Advanced Auditing, Assurance and Professional Ethics · Reporting

Reporting Implications of Modified Opinions (SA 700 Link)

Updated 5 October 2026 · Fact-checked

A modified opinion is a qualified, adverse or disclaimer opinion. You change the Opinion heading, retitle 'Basis for Opinion' to match, describe the matter and its effects, and amend the auditor's responsibilities wording. With a disclaimer, key audit matters are not communicated in the report; with a qualified or adverse opinion, other key audit matters can still be reported.

Understand Reporting Implications of Modified Opinions (SA 700 link)

An auditor's report starts from an unmodified opinion. SA 700 sets the layout: Opinion, Basis for Opinion, then the other sections. SA 705 says what changes when the opinion cannot be unmodified. SA 700 links to this by requiring you to modify the opinion when the conditions are met.

There are two reasons for modifying. First, the financial statements are materially misstated. Second, you are unable to obtain sufficient appropriate audit evidence. Then you ask how pervasive the effect is. Pervasive effects are not confined to specific elements, or if confined, represent a substantial proportion of the financial statements, or relate to disclosures fundamental to users' understanding.

The decision grid:

Material but not pervasive misstatement: qualified opinion ('except for').
Material and pervasive misstatement: adverse opinion.
Unable to get evidence, possible effects material but not pervasive: qualified opinion ('except for the possible effects').
Unable to get evidence, possible effects material and pervasive: disclaimer of opinion.

The reporting changes follow the opinion. The section heading changes to 'Qualified Opinion', 'Adverse Opinion' or 'Disclaimer of Opinion'. The Basis section is retitled and must describe the matter and, where practicable, quantify the financial effect. If you cannot quantify, say so. A disclaimer also changes the wording of the introduction and the auditor's responsibilities section, because you did not obtain a basis for an opinion.

Key rules to remember

Qualified opinion (misstatement): Material + not pervasive misstatement → 'except for' opinion; Opinion wording: 'In our opinion, except for the effects of the matter described in the Basis section, the financial statements give a true and fair view...'
Adverse opinion: Material + pervasive misstatement → 'do not give a true and fair view'; No 'except for' wording. State that the financial statements do not present fairly.
Qualified opinion (limitation): Unable to get evidence + possible effects material, not pervasive → 'except for the possible effects'; Basis section explains the limitation and why evidence was unavailable.
Disclaimer of opinion: Unable to get evidence + possible effects material and pervasive → 'we do not express an opinion'; Do not say the statements are fairly presented. Amend the sentence on evidence so it says you were unable to obtain sufficient appropriate audit evidence to provide a basis for an opinion. The statement about the audit being conducted per SAs is adjusted, and the Auditor's Responsibilities section is amended as in the SA 705 illustrations.
Heading rules: Opinion heading = 'Qualified Opinion' / 'Adverse Opinion' / 'Disclaimer of Opinion'; Basis heading = 'Basis for Qualified Opinion' / 'Basis for Adverse Opinion' / 'Basis for Disclaimer of Opinion'; Use the matching heading in both sections.
Key audit matters: Do not describe as a KAM the matter giving rise to a modified opinion; SA 701 applies to listed entities, and to other cases where the auditor decides, or law requires, that KAMs be communicated. The matter giving rise to the modification goes in the Basis section, not in KAMs; other KAMs may still be reported with a qualified or adverse opinion. With a disclaimer of opinion, KAMs are not communicated in the report, because SA 705 and SA 701 prohibit it.

How to solve Reporting Implications of Modified Opinions (SA 700 link) questions

Use this sequence for any case asking which opinion to give or how to word the report.

1Identify the problem: is it a misstatement (wrong, missing or inadequately disclosed items) or a limitation on scope (evidence unavailable)?
2Test materiality: is the effect, or possible effect, material? If not, no modification is needed.
3Test pervasiveness: does it affect many elements, or a substantial proportion, or fundamental disclosures?
4Choose the opinion using the grid: qualified, adverse or disclaimer.
5Retitle the Opinion and Basis sections to match, and word the opinion paragraph correctly ('except for', 'do not give', 'do not express').
6In the Basis section, describe the matter, quantify the effect if practicable, or state that quantification is not practicable.
7Adjust other sections: for a disclaimer, amend the auditor's responsibilities wording; consider key audit matters, other information and other reporting requirements.
8State your conclusion in provision-facts-conclusion form, naming SA 705 and SA 700.

Quickest way: Two-question grid

When to use it: When a case gives facts and asks for the type of opinion in a few lines.

