## SA 705 – Modified Opinions

### Classification of Audit Reports

```

Auditor's Report

├── Unmodified Opinion

└── Modified Report

├── Modified WITHOUT modifying the opinion

│ ├── Emphasis of Matter Para (EOM) ← SA 706

│ └── Other Matter Para (OM) ← SA 706

└── Modified BY modifying the opinion

├── Auditor HAS SAAE but misstatements exist

│ ├── Material but NOT pervasive → QUALIFIED OPINION

│ └── Material AND pervasive → ADVERSE OPINION

└── Auditor UNABLE to obtain SAAE

├── Material but NOT pervasive → QUALIFIED OPINION

└── Material AND pervasive → DISCLAIMER OF OPINION

```

---

### Key Concept: Pervasive Effects

Pervasive effects are those that:

1. Are not confined to specific elements, accounts, or items of the FS; or

2. If confined, represent or could represent a substantial proportion of the FS; or

3. In relation to disclosures, are fundamental to users' understanding of the FS.

---

### Communication with TCWG

When the auditor expects to modify the opinion, they must communicate with TCWG:

The circumstances leading to the expected modification.
The wording of the modification.

---

### Special Rule: Disclaimer of Opinion — Amended Responsibilities Description

When disclaiming due to inability to obtain SAAE, the auditor's responsibility description (per SA 700) is trimmed to only:

(a) A statement that the auditor's responsibility is to conduct an audit and issue a report.
(b) A statement that, because of the described matter(s), the auditor was not able to obtain SAAE to provide a basis for an audit opinion.
(c) The independence/ethics statement required by SA 700.

---

### Consequence of Management-Imposed Limitation (Post-Acceptance)

```

Management imposes a limitation after engagement accepted

↓

Request management to remove the limitation

↓

┌─────────────────────┬────────────────────────────────────────┐

│ Limitation removed │ Management REFUSES to remove limitation │

├─────────────────────┼────────────────────────────────────────┤

│ Proceed with audit │ Communicate with TCWG │

│ │ + Perform alternative procedures │

│ │ ↓ │

│ │ Still cannot obtain SAAE │

│ │ ┌────────────────┬───────────────────┐ │

│ │ │ Material, NOT │ Material AND │ │

│ │ │ pervasive │ pervasive │ │

│ │ ├────────────────┼───────────────────┤ │

│ │ │ Qualified │ Withdraw (if │ │

│ │ │ Opinion │ permitted) OR │ │

│ │ │ │ Disclaimer │ │

│ │ └────────────────┴───────────────────┘ │

└─────────────────────┴────────────────────────────────────────┘

```

---

### KAM Restriction under Disclaimer

Unless required by law or regulation, a report with a Disclaimer of Opinion shall not include a KAM section (SA 701).

Worked example

### Example 1

Example 1 – Qualified vs. Adverse: During the audit of ABC Ltd., the auditor finds that inventory worth ₹15 lakhs (out of total assets of ₹500 lakhs) is overstated. The effect is material but confined to inventory — not pervasive. → Qualified Opinion (Except for the effect of…).

### Example 2

Example 2 – Adverse Opinion: The auditor discovers that revenue of ₹400 crores (out of ₹500 crores total) is incorrectly recognised. The misstatement is material and pervasive (affects a substantial proportion of the FS). → Adverse Opinion (FS do not give a true and fair view).

### Example 3

Example 3 – Disclaimer: The auditor of a manufacturing company cannot observe the closing inventory count (₹200 crores, 60% of total assets) and no alternative procedures yield evidence. The potential misstatement is material and pervasive. → Disclaimer of Opinion (auditor does not express an opinion).

### Example 4

Example 4 – Management-imposed limitation: Management refuses to allow the auditor to send bank confirmation letters. The auditor communicates with TCWG and performs alternative procedures (reviewing subsequent receipts, bank statements). If still unable to obtain SAAE and the effect is pervasive, the auditor should withdraw from the engagement if permitted, otherwise issue a Disclaimer.

⚠️ Common exam mistakes

Issuing an Adverse Opinion when the auditor cannot obtain SAAE — Adverse Opinion is for when SAAE is obtained but misstatements EXIST; inability to obtain SAAE leads to Disclaimer (if pervasive).
Issuing a Disclaimer for a non-pervasive limitation — if the limitation is material but not pervasive, a Qualified Opinion is appropriate.
Forgetting to communicate with TCWG before modifying the opinion.
Including a full SA 700 responsibilities description in a Disclaimer report — the description must be amended to the trimmed version.
Not attempting alternative procedures before concluding on inability to obtain SAAE in a management-imposed limitation scenario.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

SA 705 – Modifications to the Opinion in the Independent Auditor's Report

Worked example

⚠️ Common exam mistakes