SA 705 tells the auditor when the opinion must be modified and which type to use. The choice rests on two questions: is the problem a misstatement or a lack of evidence, and is it material only, or material and pervasive? The answers point to a qualified opinion, an adverse opinion or a disclaimer of opinion.
Last reviewed: 17 October 2026. Facts checked. We opened the IFAC-hosted text of ISA 705 (Revised), which SA 705 mirrors, and the ICAI-hosted text of SA 700 for the surrounding report rules. We did not open the ICAI text of SA 705 itself, so we do not quote its paragraph numbers. Our existing post on types of audit opinion gives the overview. This one adds the decision logic and the process.
When the opinion must be modified
Two situations trigger a modified opinion:
- The auditor concludes, from the evidence, that the financial statements as a whole are not free from material misstatement.
- The auditor cannot obtain sufficient appropriate evidence to conclude that they are free from material misstatement.
Either one is enough. A modified opinion is a form of reporting, not a penalty.
What "pervasive" means
This is the word that decides the type. In the standard, pervasive effects are those that, in the auditor's judgment:
- are not confined to specific elements, accounts or items of the statements; or
- if confined, represent or could represent a substantial proportion of the statements; or
- for disclosures, are fundamental to users' understanding of the statements.
There is no percentage. It is a judgment, and the auditor should document the reasons.
The decision grid
| Nature of the problem | Material but not pervasive | Material and pervasive |
|---|---|---|
| Misstatement found (evidence obtained) | Qualified opinion | Adverse opinion |
| Evidence not available (possible effects) | Qualified opinion | Disclaimer of opinion |
In plain words:
- Qualified. "The statements are fine, except for this."
- Adverse. "The statements do not give a true and fair view."
- Disclaimer. "I could not get enough evidence, so I do not express an opinion."
The standard also allows a disclaimer in extremely rare cases with multiple uncertainties, where the combined effect makes an opinion impossible even though evidence on each uncertainty was obtained.
How the report changes
The standard prescribes the headings. The Opinion section is headed "Qualified Opinion", "Adverse Opinion" or "Disclaimer of Opinion". The wording changes too:
- A qualified opinion says that, except for the effects of the matter described in the Basis for Qualified Opinion section, the statements give a true and fair view. Where the cause is a lack of evidence, the phrase is except for the possible effects.
- An adverse opinion says that, because of the significance of the matters described, the statements do not give a true and fair view.
- A disclaimer says the auditor does not express an opinion.
The Basis for Opinion section is renamed to match, and it explains the matter. The layout of the rest of the report is in our guide to the audit report format under SA 700.
One more rule is easy to miss. If the auditor gives an adverse opinion or a disclaimer on the statements as a whole, the same report cannot also give an unmodified opinion on a single statement or element under the same framework. That would contradict the main opinion.
When management limits the audit
Suppose management stops the auditor from getting evidence after the engagement was accepted. The standard sets a sequence:
- If the limitation would likely lead to a qualification or a disclaimer, ask management to remove it.
- If management refuses, tell those charged with governance, unless all of them are involved in managing the entity.
- Try alternative procedures to get the evidence.
- If you still cannot get it, decide the effect. If possible effects are material but not pervasive, qualify. If they are material and pervasive, withdraw where practicable and possible under law. If withdrawal is not possible before the report is issued, disclaim.
- If you withdraw, first tell those charged with governance about any misstatements found that would have led to a modification.
Note the order. Disclaiming is not the first answer to a scope limit. Withdrawal comes first, where the law allows it.
Worked examples (illustrative, no figures)
- A receivable the auditor cannot confirm or verify any other way. If it is material but sits in one account, a qualified opinion because of possible effects. Where possible effects reach most of the statements, a disclaimer.
- A company that does not recognise a liability it must record. If material but contained to one item, qualified. If the error runs through the statements, adverse.
- Records destroyed so that most balances cannot be tested. The possible effects are material and pervasive, so a disclaimer, after the withdrawal question is considered.
These are patterns, not rules. Each depends on the facts and on materiality. Our materiality guide explains how the threshold is set.
What to do before you modify
- Document the matter and the evidence, or the lack of it.
- Quantify the misstatement where you can, and say if you cannot.
- Decide on materiality, then pervasiveness, and write down why.
- Discuss the matter with management and those charged with governance early. Do not let it be a surprise at sign-off.
- Draft the Basis for Opinion section so a reader can see what the matter is, how it affects the statements and, where possible, the size of the effect.
- Check the other sections of the report for consistency, including key audit matters and going concern. A going concern problem can feed into this decision; our note on going concern indicators may help.
Keep the working papers in order. See what to keep under SA 230.
Frequently Asked Questions
What is the difference between a qualified and an adverse opinion?
Both involve a material misstatement. A qualified opinion is used when the effect is material but not pervasive, so the rest of the statements can be relied on. An adverse opinion is used when it is material and pervasive.
Is a disclaimer the same as an adverse opinion?
No. An adverse opinion says the statements are wrong. A disclaimer says the auditor could not gather enough evidence to say either way.
Can an auditor just resign instead of modifying?
Where the limitation is imposed by management and the possible effects are material and pervasive, the standard says to withdraw where practicable and possible under law. Before withdrawing, the auditor tells those charged with governance about misstatements found.
Does an emphasis of matter paragraph modify the opinion?
No. See our post on SA 706. It cannot replace a modified opinion.
Related Articles
- Types of audit opinion in India
- SA 700 and the audit report format
- Key audit matters under SA 701
- Audit materiality explained
For a first look at a going concern problem, try the going concern indicator scorer.
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