| Abstract: | This research project constructed a logit model to predict “subject to” qualified audit opinions using financial statement and market variables for 1,848 audit reports for Australian companies issued from 1984 to 1988. The model provided a better goodness of fit and was more efficient than two naive strategies for predicting “subject to” audit qualifications. The model explicitly incorporated the relative costs of Type II to Type I errors to account for the auditor's asymmetrical loss function. The model was reasonably accurate when a sensitivity analysis for the relative costs of Type II and Type I errors was considered. The accuracy rates for the estimation sample ranged from 70% to 95%. An inter-temporal holdout sample of 293 audit opinions for Australian firms issued during 1989 indicated that the model was useful for predicting “subject to” audit opinions. The accuracy rates for the holdout sample ranged from 72% to 90% over a range of relative Type II and Type I costs. |
