ISA 705 (Revised) - Final

PROPOSED INTERNATIONAL STANDARD ON AUDITING (ISA) 705
(REVISED)
MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITORS
REPORT
(Effective for audits of financial statements for periods [beginning/ending on or after date])
CONTENTS
Paragraphs
Introduction
Scope of this ISA ..................................................................................................................
Types of Modified Opinions ..................................................................................................
Effective Date .......................................................................................................................
Objective .............................................................................................................................
Definitions ...........................................................................................................................
Requirements
Circumstances When a Modification to the Auditors Opinion Is Required .........................
Determining the Type of Modification to the Auditors Opinion ............................................
715
Form and Content of the Auditors Report When the Opinion Is Modified ...........................
1629
Communication with Those Charged with Governance .......................................................
30
Application and Other Explanatory Material

Types of Modified Opinions ..................................................................................................
A1
Circumstances When a Modification to the Auditors Opinion Is Required .........................
A2A12
Determining the Type of Modification to the Auditors Opinion .............................................
A13A16
Form and Content of the Auditors Report When the Opinion Is Modified ...........................
A17A28
Communication with Those Charged with Governance .......................................................
A29
Appendix: Illustrations of Auditors Reports with Modifications to the Opinion
Proposed International Standard on Auditing (ISA) 705 (Revised), Modifications to the Opinion in the
Independent Auditors Report, should be read in conjunction with ISA 200 Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with International Standards on
Auditing.
PROPOSED ISA 705 (REVISED), MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITORS REPORT
Introduction
Scope of this ISA
1.
This International Standard on Auditing (ISA) deals with the auditors responsibility to issue an
appropriate report in circumstances when, in forming an opinion in accordance with proposed ISA 700
1
(Revised), the auditor concludes that a modification to the auditors opinion on the financial
statements is necessary.
Types of Modified Opinions

2.
This ISA establishes three types of modified opinions, namely, a qualified opinion, an adverse opinion,
and a disclaimer of opinion. The decision regarding which type of modified opinion is appropriate
depends upon:
(a)
The nature of the matter giving rise to the modification, that is, whether the financial
statements are materially misstated or, in the case of an inability to obtain sufficient
appropriate audit evidence, may be materially misstated; and
(b)
The auditors judgment about the pervasiveness of the effects or possible effects of the matter on
the financial statements. (Ref: Para. A1)
Effective Date
3.
This ISA is effective for audits of financial statements for periods [beginning/ending on or after date].
Objective
4.
The objective of the auditor is to express clearly an appropriately modified opinion on the financial
statements that is necessary when:
(a)
The auditor concludes, based on the audit evidence obtained, that the financial statements as a
whole are not free from material misstatement; or
(b)
The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.
Definitions
5.
For purposes of the ISAs, the following terms have the meanings attributed below:
(a)
Pervasive A term used, in the context of misstatements, to describe the effects on the
financial statements of misstatements or the possible effects on the financial statements of
misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate
audit evidence. Pervasive effects on the financial statements are those that, in the auditors
judgment:
(i)
Are not confined to specific elements, accounts or items of the financial statements;
(ii)
If so confined, represent or could represent a substantial proportion of the financial

statements; or
Proposed ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
2
(iii)
(b)
In relation to disclosures, are fundamental to users understanding of the financial

statements.
Modified opinion A qualified opinion, an adverse opinion or a disclaimer of opinion.
Requirements
Circumstances When a Modification to the Auditors Opinion Is Required
6.
The auditor shall modify the opinion in the auditors report when:
(a)
The auditor concludes that, based on the audit evidence obtained, the financial statements as a
whole are not free from material misstatement; or (Ref: Para. A2A7)
(b)
The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement. (Ref: Para. A8A12)
Determining the Type of Modification to the Auditors Opinion

Qualified Opinion
7.
The auditor shall express a qualified opinion when:

(a)
The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements; or
(b)
The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion,
but the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.
Adverse Opinion
8.
The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate
audit evidence, concludes that misstatements, individually or in the aggregate, are both material and
pervasive to the financial statements.
Disclaimer of Opinion
9.
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, and the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be both material and pervasive.
10.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple
uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit
evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the
financial statements due to the potential interaction of the uncertainties and their possible cumulative
effect on the financial statements.
Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a ManagementImposed Limitation after the Auditor Has Accepted the Engagement
11.
If, after accepting the engagement, the auditor becomes aware that management has imposed a
limitation on the scope of the audit that the auditor considers likely to result in the need to express a
qualified opinion or to disclaim an opinion on the financial statements, the auditor shall request that
management remove the limitation.
12.
If management refuses to remove the limitation referred to in paragraph 11 of this ISA, the auditor
shall communicate the matter to those charged with governance, unless all of those charged with
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governance are involved in managing the entity, and determine whether it is possible to perform
alternative procedures to obtain sufficient appropriate audit evidence.
13.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall determine the
implications as follows:
14.
(a)
If the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion; or
(b)
If the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive so that a qualification of the opinion
would be inadequate to communicate the gravity of the situation, the auditor shall:
(i)
Withdraw from the audit, where practicable and possible under applicable law or regulation;
or (Ref: Para. A13A14)
(ii)
If withdrawal from the audit before issuing the auditors report is not practicable or possible,
disclaim an opinion on the financial statements.
If the auditor withdraws as contemplated by paragraph 13(b)(i), before withdrawing, the auditor shall
communicate to those charged with governance any matters regarding misstatements identified
during the audit that would have given rise to a modification of the opinion. (Ref: Para. A15)
Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion

