diff --git a/SECURITY_REPORT.md b/SECURITY_REPORT.md
new file mode 100644
index 00000000..38f86f71
--- /dev/null
+++ b/SECURITY_REPORT.md
@@ -0,0 +1,100 @@
+# Security Audit Report: W5 Wallet Contract
+
+## Critical Vulnerability Found: Incorrect SendMode Validation for External Messages
+
+### Vulnerability Description
+The `verify_c5_actions` function in `contracts/wallet_v5.fc` incorrectly validates the `SendMode` flag for external messages, potentially allowing messages to be processed without the `IGNORE_ERRORS` flag set.
+
+### Location
+`contracts/wallet_v5.fc`, function `verify_c5_actions`, lines checking `count_trailing_zeroes(cs.preload_bits(7)) > 0`
+
+### Impact
+1. **Replay Attack Vector**: If an external message is processed without `IGNORE_ERRORS` flag and its actions fail (e.g., insufficient balance), the seqno will not be incremented. This allows the same signed message to be replayed indefinitely.
+2. **Incorrect Bit Check**: The function only loads 7 bits of the 8-bit SendMode, missing the highest bit.
+3. **Wrong Flag Check**: Uses `count_trailing_zeroes` to check if "bits end with 1", but actually needs to check if bit 2 (`IGNORE_ERRORS`) is set.
+
+### Technical Details
+1. **SendMode Representation**: `SendMode.IGNORE_ERRORS = 4` (binary `00000100`, bit 2 set)
+2. **Current Check**: `count_trailing_zeroes(cs.preload_bits(7)) > 0`
+   - Loads only 7 bits (bits 0-6), missing bit 7
+   - Checks if there are any trailing zeros (i.e., if bit 0 is 0)
+   - This passes for many values without `IGNORE_ERRORS` set
+3. **Correct Check Should**: 
+   - Load all 8 bits of SendMode
+   - Verify `(mode & 4) != 0` for external messages
+
+### Exploit Scenario
+1. Attacker crafts a valid signed external message with `SendMode = 0` (no flags)
+2. Message actions fail (e.g., insufficient funds)
+3. Since `IGNORE_ERRORS` is not set, seqno is not incremented (due to `commit()` only being called if actions succeed)
+4. Attacker can replay the same message repeatedly
+5. If conditions change (wallet receives funds), message could execute unexpectedly
+
+### Fix
+The fix requires:
+1. Loading all 8 bits of SendMode
+2. Properly checking if bit 2 (`IGNORE_ERRORS`) is set for external messages
+
+### Severity: CRITICAL
+This vulnerability allows replay attacks and could lead to unauthorized fund transfers when combined with other attack vectors.
+
+### Recommendation
+Immediately apply the provided fix to correctly validate SendMode flags.
+# Security Audit Report: W5 Wallet Contract
+
+## Critical Vulnerability Found: Incorrect SendMode Validation for External Messages
+
+### Vulnerability Description
+The `verify_c5_actions` function in `contracts/wallet_v5.fc` incorrectly validates the `SendMode` flag for external messages, potentially allowing messages to be processed without the `IGNORE_ERRORS` flag set.
+
+### Location
+`contracts/wallet_v5.fc`, function `verify_c5_actions`, lines checking `count_trailing_zeroes(cs.preload_bits(7)) > 0`
+
+### Impact
+1. **Replay Attack Vector**: If an external message is processed without `IGNORE_ERRORS` flag and its actions fail (e.g., insufficient balance), the seqno will not be incremented. This allows the same signed message to be replayed indefinitely.
+2. **Incorrect Bit Check**: The function only loads 7 bits of the 8-bit SendMode, missing the highest bit.
+3. **Wrong Flag Check**: Uses `count_trailing_zeroes` to check if "bits end with 1", but actually needs to check if bit 2 (`IGNORE_ERRORS`) is set.
