SA 705 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
SA 705 tells the auditor what to do when the financial statements cannot get a clean opinion. It sets three types of modified opinion, explains how to choose between them, and prescribes how the report must change.
SA 705 (Revised), as effective for audits of financial statements for periods beginning on or after 1 April 2018, applies whenever the auditor concludes that a modification is needed. ICAI may revise standards, so check icai.org for the current text. Many modifications can be avoided by reviewing records early, as in a financial and legal due diligence exercise.
The auditor modifies the opinion when the statements as a whole are materially misstated, or when the auditor cannot obtain sufficient appropriate evidence (paragraph 6). The type depends on the nature of the matter and whether its effects are pervasive. Material but not pervasive: qualified. Misstated and pervasive: adverse. Unable to get evidence and possible effects pervasive: disclaimer. The report states the reasons in a Basis section named after the type of opinion.
Types of modified opinion (paragraphs 2-5)
The standard sets three types: qualified, adverse and disclaimer. The choice rests on the nature of the matter, whether statements are misstated or the auditor cannot get enough evidence, and on the auditor's judgement of pervasiveness (paragraph 2).
"Pervasive" describes effects that, in the auditor's judgement, are not confined to specific elements, accounts or items; or, if confined, represent or could represent a substantial proportion of the statements; or, for disclosures, are fundamental to users' understanding (paragraph 5).
Decision table (A1, in the SA's own structure, re-stated)
| Nature of the matter | Material but not pervasive | Material and pervasive |
|---|---|---|
| Statements are materially misstated | Qualified opinion | Adverse opinion |
| Unable to obtain sufficient appropriate evidence | Qualified opinion | Disclaimer of opinion |
A material misstatement can arise from the appropriateness of the accounting policies chosen, how they are applied, or the adequacy of disclosures (A3).
When a modification is required (paragraph 6)
The auditor modifies the opinion when concluding, on the evidence, that the statements as a whole are materially misstated, or when unable to obtain sufficient appropriate evidence to conclude that they are not (paragraph 6). The two routes lead to the types in the table above (paragraphs 7-10).
- Qualified: misstatements are material but not pervasive, or the possible effects of undetected misstatements could be material but not pervasive (paragraph 7).
- Adverse: having obtained sufficient evidence, the auditor concludes misstatements are both material and pervasive (paragraph 8).
- Disclaimer: unable to get sufficient evidence, and possible effects could be both material and pervasive (paragraph 9). Also, in extremely rare circumstances involving multiple uncertainties, where even with sufficient evidence on each, their interaction and cumulative effect make an opinion impossible (paragraph 10; compare SA 570 part 2).
Management-imposed limitations (paragraphs 11-15)
If, after accepting the engagement, the auditor becomes aware that management has imposed a limitation likely to lead to a qualified opinion or disclaimer, the auditor asks management to remove it (paragraph 11). If management refuses, the auditor tells those charged with governance (unless all are involved in management) and considers whether alternative procedures are possible (paragraph 12).
If the evidence cannot be obtained (paragraph 13):
| Possible effects of undetected misstatements | Auditor's action |
|---|---|
| Material but not pervasive | Qualify the opinion |
| Material and pervasive, so a qualification would be inadequate | Withdraw from the audit, where practicable and possible under law; or, if withdrawal before issuing the report is not practicable or possible, disclaim an opinion |
Before withdrawing, the auditor tells governance of misstatements found that would have led to a modification (paragraph 14). When an adverse opinion or disclaimer is given on the statements as a whole, the report cannot also carry an unmodified opinion on a single statement or specific element under the same framework, because that would contradict it (paragraph 15; see SA 805).
