Objective of ISA 510
In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether:
a) Opening balance contain misstatements that materially affect the current period’s financial statements; and
b) Prior period closing balances have been correctly brought forward or, where appropriate, restated; and
c) 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.
Audit Procedures with regard to Opening Balances – ISA 510 (5-9)
The auditor shall read the most recent financial statements, if any, and the predecessor auditor report thereon, if any, for information relevant to opening balances, including disclosures
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:

• Determining whether the prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, have been restated;
• Determining whether the opening balances reflect the application of appropriate accounting policies.
• Where the prior year financial statement were audited, reviewing the predecessor auditor’s working papers to obtain evidence regarding the opening balances;
• Evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances; or
• Performing specific audit procedures to obtain evidence regarding the opening balances.
• If the auditor obtain 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 the appropriate level of management and those charged with governance.
• Relevant Information in the predecessor Auditor’s Report
  If the prior period’s financial statement 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 risk of material misstatement in the current period’s financial statements in accordance with ISA 315 (Assessing risk of misstatement)

a. That the entity use acceptable accounting policies for suitability, consistency and correct application.
b. Review of the classification, description and adequate disclosure of items in the financial statements
c. Review of the view given by the financial statements whether it is in accordance with the auditor’s knowledge of the economic circumstances of the business
d. Review of the financial statements to ensure that the view given thereof will accord with any conclusions to be drawn by reasonable users of the financial statements
e. Review of post balance sheet events and contingencies to ensure proper reflection of adjusting events and crystallized contingencies and disclosure of material non-adjusting events and possible contingent liabilities
f. Review of the financial statement for going concern applicability
g. Review of the financial statement for compliance with accounting standards
h. Review of the financial statement for compliance with statutory requirements
i. Final analytical review to ensure that the financial statement as a whole make sense
j. Review of the director’s report to ensure that it is consistent with the financial information
k. Review to ensure that issues relating to scope limitations or disagreements have been properly addressed.

A Contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably estimated. Contingent liability refers to a liability which will crystallized or occurs on the happening of a particular events. For e.g. pending legal cost.

• Review the client’s system for recording claims and disputes and the procedures for bringing these to the attention of the Board.
• Review the arrangements for instructing solicitors.
• Examine the minutes of the Board on this issues
• Examine bills rendered by solicitors
• Obtain a list of matters referred to solicitors from a director.
• Obtain a written assurance from the appropriate directors that they are not aware of any matter referred to solicitors other than those disclosed.
• If the auditor is at all in doubt he should obtain a direct confirmation from the company’s legal adviser.

• Materiality
  Material items will require more evidence to support them than immaterial items, which might be tested by comparative analytical review only.
• Risk
  The sufficiency of audit evidence required is affected by the level of risk in the area being audited.
• Source and quality of evidence
  If the evidence is high quality, then less may be required than if it were of poorer quality. In general, audit evidence from external third parties is more reliable than that from the client’s record because it is independent. Similarly evidence generated by the auditor is more reliable than that from the client. Original documents are more reliable than copies which can be tampered with.
• Internal control system
  Evidence obtained from the client’s records is more reliable when the related control system is operating effectively (as tested by the auditor).

Factors to consider when assessing the reliance that can be placed on the results of analytical procedures.
(1) Materiality of the items involved
If inventory balances are material, then auditors should not rely solely on analytical procedures.
(2) Other audit procedures
In the audit of receivables, other audit procedures such as the review of subsequent cash receipts may confirm or dispel questions arising from the application of analytical procedures to an aged profile of customers’ accounts.
(3) Accuracy of predictions
Auditors would expect greater consistency in comparing the relationship between gross profit and sales from one period to the next than in comparing discretionary expenses such as research costs or advertising expenditure.
(4) Frequency with which relationship is observed
A pattern repeated monthly as opposed to annually (for example, payroll costs).
(5) Assessments of inherent and control risks
If internal controls over sales order processing are weak, and control risk is assessed as high, the auditors may rely more on test of individual transactions or balances than on analytical procedures.
                                                                                                                                                                                     (Any 3 points)

The file of copy credit sales invoices is the most pertinent evidence which the auditor can obtain of the credit sales figure in the accounts. This is because the sales figure is built up from the individual sales which the copy sales invoices represent.
The auditor’s assessment of its validity as evidence will however depend upon the degree to which it is supported by other evidence. It is a general rule that documents created within the organization, such as the copy invoices, form weak audit evidence.
The auditor may for example assess the internal controls designed to ensure the completeness, accuracy and validity of sales invoices in the file or seek evidence from outside the organization such as customers’ remittance advices.

