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Audit Reports, KAMs and Modified Opinions for CA Final

Updated 5 October 2026 · Fact-checked

The auditor's report states the opinion on financial statements (SA 700). If there is a material misstatement or a lack of evidence, the opinion is modified (SA 705) as qualified, adverse or disclaimer. KAMs (SA 701) and EOM/OMP paragraphs (SA 706) add communication. Solve by judging materiality, then pervasiveness, then choosing the type.

Understand Audit Reports, KAMs and Modified Opinions

The auditor's report is the final product of the audit. It tells users whether the financial statements give a true and fair view (or present fairly) in accordance with the applicable financial reporting framework, which for Ind AS companies is Ind AS. The opinion is formed after the auditor concludes whether sufficient appropriate audit evidence has been obtained and whether the statements are free from material misstatement.

An unmodified opinion is given when the statements are prepared, in all material respects, in accordance with the framework. A modified opinion is given in two situations: (1) the statements are materially misstated, or (2) the auditor cannot obtain sufficient appropriate evidence. Then you decide how pervasive the effect is. Pervasive means the effect is not confined to specific elements, or if confined, represents a substantial proportion of the statements, or relates to disclosures fundamental to users' understanding.

The type of modification follows a simple grid. Material but not pervasive misstatement: qualified (except for). Material and pervasive misstatement: adverse. Material but not pervasive inability to get evidence: qualified. Material and pervasive inability: disclaimer.

For a scope limitation, you cannot measure the misstatement, so the test is whether the possible effects of undetected misstatements could be material and, if so, pervasive. The effects may be material even when you cannot be sure of their extent. In extremely rare cases involving multiple uncertainties, the auditor may disclaim an opinion because of the possible cumulative effect of the uncertainties, even if each uncertainty taken alone would not be pervasive (SA 705).

Key audit matters (KAMs) under SA 701 are matters that, in the auditor's professional judgment, were of most significance in the audit of the current period. They are chosen from matters communicated with those charged with governance. They are required for listed entities, and are otherwise given when the auditor decides to or is required by law. KAMs are not a substitute for a modified opinion and are not a separate opinion on individual matters.

Paragraphs under SA 706 draw attention without modifying the opinion. An Emphasis of Matter (EOM) refers to a matter already properly presented or disclosed in the financial statements, which is fundamental to users' understanding. An Other Matter paragraph (OMP) refers to a matter not presented or disclosed in the financial statements that is relevant to users' understanding of the audit, the auditor's responsibilities or the report.

Key rules to remember

Opinion grid: misstatement: Material, not pervasive → Qualified; Material and pervasive → Adverse; Applies when the auditor disagrees with management about the financial statements.
Opinion grid: limitation of scope: Possible effects material, not pervasive → Qualified; Possible effects material and pervasive → Disclaimer; Applies when sufficient appropriate evidence cannot be obtained. The test is on the possible effects. In extremely rare cases with multiple uncertainties, a disclaimer can also be given.
Basis for opinion: Modified opinion ⇒ 'Basis for Qualified/Adverse Opinion' or 'Basis for Disclaimer of Opinion' section; The section must describe the matter and, where practicable, quantify the effect.
Order of sections (SA 700, illustrative): Title → Addressee → Opinion → Basis for Opinion → Material Uncertainty Related to Going Concern (if any) → KAMs → Other Information → Responsibilities of management → Auditor's responsibilities → Report on Other Legal and Regulatory Requirements → Signature, date, place; This is the illustrative order in SA 700. Opinion comes first; for modified opinions the heading is adjusted, for example 'Qualified Opinion'. The Report on Other Legal and Regulatory Requirements comes after the auditor's responsibilities section. Learn this order, but remember that SA 700, SA 701 and SA 720 allow some positions to vary, so do not treat every position as rigid.
EOM vs OMP: EOM = matter disclosed in the financial statements; OMP = matter not disclosed in the financial statements; Neither modifies the opinion.
KAM exclusions: Matter giving rise to a modified opinion or a material uncertainty on going concern is not reported as a KAM; These are described in their own sections. The KAM section only cross-refers to the Basis for Opinion or Material Uncertainty section.

How to solve Audit Reports, KAMs and Modified Opinions questions

Use this sequence for any case on audit reports. It stops you from guessing the opinion type.

1Identify the facts: is there a misstatement (disagreement), a scope limitation, or only a matter needing attention?
2Check materiality: if the effect is not material, the opinion is unmodified.
3Check pervasiveness: is the effect confined to specific items, or does it affect the statements broadly?
4Pick the type using the grid: qualified, adverse or disclaimer.
5Check whether any EOM, OMP, going concern or KAM communication is also needed, and whether it is correctly placed.
6Name the section: Basis for Opinion with the matter, and quantify the effect if practicable.
7Write the conclusion in provision-facts-conclusion form: cite the SA, apply facts, state the opinion.

Quickest way: Two-question opinion test

When to use it: When a case MCQ or short answer asks which opinion the auditor should give.

Ask: is it a disagreement or a scope limitation? A disagreement leads to modification if the misstatement is material. A scope limitation leads to modification if the possible effects could be material, even when you cannot be sure of the extent.
Ask: is it pervasive? For a scope limitation, ask whether the possible effects are pervasive. If no, qualified. If yes, adverse for disagreement and disclaimer for scope limitation.
In extremely rare cases with multiple uncertainties, consider a disclaimer because of the possible cumulative effect (SA 705).
If the matter is properly disclosed and fundamental, add EOM; if it is not in the statements but relevant to users, add OMP.
Quote the SA number in your answer.