What the report says (paragraphs 16-29)
| Report element | Requirement | Paragraph |
|---|---|---|
| Opinion heading | "Qualified Opinion", "Adverse Opinion" or "Disclaimer of Opinion" | 16 |
| Qualified | States that, except for the effects (or possible effects) of the matters in the Basis section, the statements present fairly or are prepared in accordance with the framework | 17 |
| Adverse | States that, because of the matters in the Basis section, the statements do not present fairly or were not prepared in accordance with the framework | 18 |
| Disclaimer | States that no opinion is expressed, that the auditor could not obtain sufficient evidence, and changes "audited" to "engaged to audit" | 19 |
| Basis heading | Becomes "Basis for Qualified Opinion", "Basis for Adverse Opinion" or "Basis for Disclaimer of Opinion", with a description of the matter | 20 |
| Amounts | Describe and quantify financial effects of a misstatement tied to specific amounts, unless impracticable, and say so if it is | 21 |
| Narrative disclosures | Explain how they are misstated | 22 |
| Non-disclosure | Discuss with governance, describe the omitted information and, unless prohibited, include the omitted disclosures if practicable and supported by evidence | 23 |
| Inability to get evidence | Give the reasons | 24 |
| Sufficiency statement | For qualified and adverse, amended to include the word "qualified" or "adverse"; for a disclaimer the responsibility reference and sufficiency statement are left out | 25-26 |
| Other matters | Even with adverse or disclaimer, describe other matters that would have required a modification, and their effects | 27 |
When disclaiming, the description of the auditor's responsibilities is cut back to three points: the responsibility to conduct an audit under the SAs and issue a report; that, because of the matters in the Basis section, sufficient evidence could not be obtained; and the independence and ethics statement (paragraph 28). Unless law requires, a disclaimer report has no Key Audit Matters section and no Other Information section (paragraph 29; see SA 701).
The standard's appendix contains illustrative reports for different modifications. They show the pattern described above, for example a qualified opinion because of a material misstatement and a disclaimer because of an inability to obtain evidence; the layouts follow SA 700 part 2.
Communication with governance (paragraph 30)
When the auditor expects to modify the opinion, the circumstances leading to it and the wording are communicated to those charged with governance (see SA 260).
Links to other standards
A first-year audit where the opening inventory cannot be verified is a typical qualification route; see SA 510. A refused confirmation or an unreliable representation can lead to a modification under SA 505 and SA 580. For the Companies (Auditor's Report) Order, where unfavourable answers need reasons, see our CARO guidance on reasons for unfavourable answers and the form of report.
Illustrative example
Cobalt Logistics Pvt Ltd is an invented company; all figures are illustrative. Case A: management has not provided for a Rs 3 crore receivable that is clearly irrecoverable, which is material but confined to one account, so the auditor qualifies the opinion ("except for"), explains the matter in a Basis for Qualified Opinion section and quantifies the effect on profit. Case B: the company's books for its largest subsidiary are missing, and the possible effects are material and pervasive; the auditor disclaims the opinion. Case C: the statements are prepared on a going concern basis although operations have stopped and all lenders have recalled loans; misstatements are material and pervasive, so the opinion is adverse.
Need help avoiding a modified opinion?
Most modifications trace back to missing records, unreconciled balances or incomplete disclosures that could have been fixed before sign-off. TaxClue's financial and legal due diligence team can help you review balances, records and disclosures well before the audit report is drawn up.
Key takeaways
- Two triggers: material misstatement, or inability to obtain sufficient appropriate evidence.
- Pervasiveness decides between qualified and adverse, or qualified and disclaimer.
- The report must explain the matter and, where possible, quantify its effect.
- A management-imposed limitation must be challenged and may lead to withdrawal or disclaimer.
- Governance is told before the report is issued.
Read next
- SA 700 part 2: elements of the auditor's report
- SA 706: emphasis of matter
- SA 570 part 2: going concern reporting
- SA 701: key audit matters
Disclaimer: Based on the Standards on Auditing and quality standards issued by the Institute of Chartered Accountants of India, in the versions named in the article, and ICAI's announcement of 31 March 2026 on SQM 1 and SQM 2, as consulted on 3 October 2026. ICAI revises standards from time to time; check the current text and effective dates on icai.org. This article is general information, not legal advice; check the official text before acting.