ISA 705 Modifications to the Opinion in

the Independent Auditors Report

Introduction
International Standard on Auditing 705: Modifications to the Opinion in the
Independent Auditors Report provides guidance on how auditors report needs to be
modified if expressing a normal opinion is not appropriate in case financial statements
are misstated.

Executive summary
Auditor shall express a qualified opinion if:

having obtained sufficient appropriate audit evidence, auditor concludes that

misstatements in the financial statements are material but not pervasive

auditor is unable to obtain sufficient appropriate audit evidence that financial

statements thus unable to form an opinion. However, concludes that undetected
misstatements could be material but no pervasive

Auditor shall express an adverse opinion as a result of obtaining sufficient appropriate

audit evidence auditor concludes that misstatements are material but also pervasive.
Auditor shall express a disclaimer if auditor is unable to obtain sufficient appropriate
audit evidence and thus cannot form an opinion but concludes that undetected
misstatements could be both material and pervasive.

1 Understanding Basics
Auditor is duty bound to express his opinion on financial statements in a written report
whether financial statements are giving true and fair view of the business. If they do, the
auditor expresses an unmodifiedopinion.
Unmodified opinion simply means that financial statements are free from material
misstatements. However, things are not always good. And auditor may conclude that
expressing an unmodified opinion is incorrect then auditor has to modify his opinion.

Under what situation modification is necessary and how is that carried out in auditors
report, all of this other relevant guidelines are provided in ISA 705.

2 Modification of opinion reasons

Auditor is required to modify his opinion in auditors report if:
1. Audit evidence obtained indicates and auditor concludes on its basis that financial
statements are materially misstated (presence of evil confirmed)
2. Auditor is unable to gather sufficient appropriate audit evidence so as to conclude
that financial statements are free from material misstatements (absence of good
good is not confirmed)
Above two points implies one very important thing i.e. auditor cannot declare something
good if he do not have enough evidence to support it.
Putting it in easy words, something is not good unless and until you are very sure that it
IS good. If you dont know it is bad this does not automatically mean that it might be
good.

3 What is modified opinion?

An opinion in the auditors report is said to be modified if it is:

Qualified opinion a conditional opinion also known as except for opinion. An

opinion according to which except for certain aspect of financial statement everything
else is true and fair.

Adverse opinion an opinion in which auditor declares that financial statements as a

whole are not giving true and fair view.

Disclaimer of opinion It is not really an opinion rather a statement that no opinion

can be formed due to absence of sufficient appropriate audit evidence.

4 Determining modification type

It is up to the auditor to decide what modification is appropriate in the circumstances of
the engagement. However, for each type of modification certain conditions must be
fulfilled.

4.1 Qualified opinion

The auditor shall express a qualified opinion if:

Based on the audit evidence obtained auditor concludes that misstatements in the
financial statements are material but not pervasive individually or in aggregate.

Auditor is unable to gather sufficient appropriate audit evidence to form basis of

conclusion however, he concludes that undetected misstatements could be material
but not pervasive.

4.2 Adverse opinion

As a result of audit procedures sufficient appropriate audit evidence has been obtained
and on the basis of such evidence auditor concludes that misstatements in financial
statements are material and pervasive.
In such case auditor shall express adverse opinion.
4.3 Disclaimer of opinion
As a result of audit procedures auditor is unable to gather sufficient appropriate audit
evidence. And thus auditor is unable to form any conclusions regarding financial
statements and thus he concludes that undetected misstatements in the financial
statements could be both material and pervasive.
In very rare circumstances, even if sufficient appropriate audit evidence is obtained for
other aspects of the financial statements, due to multiple uncertainties auditor is unable
to conclude regarding effects of such uncertainties on financial statements therefore,
cannot express any opinion.

5 Why no sufficient appropriate audit

evidence?
Most of the time auditor is not able to collect sufficient appropriate audit evidence due
to:
1. Limitations imposed by circumstances
2. Limitations imposed by management
5.1 Limitations imposed by management

Usually the terms of engagement are decided before auditor actually starts carrying out
audit procedures and in the engagement letter management may include the limitations
on the scope of audit work. If auditor finds such limitations significantly reducing his
capacity to obtain sufficient audit evidence then auditor will ask management/client to
remove such limitations. If such limitations are not removed then auditor shall not
accept the audit engagement.
If after accepting the audit engagement, auditor becomes aware of limitations on his
audit work which may result in modified opinion then he shall ask management to
remove the imposed limitations.
If management refuses to remove such limitations then auditor shall communicate the
fact to those charged with governance and assess if alternative audit procedures can
help collect sufficient audit evidence.
If limitations are not removed and as a result auditor is unable to gather required
evidence then auditor decides about the opinion modification in his opinion as follows:
1. If auditor concludes that undetected misstatements could be material but not
pervasive then express a qualified opinion
2. If auditor concludes that undetected misstatements could be both material and
pervasive then:
1. Auditor shall withdraw from engagement and communicate the matter to
those charged with governance detailing the reasons of modification.
2. If withdrawal from engagement is not possible then express a disclaimer
of opinion