## Audit Opinion: Unmodified vs Modified

After completing all audit procedures, the auditor forms an opinion on whether the financial statements (FS) present a true and fair view.

### Two Broad Categories

Opinion	Condition
Unmodified	FS are free from material misstatement
Modified (SA 705)	FS are NOT free from material misstatement

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### SA 705 – Three Types of Modified Opinion

The key variables are:

1. Whether the auditor obtained Sufficient Appropriate Audit Evidence (SAAE)

2. Whether the misstatement (or possible misstatement) is Pervasive (affects FS as a whole) or Not Pervasive (isolated)

#### 1. Qualified Opinion

Scenario A – Auditor HAS obtained SAAE:

Misstatement exists and is Material BUT NOT Pervasive
The FS taken as a whole are still fairly presented, except for the specific matter

Scenario B – Auditor is UNABLE to obtain SAAE:

The possible misstatement could be Material BUT NOT Pervasive
This is a scope limitation (e.g., auditor could not attend physical stock count)

#### 2. Adverse Opinion

Auditor HAS obtained SAAE
Misstatement is both Material AND Pervasive
The FS as a whole do NOT give a true and fair view

#### 3. Disclaimer of Opinion

Auditor is UNABLE to obtain SAAE
Possible misstatement could be Material AND Pervasive
So severe that the auditor refuses to express any opinion at all

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### Quick-Reference Decision Matrix

SAAE Obtained?	Misstatement Severity	Opinion Issued
Yes	Material, NOT pervasive	Qualified
Yes	Material + Pervasive	Adverse
No	Material, NOT pervasive	Qualified
No	Material + Pervasive	Disclaimer

> Memory hook: Think of a spectrum of severity. Qualified = "except for this one thing." Adverse = "the FS are wrong overall." Disclaimer = "I simply cannot say."

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### Pervasive vs. Not Pervasive

	Pervasive	Not Pervasive
Meaning	Affects FS as a whole; multiple/fundamental elements	Isolated to a specific account or transaction
Example	Going Concern basis used when entity is near liquidation	Only inventory closing stock valued incorrectly

Worked example

### Example 1

Example 1 – Adverse Opinion: Company X is on the verge of liquidation. The appropriate accounting basis is liquidation basis, not going concern. However, management continues to prepare accounts on a going concern basis. The auditor has obtained SAAE confirming the going-concern assumption is inappropriate. Since the impact is material AND pervasive (the entire basis of preparation is wrong), the auditor issues an Adverse Opinion.

### Example 2

Example 2 – Qualified Opinion (SAAE obtained): During audit of ABC Ltd, the auditor finds that closing stock worth ₹50 lakh is overvalued (client used higher of cost or NRV instead of lower of cost or NRV). The misstatement is material but confined only to inventory — it does not affect the FS as a whole pervasively. The auditor issues a Qualified Opinion — 'except for the overvaluation of closing stock, the FS present a true and fair view.'

### Example 3

Example 3 – Disclaimer: The auditor of DEF Ltd was denied access to the subsidiary's records, which represent 80% of total assets. Unable to obtain SAAE on the most significant portion of the FS, and the impact would be both material and pervasive. The auditor issues a Disclaimer of Opinion.

⚠️ Common exam mistakes

Confusing Disclaimer with Adverse — Disclaimer is issued when SAAE cannot be obtained (uncertainty); Adverse is when SAAE IS obtained but reveals pervasive misstatement.
Thinking 'Qualified' always means pervasive — Qualified is specifically for material-but-NOT-pervasive situations, whether SAAE was obtained or not.
Forgetting that both Qualified scenarios (SAAE obtained and not obtained) lead to Qualified — students often think only one scenario applies.

Reference: SA 705 — SA 705 (Revised) – Modifications to the Opinion in the Independent Auditor's Report

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Audit Opinion Types & SA 705 – Modifications to Opinion

Worked example

⚠️ Common exam mistakes