The effect of financial ratios on auditor opinion in the companies listed on TSE

Abstract

The present study evaluated the relation between 15 financial ratios with auditors’ opinion. 184 companies listed in TSE during 2005 to 2010 were investigated. The present study used Kolmogrov-Smirnov technique to investigate the distribution difference of independent variables in dependent variable groups. Then, Kendall’s and Spearman and Mann-Whitney tests were applied to investigate the relation between the variables. In addition, the Discriminant analysis was applied to find the best predictor model. The results of the study showed that the distribution of the independent variables with different opinions were not similar mostly. The main hypotheses of the study were a) the distribution of the independent variables in dependent variable groups was not uniform. b) The financial ratios of the companies had significant relation with auditor opinion. c) By financial ratios, a model to predict the auditor opinion is designed and the results of the study showed that in hypothesis a) the distribution of the variables was different in two types of opinions and the study hypothesis was supported. In hypothesis b) based on Kendall’s and Spearman correlation coefficient, there was no significant relation between current ratio, quick ratio and invoice turnover ratio with the auditor opinion. All the variables had negative relation with auditor opinion. It means that by the increase of these ratios in capital structure, it is possible that the opinion is adverse. Based on Mann-Whitney test, the current ratio, quick ratio, invoice turnover ratio of the study hypothesis is rejected. The distribution of the variables in two populations was uniform and other variables were supported and had significant relation with auditor opinion. The results of Discriminant analysis in hypothesis c) Showed that based on the study, only with two financial ratios (“earnings per share”, “Fixed asset turnover”) a mode with accuracy rate 64.1% for prediction of auditor opinion was provided.