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A modified audit opinion can arise where there is an error, a disagreement over a particular matter or a lack of sufficient audit evidence in a particular area of the financial statements, including disclosures. How material or pervasive the impact is will determine the type of modification. If the directors havent disclosed a matter as required by financial reporting standards, then the auditor may conclude that the financial statements are materially misstated and modify the opinion instead. Material misstatements or non-compliance and/or lack of sufficient appropriate audit evidence can lead to a modified opinion. The auditor should describe the basis for modification. There are different types of modified opinions. Qualified opinion is when the auditor has obtained sufficient appropriate audit evidence and concludes that misstatements or instances of non-compliance, individually or in the aggregate, are material, but not pervasive, to the annual accounts or the underlying transactions. Adverse opinion is when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the possible effects on the annual accounts or underlying transactions of undetected misstatements are material but not pervasive. When the auditor modifies the opinion on the annual accounts or underlying transactions, (s)he should include a paragraph in the auditors report that provides a description of the matter giving rise to the modification. The primary basis for a modified opinion is clearly specified errors identified during the audit. The auditor should place this paragraph directly following the opinion paragraph in the auditors report and use the heading "Basis for Qualified Opinion," "Basis for Adverse Opinion," or "Basis for Disclaimer of Opinion," as appropriate

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