HKSA 510 - Initial Audit Engagements (Condensed)

Introduction & Scope

Scope of HKSA 510

HKSA 510 deals with the auditor's responsibilities relating to opening balances in an initial audit engagement. The scope extends beyond financial statement amounts to include matters requiring disclosure that existed at the beginning of the period, such as:

• Contingencies
• Commitments

Effective Date

This HKSA is effective for audits of financial statements for periods beginning on or after 15 December 2009.

Objective (Paragraph 3)

In conducting an initial audit engagement, the auditor's objective with respect to opening balances is to obtain sufficient appropriate audit evidence about whether:

1. Opening balances contain misstatements that materially affect the current period's financial statements; and
2. Appropriate accounting policies reflected in the opening balances have been consistently applied in the current period's financial statements, or changes thereto are appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

Definitions

Initial Audit Engagement

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.

Opening Balances

Those account balances that exist at the beginning of the period. Opening balances:

• Are based upon the closing balances of the prior period
• Reflect the effects of transactions and events of prior periods
• Reflect accounting policies applied in the prior period
• Also include matters requiring disclosure that existed at the beginning of the period (e.g., contingencies and commitments)

Predecessor Auditor

The auditor from a different audit firm who:

• Audited the financial statements of an entity in the prior period
• Has been replaced by the current auditor

Audit Procedures

Reading the Most Recent Financial Statements (Paragraph 5)

Audit Evidence Regarding Opening Balances (Paragraph 6)

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:

1. Determining whether the prior period's closing balances have been correctly brought forward or restated
2. Determining whether the opening balances reflect the application of appropriate accounting policies
3. Performing one or more of the following:

When Misstatements are Identified (Paragraph 7)

Consistency of Accounting Policies (Paragraph 8)

Relevant Information in the Predecessor Auditor's Report (Paragraph 9)

If the prior period's financial statements were audited by a predecessor auditor and there was a modification to the opinion, the auditor shall evaluate the effect of the matter giving rise to the modification in assessing the risks of material misstatement in the current period's financial statements in accordance with HKSA 315 (Revised 2019).

Audit Conclusions and Reporting

Inability to Obtain Sufficient Appropriate Audit Evidence (Paragraph 10)

Misstatements in Opening Balances (Paragraph 11)

Inconsistency in Accounting Policies (Paragraph 12)

The auditor shall express a qualified opinion or an adverse opinion as appropriate if the auditor concludes that:

• The current period's accounting policies are not consistently applied in relation to opening balances; OR
• A change in accounting policies is not appropriately accounted for or not adequately presented or disclosed

Modification to the Opinion in the Predecessor Auditor's Report (Paragraph 13)

Application and Explanatory Material (A1-A9)

Application and Explanatory Material

Public Sector Entities (A1-A2)

A1 - Legal or Regulatory Limitations: In the public sector, there may be legal or regulatory limitations on the information that the current auditor can obtain from a predecessor auditor. If sufficient appropriate audit evidence cannot be obtained, consideration must be given to the effect on the auditor's opinion.

A2 - Outsourcing Arrangements: If the statutorily appointed auditor outsources an audit to a private sector audit firm, and appoints a different firm than the one that audited the prior period, this is not usually regarded as a change in auditors for the statutorily appointed auditor. However, the engagement may be considered an initial audit engagement from the perspective of the private sector auditor.

Factors Affecting Audit Procedures (A3)

Reviewing Predecessor Auditor's Working Papers (A4)

Whether such a review provides sufficient appropriate audit evidence is influenced by the professional competence and independence of the predecessor auditor.

Audit Evidence for Current Assets and Liabilities (A6)

Some audit evidence about opening balances may be obtained as part of the current period's audit procedures. For example, the collection of opening accounts receivable during the current period provides audit evidence of their existence, rights and obligations, completeness and valuation at the beginning of the period.

Inventories - Special Consideration: 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. Additional audit procedures may be necessary, such as:

• 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 cutoff

Audit Evidence for Non-Current Assets and Liabilities (A7)

For non-current assets and liabilities, some audit evidence may be obtained by examining the accounting records and other information underlying the opening balances, or through confirmation with third parties (e.g., for long-term debt and investments).

Audit Conclusions and Reporting (A8)

The inability to obtain sufficient appropriate audit evidence regarding opening balances may result in:

• A qualified opinion or a disclaimer of opinion, as appropriate; OR
• Unless prohibited by law or regulation, an opinion which is qualified or disclaimed regarding the results of operations and cash flows and unmodified regarding financial position. This form of opinion is permitted in Hong Kong.

Modification to the Opinion in the Predecessor Auditor's Report (A9)

In some situations, a modification to the predecessor auditor's opinion may not be relevant and material to the opinion on the current period's financial statements. This may be the case where, for example, the matter giving rise to the scope limitation has been resolved in the current period.

Illustrative Auditor's Reports (Appendix)

Illustrative Auditor's Reports

Illustration 1: Qualified Opinion (Both Performance and Position)

Assumptions:

• Audit of a complete set of financial statements of a non-listed entity using HKFRSs
• Auditor did not observe the counting of physical inventory at the beginning of the current period
• Unable to obtain sufficient appropriate audit evidence regarding opening balances of inventory
• Possible effects are material but not pervasive to financial performance and cash flows
• Financial position at year end is fairly presented
• Law and regulation prohibit the auditor from giving a split opinion

Key Elements of the Report:

1. Qualified Opinion — 'except for the possible effects of the matter described in the Basis for Qualified Opinion section'
2. Basis for Qualified Opinion — Explains the inability to observe inventory count and the resulting scope limitation
3. Other Matter — References the predecessor auditor's report on prior period financial statements

Illustration 2: Qualified Opinion on Performance and Cash Flows, Unmodified on Financial Position

Assumptions:

• Same basic facts as Illustration 1
• An opinion that is qualified regarding financial performance and cash flows and unmodified regarding financial position is considered appropriate
• This form of opinion is permitted in Hong Kong

Key Elements of the Report:

1. Qualified Opinion on the Financial Performance and Cash Flows — 'except for the possible effects of the matter described in the Basis for Qualified Opinion section'
2. Opinion on the Financial Position — Unmodified opinion
3. Basis for Opinions, Including Basis for Qualified Opinion on the Financial Performance and Cash Flows — Explains the scope limitation
4. Other Matter — References predecessor auditor
5. Report on Other Matters under sections 407(2) and 407(3) of the Companies Ordinance — Addresses inability to determine whether adequate accounting records had been kept and failure to obtain all necessary information

Key Takeaways Summary

Key Takeaways Summary

Conformity with International Standards

As of January 2024, this HKSA conforms with International Standard on Auditing (ISA) 510, Initial Audit Engagements—Opening Balances.