Advanced Audit and Assurance (International) · Auditor's reports

ISA 705 Modified Opinions: Qualified, Adverse and Disclaimer

Updated 11 October 2026 · Fact-checked

ISA 705 requires a modified opinion when financial statements are materially misstated or the auditor cannot get enough evidence. Material but not pervasive gives a qualified opinion. Pervasive misstatement gives an adverse opinion. Pervasive inability to obtain evidence gives a disclaimer of opinion.

Understand Modified Opinions under ISA 705

An auditor gives an unmodified opinion when the financial statements are prepared, in all material respects, in line with the applicable framework. A modified opinion is needed in two situations. Either the financial statements are materially misstated, or the auditor is unable to obtain sufficient appropriate audit evidence (a limitation on scope).

Then you decide how serious the matter is. A matter is material if it could influence the decisions users make. It is pervasive if its effects are not confined to specific elements, accounts or items, or if they are confined but represent a substantial proportion of the financial statements, or, for disclosures, are fundamental to users' understanding.

This gives a simple grid. Misstatement that is material but not pervasive: qualified opinion ("except for"). Misstatement that is material and pervasive: adverse opinion. Inability to get evidence where the possible effects are material but not pervasive: qualified opinion ("except for"). Inability to get evidence where the possible effects could be material and pervasive: disclaimer of opinion.

Note the difference in wording. With a misstatement, the auditor knows there is a problem. With a scope limitation, the auditor does not know the effect and judges how bad it could be. That is why a disclaimer is about what might be hidden, not what is wrong.

The modification affects the report layout. The opinion section is headed "Qualified Opinion", "Adverse Opinion" or "Disclaimer of Opinion". A "Basis for Opinion" section is renamed "Basis for Qualified Opinion", "Basis for Adverse Opinion" or "Basis for Disclaimer of Opinion". It must explain the matter and, where practicable, quantify the effect.

Key rules to remember

Misstatement, material not pervasive: Material misstatement + not pervasive → Qualified opinion ("except for"); Use wording such as "except for the effects of the matter described in the Basis for Qualified Opinion section".
Misstatement, material and pervasive: Material misstatement + pervasive → Adverse opinion; Say the financial statements do not give a true and fair view (or are not presented fairly, in all material respects).
Scope limitation, not pervasive: Unable to get evidence + possible effects material but not pervasive → Qualified opinion; Use "except for the possible effects of...".
Scope limitation, pervasive: Unable to get evidence + possible effects material and pervasive → Disclaimer of opinion; State that you do not express an opinion. Do not say the statements are right or wrong.
Disclaimer after accepting the engagement: Management imposes a limitation + auditor concludes a disclaimer is likely → request removal; if not removed, communicate with those charged with governance and consider withdrawal where practicable; If withdrawal is not possible, issue the disclaimer.
Report sections: Opinion section heading + Basis for [Qualified/Adverse/Disclaimer] section; The Basis section comes straight after the opinion and describes the matter and its effect.

How to solve Modified Opinions under ISA 705 questions

Use this method for any question asking what opinion to give or to draft the report.

1Identify the issue: is it a disagreement over a misstatement (wrong, missing or inadequate disclosure) or a limitation on scope (no evidence available)?
2Test materiality. Compare the amount with the materiality given, or with profit, revenue or assets. If it is not material, no modification is needed.
3Test pervasiveness. Ask: does it affect many areas, a substantial proportion of the statements, or a fundamental disclosure? Consider knock-on effects.
4Pick the opinion from the grid: misstatement gives qualified or adverse; scope limitation gives qualified or disclaimer.
5Draft the report parts asked for: opinion heading and wording, then the Basis section explaining the matter and quantifying it where practicable.
6Consider other effects: key audit matters, other reporting duties, communication with those charged with governance, and whether the limitation was imposed by management.
7State your reasoning in a sentence or two so the marker sees the judgement, not just the label.

Quickest way: Two-question grid

When to use it: When time is short and you need the opinion type quickly.

Ask first: wrong or unknown? Wrong means misstatement; unknown means scope limitation.
Ask second: material only, or pervasive too?
Material only: qualified. Pervasive and wrong: adverse. Pervasive and unknown: disclaimer.
Write one line justifying pervasiveness with numbers or the areas affected.

