Corporate Accounting and Auditing · Audit Report and Reporting under CARO

SA 705 Modifications to the Auditor's Report Explained

Updated 10 October 2026 · Fact-checked

SA 705 tells the auditor when to modify the opinion. A modification arises when financial statements have a material misstatement or the auditor cannot get sufficient appropriate evidence. If the effect is material but not pervasive, give a qualified opinion. If it is material and pervasive, give an adverse opinion (misstatement) or a disclaimer (no evidence).

Understand Modifications to the Auditor's Report (SA 705)

An auditor normally gives an unmodified opinion: the financial statements give a true and fair view. SA 705 deals with the cases where the auditor cannot say this. There are only two reasons for a modification.

First, the auditor concludes the financial statements are materially misstated. This is a disagreement with management, for example about an accounting policy, a number or a disclosure. Second, the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the statements are free from material misstatement. This is a limitation on scope, for example the auditor could not attend inventory counting and no alternative procedure worked.

The type of opinion depends on two tests: the nature of the problem (misstatement or inability to get evidence) and how pervasive the effect is. Pervasive effects are those that are not confined to specific items, or if confined, represent a substantial proportion of the financial statements, or relate to disclosures fundamental to users' understanding.

This gives a simple grid. Material but not pervasive: qualified opinion ('except for') in both cases. Material and pervasive: adverse opinion if there is a misstatement, disclaimer of opinion if there is a scope limitation.

When the opinion is modified, the report needs a Basis for Qualified / Adverse Opinion / Disclaimer of Opinion paragraph. It describes the matter and, where practicable, quantifies the effect. It comes immediately after the opinion paragraph. Also, a limitation imposed by management after the auditor accepted the engagement may lead the auditor to request removal of the limitation, and if it is not removed, qualify or disclaim, as the circumstances require.

Key rules to remember

Decision grid: misstatement: Material but not pervasive → Qualified opinion; Material and pervasive → Adverse opinion; Used when the auditor disagrees with management on the financial statements.
Decision grid: inability to obtain evidence: Material but not pervasive → Qualified opinion; Material and pervasive → Disclaimer of opinion; Used for scope limitations where possible effects could be material.
Opinion wording: Qualified (misstatement): 'except for the effects of the matter described in the Basis for Qualified Opinion paragraph'; Qualified (scope limitation): 'except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph'; Adverse: 'do not give a true and fair view'; Disclaimer: 'we do not express an opinion'. The heading of the opinion section also changes to match.
Report structure: Opinion → Basis for (Qualified / Adverse) Opinion or Basis for Disclaimer of Opinion; The basis paragraph must state the reasons and, where practicable, quantify the effect.

How to solve Modifications to the Auditor's Report (SA 705) questions

Use this sequence for any scenario question asking what opinion the auditor should give.

1Read the facts and identify the problem: is it a wrong accounting treatment or disclosure (misstatement), or something the auditor could not verify (scope limitation)?
2Decide whether the matter is material. If it is not material, the opinion stays unmodified.
3Decide whether the effect is pervasive: widespread across the statements, or a substantial proportion, or fundamental to users' understanding.
4Apply the grid: misstatement gives qualified or adverse; inability to get evidence gives qualified or disclaimer.
5State the opinion in the correct words and say why, quoting the figures from the question. For a misstatement use 'except for the effects'; for a scope limitation use 'except for the possible effects'.
6Mention the Basis paragraph: describe the matter and quantify the effect where practicable.
7If the limitation was imposed by management, add that the auditor should ask for its removal first.

Quickest way: Two questions, four outcomes

When to use it: Use in MCQs and short scenario questions where you must pick the type of opinion in under a minute.

Ask: wrong numbers or no evidence? Wrong numbers means misstatement; no evidence means scope limitation.
Ask: is it just a part or is it everywhere? Part means qualified; everywhere means pervasive.
If pervasive, pick adverse for wrong numbers and disclaimer for no evidence.
Check the keywords: 'except for' means qualified, 'do not give a true and fair view' means adverse, 'do not express an opinion' means disclaimer.

