Opening balances: test what a successor audit establishes
A reliable closing balance does not automatically resolve an uncertain opening balance. The opening amount can flow through current-year profit even when the ending asset is supported. A useful successor-audit worksheet follows that flow and identifies which evidence addresses each starting balance.
This guide concerns a PCAOB issuer audit and AS 2610 as displayed on October 25, 2026. The incoming auditor is auditing the current year after a change of firms. A separate engagement to reaudit an earlier period is a different task. All balances and procedures described in the examples are hypothetical.
Establish responsibility for the opening evidence
AS 2610 .11–.13 addresses access to predecessor working papers, evidence relevant to opening balances and consistency, and the successor’s own responsibility for its procedures and conclusions.
Prior audited statements, inquiries, relevant predecessor papers and current-year work can all inform the analysis. Reviewing those papers does not transfer the predecessor’s opinion to the successor or make the predecessor responsible for the new opinion.
Access also needs the relevant authorization and scope. The predecessor determines which papers are made available or copied under the described process. An investor cannot assume that a firm change makes the old file public or that the successor automatically received every document.
Record the reporting period, opening date, predecessor report and exact balances being evaluated. The evidence needed for current-year opening effects is not identical to issuing a fresh opinion on all prior-year statements.
Work an inventory flow into cost of sales
All monetary amounts are hypothetical thousands. Assume no production conversion, foreign exchange, purchase returns, tax or other inventory changes. Reported opening inventory is 40, current-year purchases are 120, and ending inventory is 50. Assume purchases and the monetary ending balance have appropriate evidence for the simplified calculation; a physical count alone would not establish every valuation assertion.
Reported cost of sales = 40 + 120 − 50 = 110.
Now assume investigation establishes that opening inventory was overstated by 8, so the correct opening amount was 32. The appropriate current-year cost under those facts is:
Corrected cost of sales = 32 + 120 − 50 = 102.
| Item | Recorded basis | Corrected basis | Difference |
|---|---|---|---|
| Opening inventory | 40 | 32 | 8 |
| Purchases | 120 | 120 | 0 |
| Ending inventory | 50 | 50 | 0 |
| Cost of sales | 110 | 102 | 8 |
Current-year cost of sales is overstated by 8 and profit is understated by 8 before tax, under the stated assumptions. Sufficient evidence about ending inventory of 50 does not erase that opening effect.
If sales are 150, reported gross profit is 40 and corrected gross profit is 48. The corresponding gross margins are about 26.67% and 32%. The same supported year-end inventory can coexist with a materially different current-year earnings measure; no conclusion about materiality follows from these fictional numbers alone.
Keep opening equity and current earnings distinct
Suppose the original opening overstatement also overstated prior closing retained earnings by 8. When that error fully flows through current cost of sales, it understates current profit by 8. Under the simplified assumptions, those two effects can offset in closing retained earnings.
That does not make the error harmless. The opening balance and current-period performance remain misstated even if a final equity total happens to agree. A researcher looking only at the last balance sheet would miss the income-statement distortion.
Create separate columns for prior-period effect, current-year flow and closing balance effect. Do not count the opening 8 and current earnings 8 as two unrelated new errors totaling 16. They are linked manifestations of the same assumed origin.
The example shows propagation, not a complete restatement presentation. The applicable financial reporting framework and facts determine correction, comparative information and disclosure. A successor cannot resolve accounting presentation merely by making the final equity column net to zero.
Map evidence to each assertion
An incoming auditor could evaluate prior count records, relevant predecessor work and appropriate transaction testing. Current physical evidence and tested intervening movements can also matter in appropriate circumstances. A later count, however, does not directly observe the earlier date.
The problem might involve quantity, cost, ownership or a prior cutoff. Identify which one before choosing procedures. A current count is particularly weak as a substitute for a missing historical cost basis or an ownership agreement.