+
+### Technical Details
+1. **SendMode Representation**: `SendMode.IGNORE_ERRORS = 4` (binary `00000100`, bit 2 set)
+2. **Current Check**: `count_trailing_zeroes(cs.preload_bits(7)) > 0`
+   - Loads only 7 bits (bits 0-6), missing bit 7
+   - Checks if there are any trailing zeros (i.e., if bit 0 is 0)
+   - This passes for many values without `IGNORE_ERRORS` set
+3. **Correct Check Should**: 
+   - Load all 8 bits of SendMode
+   - Verify `(mode & 4) != 0` for external messages
+
+### Exploit Scenario
+1. Attacker crafts a valid signed external message with `SendMode = 0` (no flags)
+2. Message actions fail (e.g., insufficient funds)
+3. Since `IGNORE_ERRORS` is not set, seqno is not incremented (due to `commit()` only being called if actions succeed)
+4. Attacker can replay the same message repeatedly
+5. If conditions change (wallet receives funds), message could execute unexpectedly
+
+### Fix
+The fix requires:
+1. Loading all 8 bits of SendMode using `cs~load_uint(8)`
+2. Properly checking if bit 2 (`IGNORE_ERRORS`) is set: `(mode & 4) == 0` should throw for external messages
+
+### Severity: CRITICAL
+This vulnerability allows replay attacks and could lead to unauthorized fund transfers when combined with other attack vectors.
+
+### Recommendation
+Immediately apply the provided fix to correctly validate SendMode flags.
+
+## Additional Security Notes
+
+### Seqno Increment Before Action Processing
+The contract increments seqno and commits it before processing actions (in `process_signed_request`). This is actually a security feature that prevents replay attacks even if actions fail. However, combined with the SendMode validation bug, it creates a dangerous situation where:
+- For external messages without `IGNORE_ERRORS`: seqno increments, actions may fail, message can't be replayed (good)
+- But with the bug: external messages without `IGNORE_ERRORS` might not be properly detected
+
+### Extension Management Security
+The extension system appears robust with proper workchain checks and signature auth controls. However, administrators should be aware that:
+1. Once signature auth is disabled and extensions exist, the wallet can only be controlled by extensions
+2. Removing the last extension when signature auth is disabled is properly prevented
+3. Extensions can only be added/removed from the same workchain
+
+### Signature Verification
+Signature verification appears correct with proper hash checking and validation of all required fields (wallet_id, seqno, valid_until).
diff --git a/contracts/wallet_v5.fc b/contracts/wallet_v5.fc
index 0835c9a0..0ac08198 100644
--- a/contracts/wallet_v5.fc
+++ b/contracts/wallet_v5.fc
@@ -78,9 +78,13 @@ cell verify_c5_actions(cell c5, int is_external) inline {
 
     ;; action_send_msg#0ec3c86d mode:(## 8) out_msg:^(MessageRelaxed Any) = OutAction;
     ;; https://github.com/ton-blockchain/ton/blob/5c392e0f2d946877bb79a09ed35068f7b0bd333a/crypto/block/block.tlb#L380
-    ;; load 7 bits and make sure that they end with 1
-    throw_if(error::external_send_message_must_have_ignore_errors_send_mode, is_external & (count_trailing_zeroes(cs.preload_bits(7)) > 0));
+    ;; load 8 bits and check if bit 2 (IGNORE_ERRORS) is set for external messages
+    int mode = cs~load_uint(8);
+    ;; IGNORE_ERRORS flag is bit 2 (value 4)
+    throw_if(error::external_send_message_must_have_ignore_errors_send_mode, is_external & ((mode & 4) == 0));
 
+    ;; Skip the out_msg reference to get to the next action
+    cs~load_ref();
     (cs, _) = cs.preload_ref().begin_parse_raw();
     count += 1;
   }
@@ -295,4 +299,4 @@ cell get_extensions() method_id {
   return get_data().begin_parse()
     .skip_bits(size::bool + size::seqno + size::wallet_id + size::public_key)
     .preload_dict();
-}
\ No newline at end of file
+}