ISA 510: Initial Audit Engagements: Opening Balances: Complete Guide

What is ISA 510?

ISA 510, titled “Initial Audit Engagements: Opening Balances,” addresses a challenge unique to first-year audits: the auditor has no first-hand knowledge of whether last year’s closing balances (which become this year’s opening balances) are correct. Unlike a continuing engagement where the auditor can rely on prior-year (PY) work, the initial engagement starts with an evidence gap. This is the area where juniors are told to just roll it forward and nobody goes back to check.

This matters because opening balances directly affect the current period. Beginning inventory flows into cost of sales. Opening retained earnings carry forward the cumulative effect of all prior-period transactions. Opening provisions and accruals reverse in the current period. If the opening balances are wrong, the current-period financial statements are wrong, even if every current-year transaction is correctly recorded.

When does ISA 510 apply?

ISA 510 applies in two situations:

In the first scenario, the prior period was audited by a predecessor auditor. The entity has changed auditors and the PY financial statements carry an audit opinion from another firm. The incoming auditor must obtain evidence about opening balances without having performed the PY audit.

In the second scenario, the prior period was not audited at all. The entity is being audited for the first time, perhaps because it has grown beyond the audit exemption threshold, has obtained financing that requires an audit, or has been newly incorporated. The PY figures have never been examined by an auditor.

The auditor’s objectives

ISA 510.3 states the objectives:

(a) Obtain sufficient appropriate audit evidence about whether opening balances contain misstatements that materially affect the current period’s financial statements.

(b) Determine whether appropriate accounting policies reflected in the opening balances have been consistently applied in the current period, or whether changes are appropriately accounted for and adequately presented and disclosed.

Procedures for opening balances

Reading the prior-year financial statements

ISA 510.6 requires the auditor to 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.

Where a predecessor auditor exists

ISA 510.6(a) contemplates the incoming auditor considering whether the predecessor’s working papers provide evidence about the opening balances. The practical steps:

The incoming auditor cannot simply rely on the predecessor’s work. They must form their own conclusions. The predecessor’s working papers provide context and may reduce the extent of additional procedures needed, but they do not substitute for the incoming auditor’s own evidence.

Where the prior period was not audited

ISA 510.6(b) requires the auditor to obtain evidence about opening balances through other procedures:

• Reviewing the entity’s accounting records and other documentation relating to prior periods.
• Performing extended substantive procedures on current-period transactions that provide indirect evidence about opening balances (for example, collecting opening receivables during the current period confirms their existence, and clearing opening inventory through cost of sales confirms its approximate valuation).
• Physically verifying assets: inspecting fixed assets, counting inventory (if applicable to the opening period), and confirming bank balances.
• Reviewing subsequent events that may provide evidence about opening-balance items.

Accounting policy consistency

ISA 510.6(c) requires the auditor to evaluate whether accounting policies reflected in the opening balances are consistent with those applied in the current period, and whether any changes have been appropriately accounted for and disclosed under the applicable financial reporting framework.

If the entity has changed accounting policies between the prior and current period (e.g., adopted a new IFRS standard, changed depreciation method, changed revenue recognition policy), the auditor must evaluate whether the change and its disclosure comply with the framework and whether the comparative information has been appropriately restated where required.

Modification to the predecessor’s report

ISA 510.7 requires the auditor, if the predecessor’s report contained a modification, to evaluate the effect of the matter that gave rise to the modification when assessing the risks of material misstatement in the current period.

For example:

• If the predecessor issued a qualified opinion because they could not attend the physical inventory count, the incoming auditor must consider whether the opening inventory figure is reliable and what evidence is needed to support it.
• If the predecessor issued a going concern emphasis of matter, the incoming auditor must evaluate whether that concern persists and affects the current period.
• If the predecessor disclaimed an opinion due to scope limitations, the incoming auditor faces a significant evidence gap that may be very difficult to overcome.

Reporting implications

ISA 510.10–13 sets out the reporting consequences:

Unable to obtain sufficient evidence about opening balances

If the auditor cannot obtain sufficient appropriate audit evidence regarding opening balances:

• Express a qualified opinion on the financial statements (if the possible effects are material but not pervasive).
• Express a disclaimer of opinion (if the possible effects are material and pervasive, which is more likely for opening balance issues since they can affect the entire balance sheet and income statement).

Opening balances contain a material misstatement

If the auditor concludes that the opening balances contain a misstatement that materially affects the current period’s financial statements, and the misstatement is not appropriately accounted for or disclosed:

• Express a qualified opinion (if material but not pervasive).
• Express an adverse opinion (if material and pervasive).

Important nuance: balance sheet vs. income statement effects

ISA 510 recognises that the effect of opening balance misstatements may be confined to specific financial statements. A misstatement that affects the balance sheet position may not materially affect the income statement (or vice versa). In such cases, a qualification may apply to some statements but not others.

