactions or it's electronic information then it might not be so necessary to do a specific procedure but if it's something like inventory or probably playing equipment you might need to be there to check it out so we look at the previous clients work and we ask ourselves have they done a quality audit have they determined gathered evidence that supports their opinion well if they have that's fine that's great but if the auditor obtains evidence that there are missed statements then I have to do additional audit procedures to find out well what is the effect and when it says determine the effect you're trying to figure out well what is the dollar value of this are there any disclosures that are required and if there are then what I need to do is I need to talk with management about those potential issues because what we might have found is that the prior auditor failed to detect something and if that's the case then there is the entirely possible option that they may have provided a wrong opinion and we need to consider whether we need to talk to a succour other people about that so while we're going off and we're checking all these files I have to also make sure that I get sufficient appropriate evidence about the accounting policies and have they been consistently applied in the periods financial report so that's like our straight-line depreciation has that been done for the whole year or have they had any change in that now sometimes you might find that the previous auditor modify the audit opinion so they gave a qualified and adverse or a disclaimer well I have to say what will that have as an impact on this financial period does it need to result in a qualification or a modification this time what were the circumstances so we want to find out what was the issue alright has it been rectified now if it was because management refused to adjust sales and they refused to adjust sales this year then we could have an issue it could be a potential flag for potential misstatements and there's a possibility that you increase your inherent risk as a result of this so you've done all your testing and what do you do afterwards well if I can't obtain sufficient appropriate evidence about opening balances so let's say the client was never audited before if they've never been audited then it's very difficult to get sufficient appropriate evidence on opening balances and as a result what you need to consider is a qualified or disclaimer of opinion now the one that I see most often when opening balances can't be verified is qualified because then often the rest of the financial year can still be verified but there is the option for a disclaimer now it does say here reference paragraph 8 here is from a sa 705 paragraph a 8 in their explanatory material which says essentially I can't get sufficient appropriate evidence because I can't confirm those opening balances well that's beyond the control of the entity if they've never had an order before it could be related to the nature or the timing of the auditors work so if I start the audit after the end of the financial year then I'm never going to be able to do something like check the existence of inventory in which case I might need to go buy qualified or the very last one is a limitation imposed by management so that might be that management might refuse you access to evidence in that instance if the limitation is significant again you could go with a qualified opinion or you could go with the disclaimer depending on whether the issue is pervasive and you can check out my video on a si 705 for more information about that pervasiveness so what happens if opening balances are correct alright I think they're fine but there's inconsistent accounting policies well then I have to consider again a qualified or an adverse opinion depending on the severity and whether it's pervasive or not now what happens if in the predecessor the previous audit they had a modification so they had a qualification a disclaimer or an adverse if it is still relevant and material then I should also essentially replicate the modifications okay so if you had in the previous auditor a qualified and then in the current period the issue didn't go away then you give a qualified again plus any additional issues so you want to find more misstatements or anything else you might need to change this slightly if it becomes more severe you might need to go to adverse but you need to at least have that base as the minimum so that's it for a si 510 remember this only applies to the first time that you do the audit okay if you have any questions about this then please feel free to drop them in the comments click to subscribe if you haven't already and I will see you in the next video thanks for watching bye [Music] you [Music]