Opening balances, comparatives and going concern in the auditor’s report

The audit of this year’s statements rests on last year’s. Opening balances are last year’s closing balances. Comparatives are last year’s figures shown beside this year’s. If last year was audited by someone else, or not audited at all, or the figures were wrong, the current report may have to say so.

This topic joins up the audit work in the earlier topics on opening balances and comparatives with what the auditor writes in the report.

It also brings together the going concern reporting rules, which November 2025 Question 4 tested in two parts: what happens if management will not disclose a material uncertainty (5 marks), and what the report looks like where the basis is appropriate but a material uncertainty exists (7 marks). The topic on going concern gave the audit work. This one gives the report.

Opening balances: ISA 510

The audit work on opening balances was covered in an earlier topic. For the report, ISA 510 requires the auditor to modify the opinion in these circumstances.

The choice between qualified and the other option follows the usual test: qualified if the matter is material but not pervasive, and adverse or disclaimer if it is pervasive.

Comparatives: ISA 710

The financial statements show audited figures for the current year and for the previous year as comparative information. The opinion does not refer to the corresponding figures, except in these circumstances.

The other matter paragraph

If the prior statements were audited by a predecessor and the auditor is not prohibited by law from referring to the predecessor’s report and decides to do so, the Other Matter section states:

• that the prior period statements were audited by the predecessor;
• the type of opinion given and, if modified, the reasons; and
• the date of that report.

If the prior period was unaudited, the section states that fact.

Going concern in the report: ISA 570

If there are signs that the going concern basis may not be appropriate, the auditor considers the effect on the report. The form depends on the auditor’s judgement. There are two views:

1. the use of the going concern assumption is appropriate but a material uncertainty exists; or
2. the use of the going concern assumption is inappropriate.

If management is unwilling to make or extend a going concern assessment, the auditor also considers the effect on the report.

Appropriate basis, material uncertainty exists

The auditor considers whether the statements:

• adequately describe the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, and management’s plans to deal with them; and
• clearly disclose that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern.

If the disclosure is adequate, the opinion is unmodified. The auditor adds a separate section immediately after the Basis for Opinion paragraph, headed Material Uncertainty Related to Going Concern. It highlights the uncertainty, draws attention to the relevant note and states that the opinion is not modified in respect of the matter.

A minor change is made to the introduction of the Key Audit Matters section, if there is one, to refer to the new section.

The syllabus example says: “We draw attention to Note X to the financial statements which indicates that the company incurred a net loss of ZZZ during the year ended 31 December 20X6 and, as of that date, the company’s current liabilities exceeded its total assets by YYY.

As stated in Note X, these events or conditions, along with other matters as set forth in Note X, indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.”

If the disclosure is not adequate, the opinion is qualified or adverse. There is no separate Material Uncertainty section, because the uncertainty is fully explained in the Basis for Qualified (Adverse) Opinion section.

Management’s attitude to disclosure

Management will probably be reluctant to disclose a material uncertainty, and the syllabus gives these reasons:

• admitting that there is material uncertainty about the next 12 months can be seen as a sign of management failure, and management may not want to admit responsibility to shareholders;
• the statement will make the position worse: banks may refuse to lend or withdraw facilities, suppliers may want credit guarantees, and customers may stop buying because they fear that after-sales service will not be provided;
• employees will worry about job security, and many might leave, which raises staff turnover; and
• management may not accept that a material uncertainty exists, so there could be a genuine disagreement with the auditor.

If management refuses to give suitable disclosure, the opinion is modified. That is the answer to the implications for the audit in November 2025 Question 4(b): the auditor discusses the matter with management, tells those charged with governance, and issues a qualified or adverse opinion, explaining the matter in the Basis for Opinion section.

Basis inappropriate

If the statements are prepared on the going concern basis but the auditor considers it inappropriate, the syllabus says that the auditor expresses an adverse opinion. If the statements are prepared on an alternative acceptable basis, such as the break-up basis. The basis is adequately disclosed, the auditor can give an unmodified opinion, and may add an emphasis of matter paragraph to highlight the alternative basis.