15.
When the auditor considers it necessary to express an adverse opinion or disclaim an opinion on the
financial statements as a whole, the auditors report shall not also include an unmodified opinion with
respect to the same financial reporting framework on a single financial statement or one or more
specific elements, accounts or items of a financial statement. To include such an unmodified opinion
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in the same report in these circumstances would contradict the auditors adverse opinion or
disclaimer of opinion on the financial statements as a whole. (Ref: Para. A16)
Form and Content of the Auditors Report When the Opinion Is Modified
Auditors Opinion
16.
When the auditor modifies the audit opinion, the auditor shall use the heading Qualified Opinion,
Adverse Opinion, or Disclaimer of Opinion, as appropriate, for the opinion paragraph. (Ref: Para.
A17A19)
Proposed ISA 260 (Revised), Communication with Those Charged with Governance, paragraph 13
ISA 805, Special ConsiderationsAudits of Single Financial Statements and Specific Elements, Accounts or Items of a
Financial Statement, deals with circumstances where the auditor is engaged to express a separate opinion on one or more
specific elements, accounts or items of a financial statement.
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Qualified Opinion
17.
When the auditor expresses a qualified opinion due to a material misstatement in the financial
statements, the auditor shall state that, in the auditors opinion, except for the effects of the matter(s)
described in the Basis for Qualified Opinion section:
(a)
When reporting in accordance with a fair presentation framework, the accompanying financial
statements present fairly, in all material respects (or give a true and fair view of) [] in
accordance with [the applicable financial reporting framework]; or
(b)
When reporting in accordance with a compliance framework, the accompanying financial

statements have been prepared, in all material respects, in accordance with [the applicable
financial reporting framework].
When the modification arises from an inability to obtain sufficient appropriate audit evidence, the auditor
shall use the corresponding phrase except for the possible effects of the matter(s) ... for the modified
opinion. (Ref: Para. A20)
Adverse Opinion
18.
When the auditor expresses an adverse opinion, the auditor shall state that, in the auditors opinion,
because of the significance of the matter(s) described in the Basis for Adverse Opinion section:
(a)
When reporting in accordance with a fair presentation framework, the accompanying financial
statements do not present fairly (or give a true and fair view of) [] in accordance with [the
applicable financial reporting framework]; or
(b)
When reporting in accordance with a compliance framework, the accompanying financial

statements have not been prepared, in all material respects, in accordance with [the applicable
financial reporting framework].
19.
When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit
evidence, the auditor shall:
(a)
State that the auditor does not express an opinion on the accompanying financial statements;
(b)
State that, because of the significance of the matter(s) described in the Basis for Disclaimer of
Opinion section, the auditor has not been able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion on the financial statements; and
(c)
Amend the statement that indicates that the financial statements have been audited required by
paragraph 27(b) of proposed ISA 700 (Revised) to state that the auditor was engaged to audit the
financial statements.
Basis for Opinion

20.
When the auditor modifies the opinion on the financial statements, the auditor shall, in addition to the
specific elements required by proposed ISA 700 (Revised): (Ref: Para. A21A22)
(a)
Amend the heading Basis for Opinion required by paragraph 28 of proposed ISA 700 (Revised)
to Basis for Qualified Opinion, Basis for Adverse Opinion, or Basis for Disclaimer of Opinion,
as appropriate; and
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(b)
Within this section, include a description of the matter giving rise to the modification.
21.
If there is a material misstatement of the financial statements that relates to specific amounts in the
financial statements (including quantitative disclosures in the notes to the financial statements), the
auditor shall include in the Basis for Opinion section a description and quantification of the financial
effects of the misstatement, unless impracticable. If it is not practicable to quantify the financial
effects, the auditor shall so state in this section. (Ref: Para. A23)
22.
If there is a material misstatement of the financial statements that relates to narrative disclosures, the
auditor shall include in the Basis for Opinion section an explanation of how the disclosures are
misstated.
23.
If there is a material misstatement of the financial statements that relates to the non-disclosure of
information required to be disclosed, the auditor shall:
(a)
Discuss the non-disclosure with those charged with governance;
(b)
Describe in the Basis for Opinion section the nature of the omitted information; and
(c)
Unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable to
do so and the auditor has obtained sufficient appropriate audit evidence about the omitted
information. (Ref: Para. A24)
24.
If the modification results from an inability to obtain sufficient appropriate audit evidence, the auditor
shall include in the Basis for Opinion section the reasons for that inability.
25.
When the auditor expresses a qualified or adverse opinion, the auditor shall amend the statement
about whether the audit evidence obtained is sufficient and appropriate to provide a basis for the
auditors opinion required by paragraph 28(d) of proposed ISA 700 (Revised) to include the word
qualified or adverse, as appropriate.
26.
When the auditor disclaims an opinion on the financial statements, the auditors report shall not
include the elements required by paragraphs 28(b) and 28(d) of proposed ISA 700 (Revised). Those
elements are:
27.
(a)
A reference to the section of the auditors report where the auditors responsibilities are
described; and
(b)
A statement about whether the audit evidence obtained is sufficient and appropriate to
provide a basis for the auditors opinion.
Even if the auditor has expressed an adverse opinion or disclaimed an opinion on the financial
statements, the auditor shall describe in the Basis for Opinion section the reasons for any other
matters of which the auditor is aware that would have required a modification to the opinion, and the
effects thereof. (Ref: Para. A25)
Description of Auditors Responsibilities for the Audit of the Financial Statements When the Auditor Disclaims
an Opinion
28.
When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit
evidence, the auditor shall amend the description of the auditors responsibilities required by
paragraphs 3638 of proposed ISA 700 (Revised) to include only the following: (Ref: Para. A26)
(a)
A statement that the auditors responsibility is to conduct an audit of the entitys financial
statements in accordance with International Standards on Auditing and to issue an auditors
report;
(b)
A statement that, however, because of the matter(s) described in the Basis for Disclaimer of
Opinion section, the auditor was not able to obtain sufficient appropriate audit evidence to provide
a basis for an audit opinion on the financial statements; and
(c)
The statement about auditor independence and other ethical responsibilities required by
paragraph 28(c) of proposed ISA 700 (Revised).
Special Considerations When the Auditor Disclaims an Opinion

