Raghav Mehra & Co., Chartered Accountants, were appointed as the statutory auditors of Jeep Manufacturing Limited for the financial year…

CA Intermediate · Auditing and Ethics · MTP · May 2026
Raghav Mehra & Co., Chartered Accountants, were appointed as the statutory auditors of Jeep Manufacturing Limited for the financial year 2024–25. The company is engaged in large-scale production of automobile components and maintains significant opening balances relating to inventory, trade receivables, and fixed assets. The financial statements for the previous year (2023–24) were audited by another firm, S.K. Verma & Associates, who had issued an unmodified audit opinion. During the audit, CA Raghav Mehra decided not to perform any audit procedures on opening balances. He was of the view that since the previous year's financial statements had already been audited by a qualified auditor, reliance could be placed on the same and no further verification was necessary. The audit manager expressed concern that such an approach may not be in accordance with the Standards on Auditing. In the light of the above facts: (i) Examine whether the approach of CA Raghav Mehra is correct. (ii) State the audit procedures that should be performed regarding opening balances in such cases.

Suggested Answer and Working Notes:

(a) Initial audit engagement is an engagement in which either: (i) The financial statements for the prior period were not audited; or (ii) The financial statements for the prior period were audited by a predecessor auditor. In the given case, since the previous year's financial statements were audited by another auditor, the present engagement is an initial audit engagement. Therefore, the approach of CA Raghav Mehra is not correct, as reliance cannot be placed solely on the predecessor auditor's report. The current auditor is required to obtain sufficient appropriate audit evidence regarding opening balances. Audit Procedures regarding Opening Balances: The auditor shall read the most recent financial statements, if any, and the predecessor auditor's 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: (a) Determining whether the prior period's closing balances have been correctly brought forward to the current period or, when appropriate, any adjustments have been disclosed as prior period items in the current year's Statement of Profit and Loss; (b) Determining whether the opening balances reflect the application of appropriate accounting policies; and (c) Performing one or more of the following: (i) Where the prior year financial statements were audited, perusing the copies of the audited financial statements including other relevant documents relating to the prior period; (ii) Evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances; or (iii) Performing specific audit procedures to obtain evidence regarding the opening balances. Thus, CA Raghav Mehra's approach is inappropriate. As per Standards on Auditing, even in cases of audited prior period financial statements, the incoming auditor must perform adequate procedures on opening balances to ensure that they are free from material misstatement and properly brought forward.

Topics: Audit Evidence

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