The most pertinent evidence which the auditor could seek would be stock returned and credit notes issued after the year end in relation to the garments in the hands of customers at the year end. However, because of the tight deadline for the audit the auditor will have to rely on calculations of expected returns based on previous experience. In order to accept the validity of this evidence the auditor would check the calculations and confirm that they were made on reasonable assumptions about trends in the numbers of dresses accepted by customers and any problematical styles.

When considering the acceptability of a certificate from a third party as audit evidence the auditor would be influenced by the following.
1) the fact that the evidence is documentary;
2) the fact that it has come from a third party, particularly if it has been sent directly to the auditor by the third party;
3) the integrity of the third party implied by his status or by his membership of a profession. For example an auditor would place more reliance on a statement from a bank manager than one from a member of the general public;
4) the qualification of the third party relating to the subject on which he certifies;
5) the independence of the third party from the client;
6) any unusual disclaimer made in the certificate;
7) the extent to which the certificate is supported by other evidence.

1) the controls operating over the costing records;
2) documents such as purchase invoices supporting material individual entries in the costing record for the office;
3) the calculation of overheads included in the cost of the office, which must not include any element of profit;
4) an independent valuer’s opinion may be obtained if other evidence is not sufficiently reliable;
5) the amount for which the building is insured;
6) confirmation of cost and method of costing in the letter of representation.

(1) Internal Control
In a large company audit it will normally be possible to rely extensively upon internal controls as a sophisticated internal control system will exist. On the other hand a small company will not need such a complex system so the auditor will not be able to obtain evidence from the operation of internal controls.
(2) Substantive testing
Large companies will have a very large number of transactions, so it will not be practicable to rely entirely on substantive tests. A small company will, however have a small number of transactions and the auditor will be able to rely on the evidence of substantive tests.
(3) Involvement of directors
The directors of a large company will not be involved in the detail of the operation. Therefore in order to assess the reliability of any representations they make the auditor must assess the reliability of the reports they receive from the managers.
In a small company the directors will be involved in the day to day running of their company, so their representation will be based on a detailed knowledge and understanding. It may also be possible to rely to some extent on the supervision they exercise over the company’s accounting. An assessment of evidence from the directors of a small company will therefore depend among other things upon an assessment of their integrity, and on supporting evidence from other sources.

Observe the inventory count in order to determine whether the inventory exists. Enquire of management whether any inventory is held for third parties.
Obtain a copy of the completed inventory sheets. Select a sample of items and physically verify that the products listed on the inventory sheets are in the warehouse.
For the raw materials delivered on the day of the count, discuss with management whether these goods relate to the year being audited, or whether they are to be included in the post year end period. Trace these items through to the final inventory figures to ensure they have been recorded in the correct accounting period.

For a sample of product lines in the warehouse, verify that they have been included on the inventory sheets and that the quantity is accurately recorded.
Perform a sequence check of all inventory sheets to ensure that they have all been resumed to the warehouse manager at the end of the inventory count, so that all product lines are included in the year-end inventory quantity.
Enquire of management whether there are any items of inventory held off site which have not been included in the inventory sheets.

For a sample of finished goods sold post year end, compare the sales price to the current price list or catalogue in order to check items are being sold at a price which is greater than the item’s cost.
For a sample of items classified as work in progress at the year end, ask management how they have determined the percentage completion at the year end. Recalculate the costs incurred to date. Compare this to the future selling price of the completed item less the costs to complete in order to determine the net realisable value of the item. Trace through the final valuation of the item to the financial statements.
Review the inventory movement records to identify any particularly slow moving inventory lines. Discuss the saleability of these items with management and enquire whether any provision has been made in order to write the item down to its net realisable value (also check whether damaged inventory identified by Cermaicz Company during the count has been written down to its net realisable value).