Common mistakes in Modifications to the Auditor's Report (SA 705)

Giving an adverse opinion when the auditor could not get evidence on a pervasive matter.
Students link 'pervasive' to 'adverse' automatically.
Fix: Adverse is only for misstatement. A pervasive scope limitation gives a disclaimer of opinion.
Calling a qualified opinion a 'partial disclaimer' or mixing the two terms.
Both arise from a scope limitation, so they look alike.
Fix: Qualified expresses an opinion 'except for' the matter. A disclaimer expresses no opinion at all.
Modifying the opinion for an immaterial item.
Students treat every error as reportable.
Fix: Test materiality first. An immaterial matter leaves the opinion unmodified.
Not writing the Basis paragraph or leaving the effect unquantified.
Students focus only on naming the opinion.
Fix: Always state that a Basis paragraph follows the opinion and describes the matter and, where practicable, its financial effect.
Confusing SA 705 with SA 706 Emphasis of Matter.
Both add a paragraph to the report.
Fix: An Emphasis of Matter paragraph does not change the opinion. A modification under SA 705 does.

Worked examples

Example 1

During the audit of Sunrise Textiles Ltd, the auditor finds that inventory of ₹8,00,000 was not counted by the company at year end and no alternative procedure can verify it. Total assets are ₹5,00,00,000 and profit before tax is ₹60,00,000. Which opinion should the auditor give?

Show the solution

Nature of problem: the auditor cannot obtain sufficient appropriate evidence, so this is a scope limitation.
Materiality: ₹8,00,000 is about 13.3% of profit before tax (8,00,000 ÷ 60,00,000), so it is material.
Pervasiveness: it is a specific item and about 1.6% of total assets (8,00,000 ÷ 5,00,00,000). It is not pervasive.
Apply the grid: scope limitation, material but not pervasive gives a qualified opinion.
Wording: because this is a scope limitation, the opinion says 'except for the possible effects'.

Answer: Qualified opinion ('except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph'), with the Basis paragraph explaining the inventory limitation.

Example 2

Management of Bharat Components Ltd refuses to provide for a doubtful debt and an impairment loss that together overstate profit and assets. The effects are material and the auditor judges them to be pervasive to the financial statements. What opinion is appropriate, and how should the report be structured?

Show the solution

Nature of problem: the auditor disagrees with management's accounting, so it is a misstatement.
Materiality: the effects are stated to be material.
Pervasiveness: the effects are pervasive.
Apply the grid: misstatement, material and pervasive gives an adverse opinion.
Report structure: the opinion section states that the financial statements do not give a true and fair view, headed 'Adverse Opinion'. A 'Basis for Adverse Opinion' paragraph follows, describing both items and quantifying their effect where practicable.

Answer: Adverse opinion, supported by a Basis for Adverse Opinion paragraph that describes and, where practicable, quantifies the effects.

Exam tips

Draw the 2×2 grid at the start of your answer. It earns step marks and keeps you from mixing opinions.
In MCQs, check whether the facts describe a disagreement or a lack of evidence before looking at the options.
Quote the figures from the question when judging materiality and pervasiveness, and do it in a line or two.
Use the exact wording of each opinion; examiners look for 'except for', 'do not give a true and fair view' and 'we do not express an opinion'.
Keep SA 705 and SA 706 separate: modified opinion versus an added paragraph with the opinion unchanged.

Practice questions from Audit Report and Reporting under CARO

Modifications to the Auditor's Report (SA 705) in other exams

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

Modifications to the Auditor's Report (SA 705): frequently asked questions

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

A qualified opinion says the statements are fairly presented except for a specific matter that is material but not pervasive. A disclaimer means the auditor could not get sufficient evidence and the possible effects are both material and pervasive, so no opinion is given.

When does an auditor give an adverse opinion?

An auditor gives an adverse opinion when the financial statements contain misstatements that are both material and pervasive. The auditor then states that the statements do not give a true and fair view.

Is a limitation on scope always a qualified opinion?

No. If the possible effects of the limitation are material but not pervasive, the opinion is qualified. If they are material and pervasive, the auditor disclaims an opinion.

Does an Emphasis of Matter paragraph modify the opinion?

No. An Emphasis of Matter paragraph under SA 706 draws attention to a matter already properly presented or disclosed. The opinion remains unmodified.