## SA 705 – Modifications to the Auditor's Opinion
### Objective
To modify the opinion when:
- [A] The auditor obtains Sufficient Appropriate Audit Evidence (SAAE) but concludes the FS are materially misstated, OR
- [B] The auditor is unable to obtain SAAE that the FS are free from material misstatement.
---
### Key Concept: Pervasive
| Condition | Meaning |
|---|---|
| Not confined to one item | Affects the FS as a whole |
| Confined to one area | But impacts a substantial portion of FS (benchmark: ≥ 60% of Total Assets — referred to as 'Babylon' in notes) |
| Relates to disclosures | Fundamental to users' understanding of the FS |
> Pervasive ≠ just material. Something can be material without being pervasive. The distinction drives which type of modified opinion is issued.
---
### Three Types of Modified Opinion
| Situation | Material, NOT Pervasive | Material AND Pervasive |
|---|---|---|
| SAAE obtained → FS are misstated | Qualified | Adverse |
| SAAE NOT obtained → FS could be misstated | Qualified | Disclaimer |
#### Summary mnemonics
- Qualified = problem exists but is limited in scope (either material-not-pervasive misstatement, or possible-material-not-pervasive unknown)
- Adverse = worst certain outcome — auditor has evidence that FS are both materially AND pervasively misstated
- Disclaimer = worst uncertain outcome — auditor cannot form any opinion because scope limitation is so severe its possible effect is both material AND pervasive
---
### Dealing with Scope Limitations (Inability to Obtain SAAE)
When a limitation is imposed during the engagement:
1. Request management to remove the limitation.
2. If management cannot/will not → Request TCWG (Those Charged With Governance) to remove the limitation.
3. If TCWG also cannot remove it → evaluate the impact:
- Possible effect material but NOT pervasive → Qualified opinion
- Possible effect material AND pervasive → Disclaimer of opinion
4. Option to withdraw from the engagement (notify TCWG, explaining the impact of the misstatement).
- If withdrawal is not possible → issue a Disclaimer of opinion.
---
### Auditor's Decision Flow
```
Uncorrected misstatement found?
└─ Material?
├─ YES → SAAE obtained?
│ ├─ Pervasive? YES → Adverse
│ └─ Pervasive? NO → Qualified
└─ Could be material (SAAE not obtained)?
├─ Pervasive? YES → Disclaimer
└─ Pervasive? NO → Qualified
```