SA 705 — Modified Opinions: Qualified, Adverse, and Disclaimer
## SA 705: Modifications to the Opinion in the Independent Auditor's Report
### Scope of SA 705
SA 705 deals with the auditor's responsibility to issue an appropriately modified opinion when:
The auditor concludes the FS are not free from material misstatement, OR
The auditor is unable to obtain sufficient appropriate audit evidence (S&A AE)
It also prescribes how the form and content of the audit report changes when a modified opinion is issued.
---
### The Three Types of Modified Opinion
#### 1. Qualified Opinion
When to issue: The auditor issues a qualified opinion when:
Misstatements are material but NOT pervasive to the FS (evidence obtained, but misstatement found), OR
Unable to obtain S&A AE, but possible effects of undetected misstatements could be material but NOT pervasive.
> Keyword: Material + NOT Pervasive
---
#### 2. Adverse Opinion
When to issue: The auditor issues an adverse opinion when:
Misstatements are both material AND pervasive to the FS.
> Keyword: Material + Pervasive (with sufficient evidence obtained)
---
#### 3. Disclaimer of Opinion
When to issue: The auditor disclaims an opinion when:
Unable to obtain S&A AE, AND
The possible effects of undetected misstatements could be both material AND pervasive.
> Keyword: Unable to obtain evidence + Material + Pervasive
---
### Decision Matrix
Condition
Evidence Obtainable?
Material?
Pervasive?
Opinion Type
Misstatement found
Yes
Yes
No
Qualified
Misstatement found
Yes
Yes
Yes
Adverse
Cannot obtain evidence
No
Possible – Yes
No
Qualified
Cannot obtain evidence
No
Possible – Yes
Yes
Disclaimer
---
### What is 'Pervasive'?
Pervasive effects are those that:
Are not confined to specific elements, accounts, or items in the FS
Represent a substantial proportion of the FS, or
Relate to disclosures that are fundamental to users' understanding of the FS
---
### Overall Opinion Hierarchy
```
Audit Opinion
├── Unmodified Opinion (SA 700) — FS free from MM
└── Modified Opinion (SA 705)
├── Qualified Opinion — Material, NOT Pervasive
├── Adverse Opinion — Material AND Pervasive (evidence obtained)
└── Disclaimer of Opinion — Material AND Pervasive (no evidence)
```
Worked example
### Example 1
Example 1 — Qualified vs. Adverse:
An auditor is auditing PQR Ltd. The company has misstated its inventory by ₹50 lakhs (material). However, the rest of the FS — including revenue, debtors, payables, and all disclosures — are fairly stated. The ₹50 lakh error relates only to one inventory line item.
Analysis: The misstatement is material but NOT pervasive — it is confined to one specific item and does not undermine the FS as a whole.
Opinion:Qualified Opinion under SA 705.
### Example 2
Example 2 — Adverse Opinion:
ABC Ltd. has followed a completely incorrect revenue recognition policy, resulting in an overstatement of revenue by ₹500 crores. This flows through to profit, retained earnings, tax, and nearly every financial line item.
Analysis: The misstatement is material (extremely large) and pervasive (affects the FS as a whole — multiple line items, disclosures, and the overall picture presented to users).
Opinion:Adverse Opinion — the FS do not give a true and fair view.
### Example 3
Example 3 — Disclaimer of Opinion:
The auditor of DEF Ltd. is denied access to the subsidiary's records, which account for 70% of consolidated revenue. The auditor cannot perform any alternative procedures.
Analysis: The auditor is unable to obtain S&A AE. The possible effects are both material (70% of revenue) and pervasive (core to understanding the group's performance).
Opinion:Disclaimer of Opinion — the auditor cannot form any opinion on the FS.
⚠️ Common exam mistakes
Confusing Adverse Opinion with Disclaimer — Adverse is when evidence IS obtained but misstatement is pervasive; Disclaimer is when evidence CANNOT be obtained and effects could be pervasive.
Forgetting the 'pervasive' dimension — students often focus only on 'material' and ignore whether it is also pervasive.
Stating that a Disclaimer means the auditor found errors — a Disclaimer means the auditor could NOT audit, not that errors were found.
Applying SA 705 to non-material misstatements — modifications are only triggered when misstatements are material (or potentially material).
Mixing up which SA governs which opinion: SA 700 = Unmodified; SA 705 = Modified (Qualified/Adverse/Disclaimer); SA 706 = EMP/OMP.
Bare-Act text Qualified Opinion / Adverse Opinion / Disclaimer of Opinion · SA 705 (Revised) — Modifications to the Opinion in the Independent Auditor's Report (ICAI) · click to expand
The auditor shall express a qualified opinion when: the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.