29.
When the auditor disclaims an opinion on the financial statements, the auditors report shall not
include: (Ref: Para. A27)
4
(a)
A section addressing the reporting requirements in proposed ISA 701; (Ref: Para. A28)
(b)
A section addressing the reporting requirements in proposed ISA 570 (Revised);
(c)
A section addressing the reporting requirements in proposed ISA 720 (Revised); or
(d)
A further description of the audit and the auditors responsibilities as required by paragraphs
3738 of proposed ISA 700 (Revised).
5
6
Communication with Those Charged with Governance

30.
When the auditor expects to modify the opinion in the auditors report, the auditor shall communicate
with those charged with governance the circumstances that led to the expected modification and the
proposed wording of the modification. (Ref: Para. A29)
***
Paragraphs 911 and 13 of proposed ISA 701, Communicating Key Audit Matters in the Independent Auditors Report
Paragraphs 1920 and 2225 of proposed ISA 570 (Revised), Going Concern
Proposed ISA 720 (Revised), The Auditors Responsibilities Relating to Other Information in Documents Containing or
Accompanying Audited Financial Statements and the Auditors Report Thereon
7
Application and Other Explanatory Material

Types of Modified Opinions (Ref: Para. 2)
A1.
The table below illustrates how the auditors judgment about the nature of the matter giving rise to
the modification, and the pervasiveness of its effects or possible effects on the financial statements,
affects the type of opinion to be expressed.
Nature of Matter
Giving Rise to the
Modification
Auditors Judgment about the Pervasiveness of the Effects or Possible

Effects on the Financial Statements
Material but Not Pervasive
Material and Pervasive
Financial statements
are materially
misstated
Qualified opinion
Adverse opinion
Inability to obtain
sufficient appropriate
audit evidence
Qualified opinion
Disclaimer of opinion
Circumstances When a Modification to the Auditors Opinion Is Required

Nature of Material Misstatements (Ref: Para. 6(a))
A2.
Proposed ISA 700 (Revised) requires the auditor, in order to form an opinion on the financial
statements, to conclude as to whether reasonable assurance has been obtained about whether the
7
financial statements as a whole are free from material misstatement. This conclusion takes into
account the auditors evaluation of uncorrected misstatements, if any, on the financial statements in
8
accordance with ISA 450.
A3.
ISA 450 defines a misstatement as a difference between the amount, classification, presentation, or
disclosure of a reported financial statement item and the amount, classification, presentation, or
disclosure that is required for the item to be in accordance with the applicable financial reporting
framework. Accordingly, a material misstatement of the financial statements may arise in relation to:
(a)
The appropriateness of the selected accounting policies;
(b)
The application of the selected accounting policies; or
(c)
The appropriateness or adequacy of disclosures in the financial statements.
Appropriateness of the Selected Accounting Policies

A4.
In relation to the appropriateness of the accounting policies management has selected, material
misstatements of the financial statements may arise when:
(a)
The selected accounting policies are not consistent with the applicable financial reporting
framework; or
(b)
The financial statements, including the related notes, do not represent the underlying transactions
and events in a manner that achieves fair presentation.
Proposed ISA 700 (Revised), paragraph 11
ISA 450, Evaluation of Misstatements Identified during the Audit, paragraph 11

8
A5.
Financial reporting frameworks often contain requirements for the accounting for, and disclosure of,
changes in accounting policies. Where the entity has changed its selection of significant accounting
policies, a material misstatement of the financial statements may arise when the entity has not
complied with these requirements.
Application of the Selected Accounting Policies

A6.
In relation to the application of the selected accounting policies, material misstatements of the
financial statements may arise:
(a)
When management has not applied the selected accounting policies consistently with the
financial reporting framework, including when management has not applied the selected
accounting policies consistently between periods or to similar transactions and events
(consistency in application); or
(b)
Due to the method of application of the selected accounting policies (such as an unintentional
error in application).
Appropriateness or Adequacy of Disclosures in the Financial Statements

A7.
In relation to the appropriateness or adequacy of disclosures in the financial statements, material

misstatements of the financial statements may arise when:
(a)
The financial statements do not include all of the disclosures required by the applicable
financial reporting framework;
(b)
The disclosures in the financial statements are not presented in accordance with the
applicable financial reporting framework; or
(c)
The financial statements do not provide the disclosures necessary to achieve fair
presentation.
Nature of an Inability to Obtain Sufficient Appropriate Audit Evidence (Ref: Para. 6(b))
A8.
A9.
The auditors inability to obtain sufficient appropriate audit evidence (also referred to as a limitation
on the scope of the audit) may arise from:
(a)
Circumstances beyond the control of the entity;
(b)
Circumstances relating to the nature or timing of the auditors work; or
(c)
Limitations imposed by management.
An inability to perform a specific procedure does not constitute a limitation on the scope of the audit
if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative
procedures. If this is not possible, the requirements of paragraphs 7(b) and 910 apply as
appropriate. Limitations imposed by management may have other implications for the audit, such
as for the auditors assessment of fraud risks and consideration of engagement continuance.
A10. Examples of circumstances beyond the control of the entity include when:
The entitys accounting records have been destroyed.
The accounting records of a significant component have been seized indefinitely by

governmental authorities.
9
A11. Examples of circumstances relating to the nature or timing of the auditors work include when:
The entity is required to use the equity method of accounting for an associated entity, and the
auditor is unable to obtain sufficient appropriate audit evidence about the latters financial
information to evaluate whether the equity method has been appropriately applied.
The timing of the auditors appointment is such that the auditor is unable to observe the
counting of the physical inventories.
The auditor determines that performing substantive procedures alone is not sufficient, but the
entitys controls are not effective.
A12. Examples of an inability to obtain sufficient appropriate audit evidence arising from a limitation on
the scope of the audit imposed by management include when:
Management prevents the auditor from observing the counting of the physical inventory.
Management prevents the auditor from requesting external confirmation of specific account
balances.
Determining the Type of Modification to the Auditors Opinion

Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a ManagementImposed Limitation after the Auditor Has Accepted the Engagement (Ref: Para. 13(b)14)
A13. The practicality of withdrawing from the audit may depend on the stage of completion of the
engagement at the time that management imposes the scope limitation. If the auditor has substantially
completed the audit, the auditor may decide to complete the audit to the extent possible, disclaim an
opinion and explain the scope limitation within the Basis for Disclaimer of Opinion section prior to
withdrawing.
A14. In certain circumstances, withdrawal from the audit may not be possible if the auditor is required by law
or regulation to continue the audit engagement. This may be the case for an auditor that is appointed to
audit the financial statements of public sector entities. It may also be the case in jurisdictions where the
auditor is appointed to audit the financial statements covering a specific period, or appointed for a
specific period and is prohibited from withdrawing before the completion of the audit of those financial
statements or before the end of that period, respectively. The auditor may also consider it necessary to
9
include an Other Matter paragraph in the auditors report.
A15. When the auditor concludes that withdrawal from the audit is necessary because of a scope limitation,
there may be a professional, legal or regulatory requirement for the auditor to communicate matters
relating to the withdrawal from the engagement to regulators or the entitys owners.
Proposed ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditors
Report, paragraph A9
10
Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion (Ref: Para. 15)
A16. The following are examples of reporting circumstances that would not contradict the auditors adverse
opinion or disclaimer of opinion:
The expression of an unmodified opinion on financial statements prepared under a given

financial reporting framework and, within the same report, the expression of an adverse
10
opinion on the same financial statements under a different financial reporting framework.
The expression of a disclaimer of opinion regarding the results of operations, and cash flows,
11
where relevant, and an unmodified opinion regarding the financial position (see ISA 510 ). In
this case, the auditor has not expressed a disclaimer of opinion on the financial statements
as a whole.
Form and Content of the Auditors Report When the Opinion Is Modified
Illustrative Auditors Reports
A17. Illustrations 1 and 2 in the Appendix contain auditors reports with qualified and adverse opinions,
respectively, as the financial statements are materially misstated.
A18. Illustration 3 in the Appendix contains an auditors report with a qualified opinion as the auditor is unable
to obtain sufficient appropriate audit evidence. Illustration 4 contains a disclaimer of opinion due to an
inability to obtain sufficient appropriate audit evidence about a single element of the financial statements.
Illustration 5 contains a disclaimer of opinion due to an inability to obtain sufficient appropriate audit
evidence about multiple elements of the financial statements. In each of the latter two cases, the
possible effects on the financial statements of the inability are both material and pervasive. The
Appendices to other ISAs that include reporting requirements, including proposed ISA 570 (Revised),
also include illustrations of auditors reports with modified opinions.
Auditors Opinion (Ref: Para. 16)
A19. Amending this heading makes it clear to the user that the auditors opinion is modified and indicates
the type of modification.
Qualified Opinion (Ref: Para. 17)
A20. When the auditor expresses a qualified opinion, it would not be appropriate to use phrases such as
with the foregoing explanation or subject to in the Opinion section as these are not sufficiently
clear or forceful.
Basis for Opinion (Ref: Para. 2027)
A21. Consistency in the auditors report helps to promote users understanding and to identify unusual
circumstances when they occur. Accordingly, although uniformity in the wording of a modified opinion
and in the description of the reasons for the modification may not be possible, consistency in both the
form and content of the auditors report is desirable.
A22. The Basis for Opinion section of the auditors report provides important context about the auditors
opinion, in particular in cases where the auditors opinion is modified. The placement of this information
10
See paragraph A24 of proposed ISA 700 (Revised) for a description of this circumstance.
11
ISA 510, Initial Audit EngagementsOpening Balances, paragraph 10