Note. Some sources say a qualified report should be considered if management will not change its view. Here the answer is adverse. For a clear case of inappropriate use, use the adverse opinion, which is also the ISA 570 position, and mention the qualified option only if the question gives you room.

The rules in more depth

Why opening balances affect the income statement

Opening inventory is part of cost of sales. If the auditor cannot verify opening inventory, profit for the year may be misstated, but the closing statement of financial position may be fine. That is why a scope limitation on opening balances often affects the statement of comprehensive income and the statement of cash flows more than the statement of financial position, and why a qualified opinion is common.

Why the comparatives are not normally mentioned

The opinion is on the current period. The comparatives were covered by last year’s opinion. The auditor refers to them only if last year’s problem still affects this year, or if a new problem in last year’s figures has been found.

Why going concern has its own section

A going concern uncertainty is serious but it is not a failure of the statements, so it does not call for a modified opinion if disclosed. A separate section makes it prominent, and keeps it apart from key audit matters and emphasis of matter paragraphs, which readers might see as less urgent.

Worked example: a first-year audit

Scenario. Kite Ltd appointed your firm for the year to 31 December 2025. Last year’s statements were audited by another firm, which gave an unmodified opinion on 20 March 2025. Materiality is ₦40 million. You cannot get sufficient appropriate evidence about opening inventory of ₦70 million, because the previous auditor did not attend the count. The previous firm will not give access to its files. Closing inventory at 31 December 2025, which you attended, is fully supported.

Step 1: the effect. Opening inventory is part of cost of sales. If opening inventory could be misstated by up to ₦70 million, profit for the year could be misstated by up to ₦70 million, which is above materiality of ₦40 million. Closing inventory, and so the statement of financial position, is supported.

The effect is on profit for the year, the statement of changes in equity at the start and the cash flow statement’s reconciliation, not on the whole of the statements.

Step 2: the opinion. It is a limitation on scope on opening balances. The matter is material. It is confined to specific items, so it is not pervasive.

The opinion is qualified, with “except for the possible effects on the profit for the year and the opening equity” wording, and the Basis for Qualified Opinion section says that the auditor could not get evidence about opening inventory and so could not tell whether adjustments to cost of sales were needed.

Step 3: the comparatives. Because the prior year was audited by another firm, an other matter paragraph states that the statements for the year ended 31 December 2024 were audited by another auditor who expressed an unmodified opinion on 20 March 2025.

Step 4: going concern. Suppose that, in addition, Kite has net current liabilities, a material uncertainty exists and the note is adequate. The report adds the Material Uncertainty Related to Going Concern section. This is separate from the qualification, and the opinion section states the qualified opinion for the opening inventory matter only.

How to score full marks

• Identify the source of the problem. Opening balances, comparatives or going concern.
• Apply the misstatement or scope test, then the material or pervasive test.
• Name the paragraph. Other matter for a predecessor or an unaudited prior year. A separate section for a going concern uncertainty.
• Give the effect on the statements. Opening balances touch the statement of comprehensive income and cash flows first.
• For going concern, deal with adequate and inadequate disclosure separately.
• Give the reasons management is reluctant, if the question asks.

Common mistakes in the exam

• Referring to comparatives in the opinion in cases where ISA 710 does not require it.
• Using an emphasis of matter paragraph for a predecessor auditor. It is an other matter paragraph.
• Giving an unmodified opinion with a going concern section when disclosure is inadequate.
• Giving a disclaimer for a misstatement of opening balances.
• Forgetting that ISA 510 work on opening balances applies when the prior year is unaudited.
• Giving only one reason for management’s reluctance.

Quick revision

• ISA 510: no evidence on opening balances (qualified or disclaimer), misstatement not dealt with (qualified or adverse), inconsistent policies (qualified or adverse), prior modification still relevant.
• ISA 710: refer to corresponding figures only for an unresolved prior modification or an uncorrected prior misstatement.
• Predecessor auditor or unaudited prior year: other matter paragraph.
• Going concern, appropriate with uncertainty and adequate disclosure: unmodified, separate section after the Basis for Opinion.
• Inadequate disclosure: qualified or adverse, no separate section. Inappropriate basis: adverse.
• Management’s reasons: sign of failure, banks, suppliers, customers, employees, genuine disagreement.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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