Worked example: opening balance procedures at Janssens Bouwmaterialen NV

Janssens Bouwmaterialen NV is a Belgian construction supplies distributor with €35M revenue, operating from two warehouses near Antwerp. The company changed auditors after a disagreement over fee increases. The predecessor firm issued an unmodified opinion on the prior year. Overall materiality for the current period is €350,000 (1% of revenue) and performance materiality is €262,500. The engagement team must obtain evidence about the opening balance sheet, where the largest items are inventory (€5.1M), trade receivables (€4.8M), property and equipment (€6.2M), and trade payables (€3.9M).

1. Contact the predecessor and review their working papers. The team writes to the predecessor (with client consent) requesting access to the prior-year working papers. The predecessor agrees to a file review at their office. The team reviews the predecessor’s work on inventory counting, receivables confirmations, fixed asset verification, and the summary of adjustments. The predecessor’s report was unmodified with no emphasis of matter. Documentation note: record the date of the file review, the sections reviewed, the predecessor’s firm name and regulatory standing, and your assessment of the quality and relevance of their work for ISA 510.6(a).
2. Evaluate opening receivables. The team examines the post-year-end cash receipts for the opening receivable balances. Of the €4.8M, €4.1M was collected in the first two months of the current year. For the remaining €700,000, the team reviews the underlying sales invoices, delivery notes, and customer contracts. One balance of €85,000 was written off in February as uncollectible. Documentation note: record the coverage achieved through subsequent receipts testing, the procedures for uncleared balances, and whether the €85,000 write-off indicates the opening provision was inadequate.
3. Verify opening inventory. The predecessor attended the prior-year inventory count, and their working papers include count sheets and a summary of differences. The team compares the predecessor’s count records to the opening inventory listing. For the current-year count (attended by the new team), the team performs a rollback: starting from the current count and working backwards through purchases and sales to reconstruct what the opening inventory should have been. The difference between the reconstructed figure and the recorded opening balance is €28,000. Documentation note: document the rollback calculation in detail, including the data sources (purchase records, dispatch records, current count sheets) and the conclusion that the €28,000 variance is below performance materiality.
4. Test opening property and equipment. The team inspects the physical existence of major assets, reviews ownership documents (purchase invoices, title deeds for the warehouse properties), and recalculates depreciation from acquisition to the opening date. No differences are found. Documentation note: list the assets inspected, the ownership evidence obtained, and the depreciation recalculation for each asset class. Note that the predecessor’s fixed asset register was agreed to the prior-year financial statements without exception.
5. Assess accounting policy consistency. The team compares the accounting policies disclosed in the prior-year financial statements to those applied in the current year. Janssens uses the weighted average cost method for inventory, straight-line depreciation for fixed assets, and recognises revenue on delivery. No policy changes occurred. Documentation note: record the comparison of each material accounting policy between periods and confirm no changes require disclosure under IAS 8.

The file should tell a story. A reviewer opening it sees evidence covering every material opening balance: predecessor working paper review, subsequent receipts analysis, inventory rollback, fixed asset verification, and policy consistency check. The team concluded that opening balances do not contain misstatements materially affecting the current period.

Practical checklist

1. Contact the predecessor in writing within the first week of planning. Get client consent first. Request access to working papers for all material balance sheet areas and the summary of adjustments. Do not wait until fieldwork to discover the predecessor won’t cooperate (ISA 510.6(a)).
2. Prioritise balance sheet items that flow through the income statement. Opening inventory affects cost of sales. Opening accruals reverse into current-year expenses. Opening receivable provisions affect bad debt expense. Focus your procedures on these items because errors in them misstate both the balance sheet and the income statement (ISA 510.3(a)).
3. Perform a rollback for inventory when you did not attend the prior-year count. Start from the current physical count, subtract current-year purchases, add current-year cost of sales, and reconcile to the opening balance. Document the data sources and the acceptable variance threshold (ISA 510.6(b)).
4. Evaluate the predecessor’s regulatory standing. Check whether the predecessor firm has any regulatory sanctions, enforcement actions, or inspection findings that might affect the reliability of their work. This is not a formality; it changes how much weight you place on their working papers (ISA 510.6(a)).
5. Document the reporting consequence upfront. If you cannot obtain sufficient evidence about a material opening balance, the consequence is a qualified opinion or disclaimer. Write this risk into the planning memo so the engagement partner and the client are aware before fieldwork starts (ISA 510.10-11).