11
in close proximity to the auditors opinion in the auditors report enhances the usefulness of the
auditors report.
A23. An example of the financial effects of material misstatements that the auditor may describe within
the Basis for Opinion section in the auditors report is the quantification of the effects on income tax,
income before taxes, net income and equity if inventory is overstated.
A24. Disclosing the omitted information within the Basis for Opinion section would not be practicable if:
(a)
The disclosures have not been prepared by management or the disclosures are otherwise not
readily available to the auditor; or
(b)
In the auditors judgment, the disclosures would be unduly voluminous in relation to the auditors
report.
A25. An adverse opinion or a disclaimer of opinion relating to a specific matter described within the Basis
for Opinion section does not justify the omission of a description of other identified matters that
would have otherwise required a modification of the auditors opinion. In such cases, the disclosure
of such other matters of which the auditor is aware may be relevant to users of the financial
statements.
Description of Auditors Responsibilities for the Audit or the Financial Statements When the Auditor Disclaims
an Opinion (Ref: Para. 28)
A26. When the auditor disclaims an opinion on the financial statements, the following statements may be
better positioned within the Auditors Responsibilities for the Audit of the Financial Statements section of
the auditors report, as illustrated in Illustrations 45 of the Appendix to this ISA:
The statement required by paragraph 28(a) of proposed ISA 700 (Revised), amended to state that
the auditors responsibility is to conduct an audit of the entitys financial statements in accordance
with ISAs; and
The statement required by paragraph 28(c) of proposed ISA 700 (Revised) about independence
and other ethical responsibilities.
Special Considerations When the Auditor Disclaims an Opinion (Ref: Para. 29)
A27. Providing the reasons for the auditors inability to obtain sufficient appropriate audit evidence within
the Basis for Disclaimer of Opinion section of the auditors report provides useful information to
users in understanding why the auditor has disclaimed an opinion on the financial statements and
may further guard against inappropriate reliance on them. However, providing further details about
the audit, including addressing the auditors responsibilities about going concern, key audit matters,
other information, or providing an extensive description of the auditors responsibilities for the audit
of the financial statements may overshadow the disclaimer of opinion on the financial statements as
a whole.
Key Audit Matters (Ref: Para. 29(a)
A28. Paragraph 27 of this ISA explains that, even when the auditor disclaims an opinion on the financial
statements, any other matters of which the auditor is aware that would have required a modification
to the opinion, and the effects thereof, should be addressed within the Basis for Opinion section of
the auditors report. In contrast, any discussion of key audit matters unrelated to the disclaimer of
opinion may suggest the financial statements are more credible in relation to those matters than
12
would be appropriate in the circumstances and would overshadow the disclaimer of an opinion on
the financial statements as a whole.
Communication with Those Charged with Governance (Ref: Para. 30)
A29. Communicating with those charged with governance the circumstances that lead to an expected
modification to the auditors opinion and the proposed wording of the modification enables:
(a)
The auditor to give notice to those charged with governance of the intended modification(s) and
the reasons (or circumstances) for the modification(s);
(b)
The auditor to seek the concurrence of those charged with governance regarding the facts of the
matter(s) giving rise to the expected modification(s), or to confirm matters of disagreement with
management as such; and
(c)
Those charged with governance to have an opportunity, where appropriate, to provide the auditor
with further information and explanations in respect of the matter(s) giving rise to the expected
modification(s).
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Appendix
(Ref: Para. A17A18, A26)
Illustrations of Auditors Reports with Modifications to the Opinion

Note: Only the required reporting elements that would be affected by the auditor expressing a modified
opinion have been reproduced in these illustrations. The Appendix to proposed ISA 700 (Revised)
contains the illustrative wording for sections whose contents would not be affected by this ISA.
Illustration 1: An auditors report containing a qualified opinion due to a material misstatement of the
financial statements.
Illustration 2: An auditors report containing an adverse opinion due to a material misstatement of

the consolidated financial statements.
Illustration 3: An auditors report containing a qualified opinion due to the auditors inability to obtain
sufficient appropriate audit evidence regarding a foreign associate.
Illustration 4: An auditors report containing a disclaimer of opinion due to the auditors inability to
obtain sufficient appropriate audit evidence about a single element of the consolidated financial
statements.
Illustration 5: An auditors report containing a disclaimer of opinion due to the auditors inability to
obtain sufficient appropriate audit evidence about multiple elements of the financial statements.
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Illustration 1 Qualified Opinion due to a Material Misstatement of the Financial Statements

For purposes of this illustrative auditors report, the following circumstances are assumed:
Audit of a complete set of general purpose financial statements prepared by management of a

listed entity in accordance with International Financial Reporting Standards (IFRSs), which is a fair
presentation framework. The audit is not a group audit conducted in accordance with ISA 600,
Special ConsiderationsAudits of Group Financial Statements (Including the Work of Component
Auditors).
The terms of the audit engagement reflect the description of managements responsibility for the
financial statements in ISA 210, Agreeing the Terms of Audit Engagements.
Inventories are misstated. The misstatement is deemed to be material but not pervasive to the
financial statements (i.e., a qualified opinion is appropriate).
Key audit matters have been communicated in accordance with proposed ISA 701.
In addition to the audit of the financial statements, the auditor has other reporting responsibilities
required under local law.
INDEPENDENT AUDITORS REPORT

To the Shareholders of ABC Company [or Other Appropriate Addressee]
Report on the Audit of the Financial Statements 12

Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our
report, the accompanying financial statements present fairly, in all material respects, (or give a true and fair
view of) the financial position of ABC Company (the Company) as at December 31, 20X1, and (of) its financial
performance and its cash flows for the year then ended in accordance with International Financial Reporting
Standards (IFRSs).
We have audited the financial statements of the Company, which comprise the statement of financial position
as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and
statement of cash flows for the year then ended, and notes to the financial statements, including a summary of
significant accounting policies.
Basis for Qualified Opinion
The Companys inventories are carried in the statement of financial position at xxx. Management has not
stated the inventories at the lower of cost and net realizable value but has stated them solely at cost, which
constitutes a departure from IFRSs. The Companys records indicate that, had management stated the
inventories at the lower of cost and net realizable value, an amount of xxx would have been required to write
the inventories down to their net realizable value. Accordingly, cost of sales would have been increased by xxx,
and income tax, net income and shareholders equity would have been reduced by xxx, xxx and xxx,
respectively.
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities
under those standards are further described in the Auditors Responsibilities for the Audit of the Financial
12
The sub-title Report on the Audit of the Financial Statements is unnecessary in circumstances when the second sub-title
Report on Other Legal and Regulatory Requirements is not applicable.
15
Statements section of our report. We are independent of the Company within the meaning of [indicate relevant
ethical requirements or applicable law or regulation] and have fulfilled our other responsibilities under those
relevant ethical requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of
the financial statements. Key audit matters are selected from the matters communicated with [those charged
with governance], but are not intended to represent all matters that were discussed with them. In addition to
the matter described in the Basis for Qualified Opinion section of our report, we have determined the matters
described below to be the key audit matters. Our audit procedures relating to these matters were designed
in the context of our audit of the consolidated financial statements as a whole. Our opinion on the
financial statements is not modified with respect to any of the key audit matters described below, and we
do not express an opinion on these individual matters.
[Reporting of individual matters in accordance with paragraph 10 of proposed ISA 701 see Illustration 1 in
proposed ISA 700 (Revised).]
Going Concern
[Reporting in accordance with proposed ISA 570 (Revised) see Illustration 1 in proposed ISA 700 (Revised)
and proposed ISA 570 (Revised).]
Other Information
[The illustrative wording for this section is subject to the IAASBs finalization of proposed ISA 720 (Revised).
The content of this section may include, among other matters: (a) a description of the auditors responsibilities
with respect to other information; (b) identification of the document(s) available at the date of the auditors
report that contain the other information to which the auditors responsibilities apply; (c) a statement
addressing the outcome of the auditors work on the other information; and (d) a statement that the auditor has
not audited or reviewed the other information and, accordingly, does not express an audit opinion or a review
conclusion on it.]
13
Responsibilities of [Management and Those Charged with Governance or other appropriate