For a different balance, assume opening receivables of 25 and later cash receipts of 15 traced to the specific opening invoices with reliable support. That evidence can address relevant existence or collection questions for those items. It does not automatically establish that the original sale was recognized in the correct period.
The remaining receivables of 10 are not automatically bad debts. They require their own evidence. A method suitable for opening receivables also does not mechanically establish opening inventory, long-lived asset costs or contingent obligations.
Do not turn current work into a prior-period reaudit
AS 2610 .14–.20 separately discusses a reaudit of previously audited statements. Information from predecessor inquiries and files can help plan it, but does not alone provide a basis for a new opinion. The successor performing the reaudit remains responsible for that work.
For inventory in a reaudit, the standard discusses later physical counts together with appropriate intervening-transaction work and other relevant procedures. These are evidence requirements, not a guarantee that any old balance can always be reconstructed.
If a later count is 50, it cannot be treated as proof that opening inventory was 40 simply because 40 appeared in last year’s signed financial statements. The bridge needs actual supported movements and the relevant valuation and rights evidence.
Conversely, a new auditor’s current-year report does not automatically mean it reaudited the prior year. Read the report’s periods, reference language and any separate reports. Appointment date alone cannot identify the scope of all work performed.
Address possible prior misstatements without inventing public facts
If current work reveals information suggesting that prior statements may require revision, AS 2610 .21–.22 describes communication involving the client and predecessor and consideration of unresolved matters.
For public research, a disclosed discussion or amended statement is evidence of that specific event. An absence of public correspondence does not prove no discussion occurred. Do not infer a disagreement, refusal or withdrawal solely because opening evidence is described as difficult.
Equally, predecessor access does not prove every opening balance was resolved. Record the particular evidence obtained and any remaining limitations. The opinion’s actual scope and wording must be read; it is not determined by the worksheet’s arithmetic alone.
Execute an opening-balance matrix
| Balance | Current-year link | Potential evidence | Limit to retain |
|---|---|---|---|
| Inventory | Cost of sales and gross profit | Prior count records, tested movements, costs and rights | Closing count alone insufficient |
| Receivables | Collection and credit loss | Matched receipts, contracts and opening invoice evidence | Receipt does not prove original cutoff |
| Long-lived assets | Depreciation and impairment | Historical cost, additions, disposals and current evidence | Physical existence does not establish original basis |
| Obligations | Current expense or settlement | Contracts, payments and relevant prior records | Payment alone may not prove completeness |
| Accounting policies | Comparability across periods | Policies and actual application | Same wording does not prove consistent execution |
Public filings may identify auditor periods, an opinion limitation, a restatement or an opening-balance issue. Full prior files and the successor’s testing are usually private. Mark each conclusion as publicly documented, conditional or unverified rather than describing a hypothetical procedure as completed for a real issuer.
When numbers conflict, align consolidation scope, currency, cost method, cutoff and whether the amount is gross or net. Separate a genuine beginning-balance problem from an unexplained current-year purchase or ending-valuation difference.
Update the matrix when predecessor access changes, relevant records are obtained, current-year evidence contradicts the opening figure, or prior statements are revised. Preserve the original uncertainty and the documents resolving it. The conclusion should show what the successor’s evidence actually supports, without inheriting an opinion by assumption.
Test an opening cost basis separately from physical existence
In another isolated example, a machine’s opening depreciable basis is recorded at 60 but supported evidence establishes 48. Assume five years of remaining straight-line life and no residual value, impairment or other change. Annual depreciation is 12 on the recorded basis and 9.6 on the supported basis, a difference of 2.4.
Seeing the machine at year-end cannot resolve that historical cost difference. The current-year expense can remain overstated even though existence is clear. This case requires cost and depreciation evidence, a different mechanism from counting units or tracing a customer’s receipt.
FAQ
Does a reliable ending inventory of 50 resolve opening inventory of 40?
No. The opening amount can still affect current cost of sales and profit.
Does reviewing predecessor papers equal a reaudit?
No. Scope, procedures and responsibility for a separate opinion must be established.