First year audits and opening balances

When a company is audited for the first time, the auditor still has to be satisfied that the opening balances carried in from the unaudited prior year do not contain misstatements that materially affect the current year. ISA (UK) 510 requires the auditor to check the balances were brought forward correctly, that the accounting policies were appropriate, and to gather evidence on them, failing which the audit opinion must be qualified or disclaimed.

What counts as a first year, or initial, audit?

ISA (UK) 510 (Revised June 2016), Initial Audit Engagements: Opening Balances, defines an initial audit engagement in paragraph 4(a) as one where either the prior period’s financial statements were not audited, or they were audited by a predecessor auditor. This page concentrates on the first case: a company whose previous accounts were unaudited, for example because it relied on the small company audit exemption and has now outgrown it, or because a buyer or lender has asked for an audit.

Opening balances are the account balances that exist at the beginning of the period. Paragraph 4(b) explains that they are based on the prior period’s closing balances and reflect earlier transactions and accounting policies. They also include items requiring disclosure that existed at the start of the period, such as contingencies and commitments. This is different from entering opening balances in a new bookkeeping system, although poor records from that exercise often surface in a first audit.

What does the auditor do before the audit starts?

ISA (UK) 300, Planning an Audit of Financial Statements, requires the auditor, before starting an initial audit, to carry out the client acceptance procedures under ISA (UK) 220 and, where there has been a change of auditors, to communicate with the predecessor auditor in line with ethical requirements (paragraph 13). Paragraph A24 adds that planning may need to be expanded because the auditor lacks previous experience of the entity.

Where the previous accounts were prepared by an accountant without an audit, there is no predecessor auditor file to review. The incoming auditor will still normally ask for the prior year working papers, trial balance and reconciliations through the usual professional clearance route, but they are evidence of what was done, not audit evidence that the figures are right.

What does ISA (UK) 510 require?

The objective in paragraph 3 is to obtain sufficient appropriate audit evidence about whether opening balances contain misstatements that materially affect the current period, and whether appropriate accounting policies reflected in them have been applied consistently or any changes properly accounted for and disclosed. The requirements are:

1. Read the most recent financial statements, and any predecessor auditor’s report, for information relevant to opening balances (paragraph 5).
2. Determine whether the prior period’s closing balances were correctly brought forward or, where appropriate, restated (paragraph 6(a)).
3. Determine whether the opening balances reflect appropriate accounting policies (paragraph 6(b)).
4. Perform one or more of: reviewing the predecessor auditor’s working papers where there was an audit; evaluating whether current period procedures give evidence about opening balances; or performing specific procedures on the opening balances (paragraph 6(c)).
5. If evidence suggests a material misstatement, perform further procedures and communicate any misstatement to management and those charged with governance (paragraph 7).
6. Obtain evidence that accounting policies have been applied consistently, or changes properly accounted for and disclosed (paragraph 8).

For an unaudited prior year, the first option is not available, so the work falls on the last two.

How do auditors get evidence on balances nobody audited?

Paragraph A3 says the extent of work depends on the entity’s accounting policies, the risks of material misstatement, the significance of the opening balances, and whether the prior year was audited. The application material then distinguishes between types of balance.

Receivables, payables and other current items

Paragraph A6 explains that collecting opening receivables or paying opening payables during the current year gives some evidence of their existence, rights and obligations, completeness and valuation at the start of the year. Much of the work on these balances therefore happens naturally through post period testing.

Inventory

Inventory is the classic problem. Paragraph A6 notes that work on closing inventory gives little evidence about inventory at the start of the year, and lists additional procedures that may help: observing a current count and reconciling back to opening quantities, testing the valuation of opening items, and performing procedures on gross profit and cut off. Opening inventory feeds directly into cost of sales, so an unverified figure affects profit for the year even when the closing balance sheet is sound. Our guide to stocktake attendance covers the count itself.

Non current assets and long term debt

Paragraph A7 says evidence for items such as property, plant and equipment, investments and long term debt may come from examining the accounting records underlying the opening balances, and sometimes from third party confirmation, for example for loans and investments. Title deeds, loan agreements and fixed asset registers are the usual sources.

What happens to the audit report?

ISA (UK) 510 links directly to the opinion.

• If the auditor cannot obtain sufficient appropriate evidence on opening balances, it must give a qualified opinion or a disclaimer of opinion under ISA (UK) 705 (paragraph 10).
• If the opening balances contain a material misstatement that is not properly dealt with in the current accounts, the opinion must be qualified or adverse (paragraph 11).
• If accounting policies are not applied consistently, or a change is not properly accounted for or disclosed, the opinion must also be qualified or adverse (paragraph 12).

Paragraph A8 adds that, unless law or regulation prohibits it, the auditor may give an opinion that is qualified or disclaimed on the results and cash flows but unmodified on the financial position. That fits the common case where the closing balance sheet is well evidenced but opening inventory, and therefore cost of sales, is not.

Separately, ISA (UK) 710 paragraph 14 requires an Other Matter paragraph stating that the corresponding figures are unaudited where the prior period was not audited. That statement does not relieve the auditor of the duty to obtain evidence on the opening balances. Our guide to audit opinions explains how these forms of report differ.

How might this play out?

Illustration only. A manufacturer took the small company exemption for the year to 30 June 2025 and needs its first audit for the year to 30 June 2026. The auditor is appointed in May 2026, after the 30 June 2025 stock count would have taken place, and no count records were kept.

• Receivables and payables at 1 July 2025 are tested by reference to cash received and paid after that date.
• Fixed assets are agreed to invoices and the asset register; the bank loan is confirmed with the lender.
• Opening inventory of about £400,000 is tested through valuation work on the main product lines and a gross margin analysis, but quantities cannot be verified.

If the remaining uncertainty is material but not pervasive, the likely result is an opinion qualified on the profit and loss account and cash flows for the year, unmodified on the 30 June 2026 balance sheet, with an Other Matter paragraph noting the corresponding figures are unaudited. The qualification should not recur the following year, once the closing count has been observed.

How can directors make a first audit go smoothly?

• Appoint the auditor before the start of the first audited year, so the auditor can attend the opening stock count. The rules on timing are in our guide to appointing and removing auditors.
• Reconcile the prior year trial balance to the filed accounts and the ledger before fieldwork starts.
• Gather supporting documents for opening fixed assets, loans and provisions, and records of any contingencies or commitments at the start of the year.
• Review accounting policies early. If the prior year accounts used policies that do not comply with the framework, an adjustment may be needed; see prior period adjustments.
• Allow for extra time and cost in the first year, as ISA (UK) 300 expects expanded planning.

A common mistake is assuming the auditor only looks at the current year end. The opening position drives the current year’s profit, so gaps in it can qualify the first audit report even when everything at the year end is in order.

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Related Accountapedia entries

• Should a small company have a voluntary audit
• Emphasis of matter and other matter paragraphs
• What counts as sufficient appropriate audit evidence
• Materiality in an audit
• The auditor and other information: ISA (UK) 720

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Sources

• Financial Reporting Council: ISA UK 510 Revised June 2016 Updated September 2025
• Financial Reporting Council: Isa uk 510
• Financial Reporting Council: ISA UK 710 Updated September 2025
• Financial Reporting Council: ISA UK 300 Revised June 2016 Updated September 2025

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.