Common mistakes in Modified Opinions under ISA 705

Giving a disclaimer for a material misstatement or an adverse opinion for a scope limitation.
Students memorise the three names but not which route each belongs to.
Fix: Link adverse to misstatement and disclaimer to scope limitation. Qualified can arise from either.
Treating material and pervasive as the same thing.
Both sound like "big".
Fix: Material means it matters to users. Pervasive means it spreads across the statements or is fundamental. Always assess both separately.
Using "except for" wording in an adverse opinion or disclaimer.
Students copy the qualified wording from a template.
Fix: Adverse says the statements do not give a true and fair view. A disclaimer says you do not express an opinion.
Leaving out the Basis section or not quantifying the effect.
Students focus only on the opinion paragraph.
Fix: Always explain the matter in the Basis section and give the amount where practicable. If not practicable, say so.
Qualifying on a matter below materiality.
Students react to any error they spot in a scenario.
Fix: Compare the amount with materiality first. Immaterial items do not change the opinion, though you may report them to management.
Ignoring the management-imposed limitation steps.
Students jump straight to the opinion.
Fix: Say you would ask management to remove the limitation, inform those charged with governance, and consider withdrawing if a disclaimer is likely.

Worked examples

Example 1

Maple Co has revenue of $80 million and profit before tax of $6 million. Materiality is set at $300,000. Inventory of $450,000 is held at a remote site the auditor was prevented from attending, and no alternative procedures could verify it. Total assets are $40 million. State the opinion and explain.

Show the solution

The issue is a limitation on scope: the auditor cannot get evidence on inventory.
Materiality: possible misstatement up to $450,000 exceeds $300,000, so it is material.
Pervasiveness: $450,000 is about 1.1% of total assets and affects one balance, with no wide knock-on effects. It is not pervasive.
Grid: scope limitation, material but not pervasive, gives a qualified opinion.
Wording: the opinion says "except for the possible effects of the matter described in the Basis for Qualified Opinion section". The Basis section explains the missing inventory evidence.
Because management prevented the attendance, the auditor would also raise this with those charged with governance.

Answer: Qualified opinion ("except for") due to a material but not pervasive limitation on scope.

Example 2

Birch Co's directors refuse to consolidate a subsidiary. The subsidiary accounts for 55% of group assets and 60% of group revenue. The auditor has the subsidiary's figures and can quantify the effect. Give the opinion and draft the opinion paragraph.

Show the solution

The issue is a misstatement: a failure to consolidate breaches the reporting framework.
Materiality: 55% of assets and 60% of revenue is far above any materiality level.
Pervasiveness: the omission affects a substantial proportion of the statements and many line items, so it is pervasive.
Grid: misstatement, material and pervasive, gives an adverse opinion.
Opinion paragraph: "In our opinion, because of the significance of the matter described in the Basis for Adverse Opinion section, the accompanying consolidated financial statements do not give a true and fair view of the financial position of the group as at the year end, or of its financial performance and cash flows for the year then ended, in accordance with IFRS Accounting Standards."
Basis section: explain that the subsidiary was not consolidated, and give the effects on assets, revenue and profit since they are known.

Answer: Adverse opinion, because the misstatement is material and pervasive.

Exam tips

Always state both tests, material and pervasive, in your answer. Markers award marks for each judgement.
Use the scenario figures. Calculate the percentage of profit, revenue or total assets to justify your choice.
When asked to draft, use the correct headings: the opinion heading and the matching Basis heading. Do not use "except for" outside a qualified opinion.
Mention practical consequences such as discussing with management, informing those charged with governance, and the effect on key audit matters. This earns professional skills marks.
Keep drafting short. Two clear paragraphs with the right wording beat a long copied report.

Practice questions from Auditor's reports

Modified Opinions under ISA 705 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Modified Opinions under ISA 705: frequently asked questions

What is the difference between a qualified opinion and a disclaimer of opinion?

A qualified opinion says the statements are fine except for one matter that is material but not pervasive. A disclaimer says you cannot express an opinion because the possible effects of lack of evidence are material and pervasive. In a disclaimer you give no view on whether the statements are right.

When do you give an adverse opinion instead of a disclaimer?

Give an adverse opinion when you have evidence that the statements are materially and pervasively misstated. Give a disclaimer when you cannot get enough evidence and the possible effects are material and pervasive. Adverse is about known error; disclaimer is about unknown effects.

What does pervasive mean in audit reporting?

It describes effects that are not confined to specific elements, accounts or items, or that are confined but form a substantial proportion of the statements. For disclosures, it also covers those fundamental to users' understanding. It is a matter of judgement.

Do I need to draft the full modified report in AAA?

Usually you draft only the relevant parts, mainly the opinion paragraph and the Basis section. Read the requirement carefully. Show the correct headings and wording, and explain your reasoning.