HKSA 510 - Initial Audit Engagements

HKSA 510 - Initial Audit Engagements — Opening Balances

1. INTRODUCTION

1.1 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:

Important: When financial statements include comparative financial information, the requirements and guidance in HKSA 710 (Comparative Information—Corresponding Figures and Comparative Financial Statements) also apply. Additionally, HKSA 300 (Planning an Audit of Financial Statements) includes requirements and guidance regarding activities prior to starting an initial audit.

1.2 Effective Date

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

1.3 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:

(a) Opening balances contain misstatements that materially affect the current period's financial statements; and

(b) 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.

2. DEFINITIONS (Paragraph 4)

2.1 Initial Audit Engagement

An engagement in which either:

(i) The financial statements for the prior period were not audited; OR

(ii) The financial statements for the prior period were audited by a predecessor auditor.

2.2 Opening Balances

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

2.3 Predecessor Auditor

The auditor from a different audit firm who:

3. REQUIREMENTS — AUDIT PROCEDURES

3.1 Reading the Most Recent Financial Statements (Paragraph 5)

Requirement: 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.

3.2 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:

(a) Determining whether the prior period's closing balances have been:

(b) Determining whether the opening balances reflect the application of appropriate accounting policies

(c) Performing one or more of the following:

3.3 When Misstatements are Identified (Paragraph 7)

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:

This communication must be in accordance with HKSA 450 (Evaluation of Misstatements Identified during the Audit), paragraphs 8 and 12.

3.4 Consistency of Accounting Policies (Paragraph 8)

Requirement: The auditor shall obtain sufficient appropriate audit evidence about whether:

- The accounting policies reflected in the opening balances have been consistently applied in the current period's financial statements

- Changes in the accounting policies have been appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework

3.5 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) (Identifying and Assessing the Risks of Material Misstatement).

4. REQUIREMENTS — AUDIT CONCLUSIONS AND REPORTING

4.1 Inability to Obtain Sufficient Appropriate Audit Evidence (Paragraph 10)

If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall express a qualified opinion or disclaim an opinion on the financial statements, as appropriate, in accordance with HKSA 705 (Revised) (Modifications to the Opinion in the Independent Auditor's Report).

4.2 Misstatements in Opening Balances (Paragraph 11)

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 appropriately accounted for or not adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion, as appropriate, in accordance with HKSA 705 (Revised).

4.3 Inconsistency in Accounting Policies (Paragraph 12)

The auditor shall express a qualified opinion or an adverse opinion as appropriate in accordance with HKSA 705 (Revised) if the auditor concludes that:

(a) The current period's accounting policies are not consistently applied in relation to opening balances in accordance with the applicable financial reporting framework; OR

(b) A change in accounting policies is not appropriately accounted for or not adequately presented or disclosed in accordance with the applicable financial reporting framework

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

If the predecessor auditor's opinion regarding the prior period's financial statements included a modification to the auditor's opinion that remains relevant and material to the current period's financial statements, the auditor shall modify the auditor's opinion on the current period's financial statements in accordance with HKSA 705 (Revised) and HKSA 710.

5. APPLICATION AND OTHER EXPLANATORY MATERIAL

5.1 Considerations Specific to 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. For example:

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, depending on the nature of the outsourcing arrangement, the engagement may be considered an initial audit engagement from the perspective of the private sector auditor.

5.2 Factors Affecting Audit Procedures for Opening Balances (A3)

The nature and extent of audit procedures necessary depend on:

5.3 Reviewing Predecessor Auditor's Working Papers (A4)

If the prior period's financial statements were audited by a predecessor auditor, the auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by reviewing the predecessor auditor's working papers.

Whether such a review provides sufficient appropriate audit evidence is influenced by:

5.4 Communications with Predecessor Auditor (A5)

Relevant ethical and professional requirements guide the current auditor's communications with the predecessor auditor.

5.5 Audit Evidence for Current Assets and Liabilities (A6)

Current Assets and Liabilities:

Some audit evidence about opening balances may be obtained as part of the current period's audit procedures. For example:

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. Therefore, additional audit procedures may be necessary, such as:

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

For non-current assets and liabilities (e.g., property, plant and equipment, investments, long-term debt):

5.7 Audit Conclusions and Reporting — Opening Balances (A8)

HKSA 705 (Revised) establishes requirements and provides guidance on:

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

(a) A qualified opinion or a disclaimer of opinion, as appropriate; OR

(b) Unless prohibited by law or regulation, an opinion which is:

Note: This form of opinion (qualified/disclaimed on performance and cash flows, unmodified on financial position) is permitted in Hong Kong.

5.8 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:

6. APPENDIX — ILLUSTRATIVE AUDITOR'S REPORTS

6.1 Illustration 1: Qualified Opinion (Both Performance and Position)

Assumptions:

Key Elements of the Report:

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

Assumptions:

Key Elements of the Report:

7. KEY TAKEAWAYS SUMMARY

8. CONFORMITY WITH INTERNATIONAL STANDARDS

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

---