Understanding Modified Audit Reports as per SA 705

Standards on Auditing (SA) 705 deals with the auditor's responsibility to appropriately modify the opinion in the independent auditor's report when necessary. A modified report indicates that the auditor found issues requiring modification of the standard audit opinion. These modifications stem from either a material misstatement in the financial statements or the auditor's inability to obtain sufficient appropriate audit evidence.

Types of Modified Opinions

According to SA 705, the auditor's opinion can be modified in three specific ways:

• Qualified Opinion: This opinion is expressed when the auditor concludes that misstatements, individually or in aggregate, are material but *not pervasive* to the financial statements. It is also issued if the auditor cannot obtain sufficient appropriate audit evidence, and the potential effect of undetected misstatements could be material but not pervasive. A qualified opinion essentially means "except for the effects of the matter(s) described..."
• Adverse Opinion: This is the most severe type of modified opinion. It is issued when the auditor, after obtaining sufficient appropriate audit evidence, concludes that the financial statements contain misstatements that are both *material and pervasive*. An adverse opinion signifies that the financial statements, as a whole, do not present a true and fair view.
• Disclaimer of Opinion: This occurs when the auditor is unable to obtain sufficient appropriate audit evidence upon which to base an audit opinion. If the possible effects of undetected misstatements (due to the lack of evidence) are believed to be both *material and pervasive*, the auditor must disclaim an opinion. This means the auditor is stating they cannot express an opinion on the financial statements.

Why 'Emphasis of Matter' is Not a Modified Report

An Audit Report with an 'Emphasis of Matter' (EOM) paragraph (Option B) is not considered a modified report under SA 705. An EOM paragraph is included when the auditor believes it is crucial to draw the user's attention to a particular disclosure or matter presented in the financial statements that is fundamental to understanding them. Importantly, the auditor must still conclude that the financial statements are presented fairly (i.e., have an unmodified or unqualified opinion) to include an EOM paragraph. It does not modify the auditor's opinion itself but highlights important information already present in the statements.

Conclusion

Therefore, the types of audit reports termed together as modified reports as per SA 705 are:

• A. Qualified Report
• C. Disclaimer of opinion Report
• D. Adverse Report

Option B, 'Audit Report with an 'Emphasis of Matter' paragraph', is used in conjunction with an unqualified opinion and does not constitute a modification of the audit opinion itself.

Thus, the correct combination is A, C, and D.