(a) Types of modified opinions
ISA 705 Modifications to the Opinion in the Independent Auditor’s Report states that modified opinions are issued in the following circumstances:
(i) The auditor has been unable to obtain sufficient appropriate audit evidence
This is often referred to as a ‘limitation on scope’ modification. If the possible effect of a limitation on scope is ‘material and pervasive’, the auditor is unable to express an opinion on the financial statements. He will thus express a disclaimer of opinion.
An example might be where a company’s accounting records have been completely destroyed by fire and therefore the financial statements may include a significant amount of information which has been estimated. In such circumstances, the auditor will be unable to form an opinion as to whether the financial statements show a true and fair view, and a disclaimer of opinion must be given.
If the auditor concludes that the possible effect of the disclaimer is ‘material but not pervasive’, he will give a qualified opinion, using the phrase ‘except for’.
An example might be where a material amount of a company’s revenues are cash sales over which there was no system of control on which the auditor could rely and there were no other satisfactory audit procedures which are able to confirm that cash sales are correctly recorded.
(ii) The financial statements are materially misstated
Here, the auditor disagrees with the amount, classification, presentation or disclosure of an item in the financial statements. If the matter is material and pervasive to the view given by the financial statements, an adverse opinion will be given.
An example might be where a company has not provided for large losses expected to arise on contracts being worked on. In such circumstances the auditor may give an adverse opinion because he concludes that the significance of the matter is pervasive to the view given by the financial statements.
If the matter is material, but not pervasive, then a qualified opinion will be given using the phrase ‘except for’.
An example might be where a company has not made an allowance against a receivable outstanding at the year end when the customer has subsequently gone into liquidation. In such circumstances, the auditor will give an ‘except for’ opinion disagreeing with the lack of an allowance against the doubtful receivable.

(b) Eunice Pharmacies
The situation of Eunice Pharmacies would lead to a qualified opinion on the grounds that the auditor has been unable to obtain sufficient appropriate audit evidence. The main elements of the auditor’s report would therefore consist of the following:
(i) Title – indicating that it is the report of an independent auditor.
(ii) Addressee – report to the shareholders.
(iii) Auditor’s Opinion paragraph stating that in the auditor’s opinion except for the possible effects of the above matter, the financial statements give a true and fair view/have been prepared in accordance with the applicable financial reporting framework.
(iv) Basis for opinion paragraph describing the matter which has given rise to the modification and quantifying it if possible. It will be possible here to refer to the monetary amount at which inventory is included in the financial statements, over which the auditor has been unable to obtain sufficient evidence.
(v) Responsibilities for the financial statements – describing management’s responsibilities for preparing the financial statements, internal controls and assessing the ability of Eunice Pharmacies to continue as a going concern.
(vi) Auditor’s responsibility section – describing the process of audit and stating that the audit was conducted in accordance with ISAs.
(vii) Name of the engagement partner and practicing certificate number
(viii) The report would be signed (as registered auditors), the address and firm’s licencing number given, and dated.