Common mistakes

• Teams accept the predecessor’s opinion as evidence that opening balances are correct. The predecessor’s unmodified opinion tells you what the predecessor concluded; it does not tell you whether the opening balances are right. The FRC’s 2025 inspection findings noted that valuation and estimates remain the top finding area, and opening balance estimates inherited from a predecessor are a recurring source of those findings. The incoming auditor must form their own conclusion (ISA 510.6).
• Opening balance procedures get compressed into the last week of fieldwork. Nobody on the team actually believes the opening balance WP covers the risk. They just don’t want to reopen the file two weeks before sign-off. By that point, the predecessor’s office has closed for the season, subsequent receipts have been banked, and the team runs out of time to perform inventory rollbacks properly. The AFM has flagged insufficient rigour in opening balance procedures during first-year engagements, particularly where the predecessor’s cooperation was limited. Plan these procedures at the start of the engagement, not the end.
• The team tests opening receivables and inventory but ignores opening provisions and accruals. A misstated opening provision reverses into the current-year income statement and distorts current-year profit. The PCAOB’s 2024 inspection cycle found a 39% deficiency rate, with estimates (including inherited provisions) among the top areas. Every material opening balance needs evidence, not just the obvious ones.

Related content

• Audit evidence (glossary): what constitutes sufficient appropriate evidence under ISA 500, including the evidence hierarchy that applies to opening balance procedures.
• ISA 530 sampling calculator (tool): determine sample sizes for substantive testing of opening balances, particularly when selecting receivables for subsequent receipts testing.
• First-year audit engagement checklist (blog): a complete checklist for initial engagements, including the ISA 510 procedures covered in this guide alongside ISA 210 and ISA 300 requirements.

ISA 510 in your jurisdiction

Netherlands. COS 510 follows ISA 510 closely. The NBA provides guidance on communication between predecessor and successor auditors (collegiale toetsing principles). Dutch professional ethics require the predecessor to cooperate with legitimate inquiries from the incoming auditor. AFM inspections examine whether incoming auditors have performed adequate procedures on opening balances and whether the transition between auditors was properly managed.

Germany. IDW PS 510 adapts ISA 510. German practice includes specific protocols for the Prüferwechsel (change of auditor), including the requirement to communicate with the predecessor and the entity’s supervisory board. The WPK’s inspections focus on whether incoming auditors have obtained adequate evidence about opening balances, particularly for complex areas such as provisions and estimates.

United Kingdom. ISA (UK) 510 is substantively aligned with ISA 510. The FRC has published guidance on communication between predecessor and successor auditors. UK ethical standards require the predecessor to provide access to relevant information (subject to client consent). The FRC’s inspections focus on the quality of opening balance procedures in initial engagements.

France. NEP 510 implements ISA 510 within the French statutory framework. The French system of joint audit (co-commissariat aux comptes) for certain entities means that changes of one auditor while the other continues provide a partial continuity of evidence. For complete changes of auditor, the H3C expects thorough evidence-gathering procedures on opening balances.

Frequently asked questions

Can the auditor rely entirely on the predecessor’s work?

No. The incoming auditor must form their own conclusions. The predecessor’s working papers provide useful context and may reduce the extent of additional procedures, but the incoming auditor cannot delegate their responsibility for the current-year opinion by relying on someone else’s work. The extent to which the predecessor’s papers are used depends on the incoming auditor’s evaluation of the predecessor’s competence and the quality of their work.

What if the predecessor refuses to cooperate?

This is uncommon but can occur. If the predecessor refuses to provide access to working papers or to communicate, the incoming auditor must perform alternative procedures to obtain evidence about opening balances. The refusal itself may be relevant to the risk assessment. It could indicate unresolved issues from the prior engagement.

How much work is needed on opening balances?

This depends on the nature and materiality of the balances, whether the PY was audited, who audited it, and the assessed risks. From the files we’ve reviewed, current assets and liabilities (receivables, inventory, accruals) attract the most attention because they directly affect the current-period income statement. Non-current assets may require less work if the auditor can verify their current existence and condition and roll back to the opening position.

Does ISA 510 apply to recurring audits?

No. ISA 510 applies only to initial audit engagements, where the entity has either changed auditors or is being audited for the first time. In recurring engagements, the auditor already has evidence from the prior-year audit that supports the opening balances.

Further reading and source references

• IAASB Handbook 2024: ISA 510 full text (the authoritative source including all application material and illustrative auditor’s reports).
• ISA 300: Planning an Audit (additional requirements and guidance for initial engagements).
• ISA 710: Comparative Information, Corresponding Figures and Comparative Financial Statements (governs the treatment of comparatives, which is closely related to opening balance issues).
• ISA 705 (Revised): Modifications to the Opinion (governs the reporting consequences of opening balance issues).
• ISA 210: Agreeing the Terms of Audit Engagements (the engagement acceptance procedures relevant to initial engagements).

This guide reflects the ISA 510 text as published in the IAASB 2024 Handbook. National implementations may include additional requirements. Always consult the applicable national standard alongside the international text. This content is for educational purposes and does not constitute legal or professional advice.

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