Ask: misstatement or can't get evidence?
Ask: material? If no, stop with an unmodified opinion.
Ask: pervasive? If no, qualified.
If pervasive: misstatement gives adverse; limitation gives disclaimer.
Write the heading, the opinion phrase and one line on the Basis section content.

Common mistakes in Reporting Implications of Modified Opinions (SA 700 link)

Choosing an adverse opinion when evidence is unavailable even though the effect is pervasive.
Students link 'pervasive' directly with 'adverse'.
Fix: Adverse is for pervasive misstatement. Pervasive limitation of scope gives a disclaimer.
Keeping the heading 'Basis for Opinion' unchanged.
Students copy the standard format and only alter the opinion wording.
Fix: Rename it to the matching 'Basis for Qualified / Adverse / Disclaimer of Opinion' heading.
Using 'except for' in an adverse opinion.
Confusing the qualified and adverse wording.
Fix: Adverse says the statements do not give a true and fair view. 'Except for' belongs only to the qualified opinion.
Not quantifying the effect or saying nothing about it.
Students describe the matter but forget the effect on the financial statements.
Fix: Quantify where practicable. If not, state that it is not practicable to quantify.
Reporting the qualification matter also as a key audit matter.
Students think any significant matter is a KAM.
Fix: The matter causing the modification is reported in the Basis section, not as a KAM.
Qualifying for an immaterial item.
Wanting to show that the issue was noticed.
Fix: Modify only if material. Immaterial items are communicated to management or those charged with governance.

Worked examples

Example 1

During the audit of XYZ Ltd, you find that inventory of ₹40 lakh was overvalued because obsolete stock was not written down. Profit before tax reported is ₹3 crore and total assets are ₹50 crore. Management refuses to adjust. All else is fine. What opinion do you give and how is the report affected?

Show the solution

Nature: misstatement, since inventory is overvalued.
Materiality: materiality is judged against a chosen benchmark. Against profit before tax, ₹40 lakh is about 13.3% of ₹3 crore, so it is material in relation to profit before tax. Management's refusal only means the misstatement stays uncorrected; it does not make the item material.
Pervasiveness: the misstatement is confined to one element, inventory. It is not a substantial proportion of the financial statements as a whole (₹40 lakh is about 0.8% of total assets of ₹50 crore), and it does not relate to fundamental disclosures. It is therefore not pervasive.
Conclusion: qualified opinion under SA 705.
Report changes: heading 'Qualified Opinion'; opinion says 'except for the effects of the matter described in the Basis for Qualified Opinion section'; Basis section retitled and states that inventory and profit before tax are overstated by ₹40 lakh (before any tax effect).

Answer: Qualified opinion. The misstatement is material (about 13.3% of profit before tax) but not pervasive, as it is confined to inventory. Retitle the sections, use 'except for' wording, and quantify the ₹40 lakh overstatement in the Basis for Qualified Opinion section.

Exam tips

Write the decision logic first: type of problem, materiality, pervasiveness. Marks are usually for the reasoning.
Always give the exact heading names and the opinion phrase in the answer.
Do not confuse emphasis of matter with modification. An emphasis paragraph does not modify the opinion.
In MCQs, look for the words 'unable to obtain' (limitation) versus 'management refuses to adjust' (misstatement).
Mention quantification of the effect in the Basis section when asked what the report must contain.

Practice questions from Reporting

Reporting Implications of Modified Opinions (SA 700 link) in other exams

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

CA IntermediateTypes of Audit Opinions: Unmodified and Modified (SA 705)

Reporting Implications of Modified Opinions (SA 700 link): frequently asked questions

What is the difference between qualified, adverse and disclaimer of opinion?

A qualified opinion says the statements are fine except for a material but not pervasive matter. An adverse opinion says they do not give a true and fair view because of a material and pervasive misstatement. A disclaimer says you do not express an opinion because of a pervasive inability to obtain evidence.

Which sections of the auditor's report change in a modified opinion?

The Opinion section and the Basis for Opinion section change in heading and content. For a disclaimer, the auditor's responsibilities wording is also amended. Other sections are reviewed for consequential changes.

Can a matter be both a modified opinion matter and a key audit matter?

No. The matter that causes the modification is described in the Basis section, not as a key audit matter. SA 701 applies to listed entities and to other cases where the auditor decides, or law requires, that KAMs be communicated. With a qualified or adverse opinion, other KAMs can still be reported. With a disclaimer of opinion, KAMs are not communicated in the report, because SA 705 and SA 701 prohibit it.

What is pervasive in this context?

It describes effects that are not confined to specific elements, or are confined but represent a substantial proportion of the financial statements, or relate to disclosures fundamental to users' understanding.