terms] for the Financial Statements
[Reporting in accordance with proposed ISA 700 (Revised) see Illustration 1 in proposed ISA 700 (Revised).]
Auditors Responsibilities for the Audit of the Financial Statements
[Reporting in accordance with proposed ISA 700 (Revised) see Illustrations 1 and 3 in proposed ISA 700
(Revised).]
Report on Other Legal and Regulatory Requirements

13
Throughout the illustrative auditors reports in the Proposed ISAs, the term management may need to be replaced by another
term that is appropriate in the context of the legal framework in the particular jurisdiction. For example, those charged with
governance, rather than management, may have these responsibilities.
16
The engagement partner responsible for the audit resulting in this independent auditors report is [name].
[Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate for the
particular jurisdiction]
[Auditors Address]
[Date]
17
Illustration 2 Adverse Opinion due to a Material Misstatement of the Consolidated Financial

Statements
For purposes of the illustrative auditors report, the following circumstances are assumed:
Audit of a complete set of general purpose consolidated financial statements prepared by

management of the parent in accordance with IFRSs, where the parent is a listed entity. The audit
is a group audit of an entity with subsidiaries conducted in accordance with ISA 600.
consolidated financial statements in ISA 210.
The consolidated financial statements are materially misstated due to the non-consolidation of a
subsidiary. The material misstatement is deemed to be pervasive to the consolidated financial
statements. The effects of the misstatement on the consolidated financial statements have not
been determined because it was not practicable to do so (i.e., an adverse opinion is appropriate).
In addition to the audit of the consolidated financial statements, the auditor has other reporting
responsibilities required under local law.

Report on the Audit of the Consolidated Financial Statements 14

Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of
our report, the accompanying consolidated financial statements do not present fairly (or do not give a true and
fair view of) the consolidated financial position of ABC Company and its subsidiaries (the Group) as at
December 31, 20X1, and (of) their consolidated financial performance and their consolidated cash flows for the
year then ended in accordance with International Financial Reporting Standards (IFRSs).
We have audited the consolidated financial statements of the Group, which comprise the consolidated
statement of financial position as at December 31, 20X1, and the consolidated statement of comprehensive
income, consolidated statement of changes in equity and consolidated statement of cash flows for the year
then ended, and notes to the consolidated financial statements, including a summary of significant accounting
policies.
Basis for Adverse Opinion
As explained in Note X, the Group has not consolidated subsidiary XYZ Company it acquired during 20X1
because it has not yet been able to determine the fair values of certain of the subsidiarys material assets and
liabilities at the acquisition date. This investment is therefore accounted for on a cost basis. Under IFRSs, the
Company should have consolidated this subsidiary and accounted for the acquisition based on provisional
amounts. Had XYZ Company been consolidated, many elements in the accompanying consolidated financial
statements would have been materially affected. The effects on the consolidated financial statements of the
failure to consolidate have not been determined.
14
The sub-title Report on the Audit of the Consolidated Financial Statements is unnecessary in circumstances when the second
sub-title Report on Other Legal and Regulatory Requirements is applicable.
18
under those standards are further described in the Auditors Responsibilities for the Audit of the Consolidated
Financial Statements section of our report. We are independent of the Group within the meaning of [indicate
relevant ethical requirements or applicable law or regulation] and have fulfilled our other responsibilities under
those ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our adverse opinion.
Key Audit Matters
the consolidated financial statements. Key audit matters are selected from the matters communicated with
[those charged with governance], but are not intended to represent all matters that were discussed with them.
In addition to the matter described in the Basis for Adverse Opinion section of our report, we have determined
the matters described below to be the key audit matters. Our audit procedures relating to these matters
were designed in the context of our audit of the consolidated financial statements as a whole. Our opinion
on the consolidated financial statements is not modified with respect to any of the key audit matters
described below, and we do not express an opinion on these individual matters.
Going Concern
[Reporting in accordance with proposed ISA 570 (Revised) see Illustration 2 in Proposed ISA 700 (Revised)
Other Information
conclusion on it.]
15


[Reporting in accordance with proposed ISA 700 (Revised) see Illustration 2 in Proposed ISA 700 (Revised).]
15
Or other term that is appropriate in the context of the legal framework in the particular jurisdiction
19
[Auditors Address]
[Date]
20
Illustration 3 Qualified Opinion due to the Auditors Inability to Obtain Sufficient Audit Evidence
Regarding a Foreign Associate
Audit of a complete set of general purpose consolidated financial statements of a listed entity
prepared by management of the entity in accordance with IFRSs. The audit is a group audit of an
entity with subsidiaries conducted in accordance with ISA 600.
The auditor was unable to obtain sufficient appropriate audit evidence regarding an investment in
a foreign associate. The possible effects of the inability to obtain sufficient appropriate audit
evidence are deemed to be material but not pervasive to the consolidated financial statements
(i.e., a qualified auditors opinion is appropriate).


Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section
of our report, the accompanying consolidated financial statements present fairly, in all material respects, (or
give a true and fair view of) the financial position of ABC Company and its subsidiaries (the Group) as at
December 31, 20X1, and (of) their consolidated financial performance and their consolidated cash flows for the
year then ended in accordance with International Financial Reporting Standards (IFRSs).
We have audited the consolidated financial statements of the Group, which comprise the consolidated
statement of financial position as at December 31, 20X1, and the consolidated statement of comprehensive
income, consolidated statement of changes in equity and consolidated statement of cash flows for the year
then ended, and notes to the consolidated financial statements, including a summary of significant accounting
policies.
Basis for Qualified Opinion
The Groups investment in XYZ Company, a foreign associate acquired during the year and accounted for
by the equity method, is carried at xxx on the consolidated statement of financial position as at December
31, 20X1, and ABCs share of XYZs net income of xxx is included in ABCs income for the year then
ended. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of
ABCs investment in XYZ as at December 31, 20X1 and ABCs share of XYZs net income for the year
because we were denied access to the financial information, management, and the auditors of XYZ.
Consequently, we were unable to determine whether any adjustments to these amounts were necessary.
16
sub-title Report on Other Legal and Regulatory Requirements is not applicable.
21
under those standards are further described in the Auditors Responsibilities for the Audit of the Consolidated
Financial Statements section of our report. We are independent of the Group within the meaning of [indicate
relevant ethical requirements or applicable law or regulation] and have fulfilled our other responsibilities under
those ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our qualified opinion.
Key Audit Matters
the consolidated financial statements. Key audit matters are selected from the matters communicated with
[those charged with governance], but are not intended to represent all matters that were discussed with them.
In addition to the matter described in the Basis for Qualified Opinion section of our report, we have determined
the matters described below to be the key audit matters. Our audit procedures relating to these matters
were designed in the context of our audit of the consolidated financial statements as a whole. Our opinion
on the consolidated financial statements is not modified with respect to any of the key audit matters
described below, and we do not express an opinion on these individual matters.
Going Concern
[Reporting in accordance with proposed ISA 570 (Revised) see Illustration 2 in proposed ISA 700 (Revised)
Other Information
conclusion on it.]
17

terms] for the Consolidated Financial Statements
Auditors Responsibilities for the Audit of the Consolidated Financial Statements

17
Or other term that is appropriate in the context of the legal framework in the particular jurisdiction
22
[Auditors Address]
[Date]
23
Illustration 4 Disclaimer of Opinion due to the Auditors Inability to Obtain Sufficient Appropriate Audit
Evidence about a Single Element of the Consolidated Financial Statements
Audit of a complete set of general purpose consolidated financial statements prepared by

management of an entity other than a listed entity in accordance with IFRSs. The audit is a group
audit of an entity with subsidiaries conducted in accordance with ISA 600.
The auditor was unable to obtain sufficient appropriate audit evidence about a single element of
the consolidated financial statements. That is, the auditor was also unable to obtain audit
evidence about the financial information of a joint venture investment that represents over 90% of
the entitys net assets. The possible effects of this inability to obtain sufficient appropriate audit
evidence are deemed to be both material and pervasive to the consolidated financial statements
(i.e., a disclaimer of opinion is appropriate).
As the auditor was unable to express an opinion on the consolidated financial statements as a
whole, the sections on Going Concern, Key Audit Matters, and Other Information would not be
applicable. Further, a more limited description of the auditors responsibilities section is required.


We do not express an opinion on the accompanying consolidated financial statements of ABC Company and
its subsidiaries (the Group). Because of the significance of the matter described in the Basis for Disclaimer of
Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide
a basis for an audit opinion on these consolidated financial statements.
We were engaged to audit the consolidated financial statements of the Group, which comprise the
consolidated statement of financial position as at December 31, 20X1, and the consolidated statement of
comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows
for the year then ended, and notes to the consolidated financial statements, including a summary of significant
accounting policies.
Basis for Disclaimer of Opinion
The Groups investment in its joint venture XYZ Company is carried at xxx on the Groups consolidated
statement of financial position, which represents over 90% of the Groups net assets as at December 31,
20X1. We were not allowed access to the management and the auditors of XYZ Company, including XYZ
Companys auditors audit documentation. As a result, we were unable to determine whether any adjustments
18
sub-title Report on Other Legal and Regulatory Requirements is not applicable.
24
were necessary in respect of the Groups proportional share of XYZ Companys assets that it controls jointly,
its proportional share of XYZ Companys liabilities for which it is jointly responsible, its proportional share of
XYZs income and expenses for the year, and the elements making up the consolidated statement of changes
in equity and the consolidated cash flow statement.
19

terms] for the Consolidated Financial Statements
Auditors Responsibilities for the Audit of the Consolidated Financial Statements
Our responsibility is to conduct an audit of the Groups consolidated financial statements in accordance
with International Standards on Auditing and to issue an auditors report. However, because of the matter
described in the Basis for Disclaimer Opinion section of our report, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on these consolidated financial statements.
We are independent of the Group within the meaning of [indicate relevant ethical requirements or applicable
law or regulation] and have fulfilled our other responsibilities under those ethical requirements.

[Auditors Address]
[Date]
19
Or other terms that are appropriate in the context of the legal framework of the particular jurisdiction
25
Illustration 5 Disclaimer of Opinion due to the Auditors Inability to Obtain Sufficient Appropriate Audit
Evidence about Multiple Elements of the Financial Statements
Audit of a complete set of general purpose financial statements prepared by management of an

entity other than a listed entity in accordance with IFRSs. The audit is not a group audit conducted
in accordance with ISA 600.
financial statements in ISA 210.
The auditor was unable to obtain sufficient appropriate audit evidence about multiple elements of
the financial statements. That is, the auditor was also unable to obtain audit evidence about the
entitys inventories and accounts receivable. The possible effects of this inability to obtain
sufficient appropriate audit evidence are deemed to be both material and pervasive to the financial
statements.
In addition to the audit of the financial statements, the auditor has other reporting responsibilities
required under local law.
As the auditor was unable to express an opinion on the financial statements as a whole, the
sections on Going Concern, Key Audit Matters, and Other Information would not be applicable.
Further, a more limited description of the auditors responsibilities section is required.

