Opening balances in a new audit : an analysis

Abstract

Purpose: The research analyses distinct characteristics that pertain to new audit engagements and their degree of influence on the incumbent auditor’s approach when scrutinising the predecessor auditor’s work by testing the opening balances. Design: An overview of relevant literature is provided, followed by an in-depth presentation and discussion of the findings compiled from the 49 interview responses and other pertinent data obtained from the Registry of Companies. Findings: Respondents indicated that the level of confidence placed on the predecessor auditor varies in accordance to the size of the predecessor audit firm. The majority of firms claimed that the procedures used by the incumbent auditor when testing opening balances are standardised by the firm. The evidence in this study shows that the review of the predecessor auditor’s working papers was ranked as the least likely procedure to be carried out by both small- and medium-sized audit firms, followed by the procedure of making inquiries to the predecessor auditor. These procedures ranked in a similar manner for the Big 4 firms, something which indicates that audit firms are unlikely to associate themselves with one another in the event of a change in auditor. Findings indicate that small firms are less likely to cooperate with the incumbent audit firm and to pass on their audit documentation. Conclusion: The study concludes that auditors long for a community that effectively cooperates with each other in the event of a change in auditor. They believe that sound communication would prevail if auditors are willing to place trust in each other and promote a mentality in which auditors have to function together as their clients change. Furthermore, regulatory authorities should ensure that a higher level of guidance is provided to the auditing profession. Value: Audit practitioners stand to benefit from the conclusions as well as the recommendations derived from this study. By acquiring an insight into the participants’ thoughts on the existing communication level and the level of communication desired, audit firms and the regulatory authorities will be at an advantage when it comes to taking appropriate action where necessary.