Opening balances on a first-year audit
The ISA 510 procedures on opening balances in a first-year audit or after a change of auditor, including when the predecessor's papers are not available.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A new audit client is good news until the planning meeting, when someone asks how the team will get comfortable with the opening balances. The previous auditor retired and closed the practice. Or last year's statements were only compiled, because the company has just crossed the audit threshold. Or the predecessor will let you see the file, but only for an afternoon in their office. In each case, this year's opinion depends on numbers your firm did not audit.
ISA 510 deals with exactly this. The auditor of an initial engagement must obtain sufficient appropriate evidence about whether the opening balances contain misstatements that materially affect the current period, and whether the accounting policies behind them have been applied consistently.
Why opening balances matter to this year's opinion
Opening balances are not just last year's problem. They feed this year's figures directly:
- opening inventory is part of this year's cost of sales;
- opening receivables and payables affect this year's revenue and expenses through cut-off;
- opening property, plant and equipment drives this year's depreciation;
- opening retained earnings carry any error forward into this year's equity.
A misstatement in the opening balances can therefore misstate this year's profit, even if every transaction this year was recorded correctly. That is why the auditor's work cannot stop at the closing balance.
Reviewing the predecessor's working papers
ISA 510 requires the auditor to read the most recent financial statements, and the predecessor's report on them, for information relevant to the opening balances. It then requires the auditor to determine whether the prior period's closing balances have been correctly brought forward, or restated where appropriate, and whether the opening balances reflect appropriate accounting policies.
Where the prior year was audited, one way to obtain evidence is to review the predecessor auditor's working papers. Access depends on the client's permission and the predecessor's agreement, and is usually arranged as part of professional clearance before acceptance; see the professional clearance letter. The review should focus on the areas that matter most to the current year: the inventory count and valuation, significant estimates, the predecessor's materiality and any matters the predecessor raised but did not resolve.
Reliance on the predecessor's work is a judgement. Consider the predecessor's competence and independence, and whether the papers actually show evidence for the balances you are relying on.
Achekam has no managed handover pack between an outgoing and an incoming accounting firm. A business changes accountant by ending one appointment and inviting the new firm, so the predecessor's papers, and any access to them, are arranged directly between the firms and the client.
Procedures when that is not possible
When the prior year was not audited, or the predecessor's papers are unavailable or not adequate, ISA 510 points to two other sources of evidence:
- Current-period procedures that also cover the opening position. Receipts from opening receivables and payments to opening payables in the new year provide evidence about their existence and amount.
- Specific procedures on the opening balances. Examine the accounting records behind them, confirm long-term balances such as loans with third parties, and inspect title documents for property.
Inventory is the hard case, because current-period procedures say little about the opening quantity. Options include observing the current year's count and reconciling back to opening quantities through the year's purchases and sales, testing the valuation of opening items, and performing gross profit and cut-off tests on the early months.
Request what you need from the client early. Through the RFI console, staff create, send and track requests for documents, answers and confirmations: the prior-year statements and trial balance, the fixed asset register, loan agreements, the predecessor's contact details and, where relevant, the client's written permission for the predecessor to give access.
Agreeing opening balances to approved comparatives
The opening balances in the ledger, the comparatives in the statements and last year's signed statements must agree, or the differences must be explained.
In Achekam, staff can upload last year's financial statements as a PDF, and Achekam reads them into figures that a person reviews and approves for use as comparatives; AI, where available, fills in details such as the entity name, never numbers. Comparatives can also come from a person's typed figures or a prior-year set a person reviews. For an initial audit, reading the comparatives from the signed prior-year PDF has an advantage: the source is the document users actually received, and a person's approval is on record.
Then agree the opening trial balance to those comparatives line by line, and investigate differences: a reclassification may be fine; an unexplained difference in opening equity is not. The auditor's responsibilities for the comparatives themselves are covered in the auditor and comparative figures.
On the opening balances work item, a step is marked done only with a written response and its documents, or set aside with a reason, and steps are never deleted. Record which route the evidence came from for each material balance: the predecessor's papers, current-period procedures or specific procedures.
Effects on the report
If the auditor cannot obtain sufficient appropriate evidence about the opening balances, ISA 510 requires a qualified opinion or a disclaimer, as ISA 705 directs. Where law allows, the auditor may qualify the opinion on the results of operations and cash flows while giving an unmodified opinion on the financial position, since the closing balances themselves are evidenced.
If the opening balances contain a misstatement that materially affects the current period and is not properly dealt with, or accounting policies have not been applied consistently, the opinion is qualified or adverse. If the predecessor's opinion was modified and the matter is still relevant and material, the current opinion is modified too.
A worked example in words: a company audited for the first time after crossing the threshold had compiled statements last year. Nobody counted inventory at the last year end. The team attends this year's count, rolls back through purchases and sales, and finds the reconstruction unreliable because of poor records. The effect is confined to cost of sales and is material but not pervasive, so the opinion is qualified on the results and cash flows, and the basis paragraph explains why.
The full text of ISA 510, and the related ISA 705 and ISA 710, is in the IAASB's 2026 Handbook, the download page for the complete auditing standards.
Before accepting the next new client
Ask, at the proposal stage, whether last year's inventory was counted and by whom. That one answer tells you whether an unmodified opinion on the first year is realistic, before the client has signed anything.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