Report on the Audit of the Financial Statements 20

We do not express an opinion on the accompanying financial statements of ABC Company (the Company).
Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our
report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion on these financial statements.
We were engaged to audit the financial statements of the Company, which comprise the statement of financial
position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in
equity and statement of cash flows for the year then ended, and notes to the financial statements, including a
summary of significant accounting policies.
Basis for Disclaimer of Opinion
We were not appointed as auditors of the Company until after December 31, 20X1 and thus did not
observe the counting of physical inventories at the beginning and end of the year. We were unable to
satisfy ourselves by alternative means concerning the inventory quantities held at December 31, 20X0
and 20X1, which are stated in the statement of financial position at xxx and xxx, respectively. In addition,
the introduction of a new computerized accounts receivable system in September 20X1 resulted in
numerous errors in accounts receivable. As of the date of our audit report, management was still in the
20
The sub-title Report on the Audit of the Financial Statements is unnecessary in circumstances when the second sub-title
Report on Other Legal and Regulatory Requirements is not applicable.
26
process of rectifying the system deficiencies and correcting the errors. We were unable to confirm or
verify by alternative means accounts receivable included in the statement of financial position at a total
amount of xxx as at December 31, 20X1. As a result of these matters, we were unable to determine
whether any adjustments might have been found necessary in respect of recorded or unrecorded
inventories and accounts receivable, and the elements making up the statement of comprehensive
income, statement of changes in equity and statement of cash flows.
21

[Reporting in accordance with proposed ISA 700 (Revised) see Illustration 1 in proposed ISA 700
(Revised).]
Our responsibility is to conduct an audit of the Companys financial statements in accordance with
International Standards on Auditing and to issue an auditors report. However, because of the matters
described in the Basis for Disclaimer Opinion section of our report, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on these financial statements.
We are independent of the Company within the meaning of [indicate relevant ethical requirements or
applicable law or regulation] and have fulfilled our other responsibilities under those ethical requirements.

[Auditors Address]
[Date]
21
Or other terms that are appropriate in the context of the legal framework of the particular jurisdiction
27

ISA 705 (Revised) - Final

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PROPOSED INTERNATIONAL STANDARD ON AUDITING (ISA) 705

Types of Modified Opinions ..................................................................................................

Effective Date .......................................................................................................................

Determining the Type of Modification to the Auditors Opinion ............................................

Communication with Those Charged with Governance .......................................................

Application and Other Explanatory Material

Circumstances When a Modification to the Auditors Opinion Is Required .........................

Determining the Type of Modification to the Auditors Opinion .............................................

Communication with Those Charged with Governance .......................................................

Appendix: Illustrations of Auditors Reports with Modifications to the Opinion

Types of Modified Opinions

If so confined, represent or could represent a substantial proportion of the financial

In relation to disclosures, are fundamental to users understanding of the financial

Modified opinion A qualified opinion, an adverse opinion or a disclaimer of opinion.

Determining the Type of Modification to the Auditors Opinion

The auditor shall express a qualified opinion when:

Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion

When reporting in accordance with a compliance framework, the accompanying financial

When reporting in accordance with a compliance framework, the accompanying financial

Basis for Opinion

Discuss the non-disclosure with those charged with governance;

Special Considerations When the Auditor Disclaims an Opinion

A section addressing the reporting requirements in proposed ISA 570 (Revised);

A section addressing the reporting requirements in proposed ISA 720 (Revised); or

Communication with Those Charged with Governance

Application and Other Explanatory Material

Auditors Judgment about the Pervasiveness of the Effects or Possible

Material and Pervasive

Circumstances When a Modification to the Auditors Opinion Is Required

The appropriateness of the selected accounting policies;

The application of the selected accounting policies; or

The appropriateness or adequacy of disclosures in the financial statements.

Appropriateness of the Selected Accounting Policies

Proposed ISA 700 (Revised), paragraph 11

ISA 450, Evaluation of Misstatements Identified during the Audit, paragraph 11

Application of the Selected Accounting Policies

Appropriateness or Adequacy of Disclosures in the Financial Statements

In relation to the appropriateness or adequacy of disclosures in the financial statements, material

Circumstances beyond the control of the entity;

Circumstances relating to the nature or timing of the auditors work; or

Limitations imposed by management.

The entitys accounting records have been destroyed.

The accounting records of a significant component have been seized indefinitely by

Determining the Type of Modification to the Auditors Opinion

The expression of an unmodified opinion on financial statements prepared under a given

ISA 510, Initial Audit EngagementsOpening Balances, paragraph 10

Illustrations of Auditors Reports with Modifications to the Opinion

Illustration 2: An auditors report containing an adverse opinion due to a material misstatement of

Illustration 1 Qualified Opinion due to a Material Misstatement of the Financial Statements

Audit of a complete set of general purpose financial statements prepared by management of a

INDEPENDENT AUDITORS REPORT

Report on the Audit of the Financial Statements 12

Responsibilities of [Management and Those Charged with Governance or other appropriate

Report on Other Legal and Regulatory Requirements

Illustration 2 Adverse Opinion due to a Material Misstatement of the Consolidated Financial

Audit of a complete set of general purpose consolidated financial statements prepared by

INDEPENDENT AUDITORS REPORT

Report on the Audit of the Consolidated Financial Statements 14