Common mistakes in Audit Reports, KAMs and Modified Opinions

Giving an adverse opinion for a scope limitation
Students treat all serious problems as adverse.
Fix: Adverse is for misstatement only. A pervasive inability to get evidence leads to a disclaimer.
Treating an EOM as a modification of the opinion
The paragraph sounds like a qualification.
Fix: EOM and OMP never modify the opinion. The opinion stays unmodified.
Confusing EOM with OMP
Both are in SA 706 and sit after the opinion.
Fix: Ask whether the matter is disclosed in the financial statements. Yes means EOM; no means OMP.
Reporting a modified-opinion matter or a going concern uncertainty as a KAM
Students think any significant matter is a KAM.
Fix: Those matters are reported in their own sections. KAMs cover other significant matters, and the KAM section only cross-refers to those sections.
Skipping the pervasiveness test
Students stop at materiality.
Fix: Always state both: material, then pervasive or not pervasive.
Giving a KAM section with a separate opinion on the matter
Students think a KAM is a mini-opinion.
Fix: State that the matter was addressed in the context of the audit as a whole and no separate opinion is given.

Worked examples

Example 1

Case: In the audit of a listed company, the auditor finds that inventory of ₹2,00,000 is overstated because obsolete items were not written down. Total assets are ₹5,00,00,000 and profit before tax is ₹80,00,000. Management refuses to adjust. The auditor considers the amount material but not pervasive. What opinion should the auditor give?

Show the solution

Facts: management has not followed the Ind AS requirement to measure inventory at the lower of cost and net realisable value. This is a disagreement, so a misstatement.
Materiality: the auditor has judged it material.
Pervasiveness: the auditor has judged it not pervasive, since it affects one item.
Under SA 705, a material but not pervasive misstatement leads to a qualified opinion.
The report will have a 'Qualified Opinion' heading and a 'Basis for Qualified Opinion' section describing the matter and quantifying the ₹2,00,000 effect.

Answer: Qualified opinion ('except for the effects of the matter'), with a Basis for Qualified Opinion section quantifying the ₹2,00,000 overstatement.

Example 2

Case: An auditor of a company is unable to attend inventory counting and cannot perform alternative procedures. Inventory is a significant part of the statements, and the possible effects are both material and pervasive. Separately, the notes properly disclose a major fire at a plant after year-end. What should the auditor report?

Show the solution

Facts: evidence on inventory cannot be obtained, so this is a scope limitation.
Materiality and pervasiveness: both are met.
Under SA 705, a material and pervasive limitation leads to a disclaimer of opinion.
Report: 'Disclaimer of Opinion' and a 'Basis for Disclaimer of Opinion' section stating the reason.
When the auditor disclaims an opinion, the report does not include a KAM section (SA 705), unless law requires it.
SA 705 does not bar an EOM or OMP alongside a disclaimer. The auditor should consider whether an EOM on the post-year-end fire is appropriate, because the disclaimer already limits how far the report can be relied on. The fire is properly disclosed in the notes, so any such paragraph would be an EOM, not an OMP.

Answer: Disclaimer of opinion with a Basis for Disclaimer of Opinion section. No KAM section is included (SA 705, unless law requires it). The auditor considers whether an EOM on the fire is appropriate, given that the disclaimer already limits the report's reliability.

Exam tips

Always write the pair: material and pervasive, then the opinion type. Markers look for both words.
In case MCQs, check whether the matter is disclosed. This decides EOM versus OMP.
Learn the order of the SA 700 sections; theory questions often ask you to list them.
Name the SA numbers: 700, 701, 705, 706, 570 (going concern) and 720 (other information).
For KAM questions, remember the selection: start from matters communicated with those charged with governance, narrow to those requiring significant auditor attention, then pick those of most significance in the audit of the current period. The KAM section should only cross-refer to the Basis for Opinion or Material Uncertainty sections for matters reported there.

Practice questions from Advanced Auditing, Assurance and Professional Ethics

Audit Reports, KAMs and Modified Opinions in other exams

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

Audit Reports, KAMs and Modified Opinions: frequently asked questions

What are the types of modified opinion under SA 705?

There are three: qualified, adverse and disclaimer. Qualified is used for material but not pervasive matters. Adverse is for material and pervasive misstatements. Disclaimer is for material and pervasive inability to obtain evidence.

What is the difference between an EOM and an OMP?

An EOM refers to a matter already presented or disclosed in the financial statements that is fundamental to users' understanding. An OMP refers to a matter not presented or disclosed in the statements that is relevant to users' understanding of the audit, the auditor's responsibilities or the report. Neither modifies the opinion.

Are KAMs required for every audit?

SA 701 requires KAMs for audits of listed entities. For other entities, they are given if the auditor decides to or is required by law or regulation.

Can a KAM replace a qualified opinion?

No. KAMs communicate significant audit matters and are not a substitute for modifying the opinion. A matter leading to a modified opinion is reported in the Basis for Opinion section, and the KAM section only cross-refers to it.