Qualified, adverse or disclaimer: choosing the opinion
When an auditor modifies the opinion under ISA 705, how misstatement and a limitation of scope lead to different opinions, and who decides.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
The client will not write down the obsolete stock. Or it cannot find the supporting documents for a large part of the year's cash payments. Or the previous bookkeeper left, the records went with him, and the opening balances cannot be verified. In each case the engagement partner must decide whether the opinion is modified, and if so, how. The decision is often made under pressure, near a deadline, with a client arguing for the mildest possible wording.
ISA 705 (Revised) turns that decision into two questions. Answering them in order, and writing the answers down, is the best protection against an opinion that is too soft or too harsh.
Material and pervasive: the two questions
An auditor modifies the opinion when, based on the evidence obtained, the statements as a whole are not free from material misstatement, or when the auditor is unable to obtain sufficient appropriate evidence to conclude that they are.
The first question is the nature of the matter: is it a misstatement, or an inability to obtain evidence?
The second is pervasiveness: are the effects, or possible effects, confined to specific elements, accounts or items of the statements? ISA 705 regards effects as pervasive when they are not confined in that way, or, if confined, represent or could represent a substantial proportion of the statements, or, in relation to disclosures, are fundamental to users' understanding.
| Nature of the matter | Material but not pervasive | Material and pervasive |
|---|---|---|
| The statements are materially misstated | Qualified opinion | Adverse opinion |
| The auditor cannot obtain sufficient appropriate evidence | Qualified opinion | Disclaimer of opinion |
Misstatement versus inability to obtain evidence
The distinction matters because the wording, and what the reader learns, is different.
A misstatement is a disagreement with the statements as prepared: an inappropriate accounting policy, a wrong amount, inadequate disclosure. The auditor knows enough to say the statements are wrong, and usually by how much.
An inability to obtain evidence is a limitation: records destroyed, a count not attended because the auditor was appointed after year end, management refusing access. The auditor does not know whether the statements are wrong.
Limitations imposed by management need particular care. If management refuses a procedure after the engagement is accepted, the auditor asks for the limitation to be removed, communicates with those charged with governance if it is not, and tries alternative procedures. If the possible effects are both material and pervasive and no alternatives work, ISA 705 points to withdrawal where practicable and possible under law, or, if not, a disclaimer.
A worked example in words: the client's warehouse records for the early part of the year were lost in a server failure. Sales and receivables at year end are well evidenced, but cost of sales for the year depends on opening inventory, which nobody can now verify. The effect is confined to cost of sales and opening retained earnings, it is material, and it is not pervasive. The opinion is qualified on the grounds of an inability to obtain evidence, and the basis section explains which figures are affected and why.
The basis for opinion paragraph
A modified opinion needs a basis section with a matching heading, "Basis for Qualified Opinion", "Basis for Adverse Opinion" or "Basis for Disclaimer of Opinion", that explains the matter.
For a misstatement of specific amounts, describe and quantify the financial effects, unless that is impracticable, in which case say so. For misstated narrative disclosures, explain how they are misstated. For omitted information, describe the omission and, where practicable, include the information. For an inability to obtain evidence, give the reasons.
Even with an adverse opinion or a disclaimer, ISA 705 requires the auditor to describe any other matters that would have required a modification. The reader should not have to guess what else was wrong.
Consultation and quality review before approval
A modified opinion is one of the decisions most worth a second view. Staff can take a technical consultation on an engagement from question to conclusion and closure, and record a difference of opinion with each party's position, escalation and resolution. Use it when the team divides on pervasiveness, or on whether a limitation was really imposed by management.
One limit needs active management. An open consultation or difference of opinion does not stop the audit report from being approved or signed in Achekam. The partner should confirm before approval that every consultation touching the opinion is closed and its conclusion reflected in the wording.
A partner can name an engagement quality reviewer for the engagement, who must be a partner or senior manager not on the engagement team, and that person must clear the audit report before it can be issued. For a South African firm, Achekam does not require a reviewer for any engagement type; naming one is the firm's decision. For a planned modification, many firms would want one.
In Achekam, the engagement team drafts the auditor's report on standard ISA 700, 705, 706 and 701 wording for an unmodified, qualified, adverse or disclaimer opinion. Approval is refused while any bracketed placeholder remains, and only the engagement partner approves. The partner may approve with papers still open by recording a reason, but a named quality reviewer's clearance cannot be bypassed. The approval route is described in drafting and approving the auditor's report.
Summarising misstatements to support the decision
A qualification for misstatement rests on the evaluation of uncorrected misstatements against materiality, so that evaluation must be complete and visible. In Achekam, the completion Summary of Uncorrected Misstatements stays empty, because no screen or route writes to the misstatement register it reads. Keep the schedule of uncorrected misstatements on a working paper of its own, showing each item, its effect on the statements and the evaluation, individually and in aggregate. The schedule and its evaluation are covered in the uncorrected misstatements schedule.
The IAASB's page on ISA 705 (Revised) describes how the report changes when the auditor issues a qualified, adverse or disclaimer of opinion.
Before the partner decides
Write the two answers on one page: what kind of matter this is, and whether its effects are pervasive, with the reasons. Then choose the opinion from the table. An opinion reached that way is much easier to defend than one negotiated in a meeting.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
