Evaluating the Ability of Cash Flow Ratios in Predicting Auditor’s Opinion

Abstract

Auditor's opinion is useful tools for making decisions by the users of financial statements. The ability of financial statements in providing effective information on auditing opinion and their relation with auditor's opinion has attracted many researchers. Thus, this study evaluates the ability of cash flows in predicting auditor 's opinion using cash flows of 83 accepted companies in Stock Exchange of Tehran from 2003-2010. This study is post-event with applied goals. Here, auditor's opinion is a dependent variable in accepted and qualified groups and cash flow ratio are independent variables in 5 ratios of cash flows to assets, cash flows to sale, cash flows to stockholders' equity, operational earning to cash flows, net profit to cash flows; company size, auditing fee, and the type of auditing institute are classified control variables. The correlation of financial ratios with auditor's opinion was examined using one main hypothesis and 5 alternative hypotheses. To test hypotheses, logistic regression and discriminate analysis methods were used. The results showed that using both methods, except for the ratio of cash flows to stockholders' equity, other ratios of cash flow are correlated with auditor's opinion and are able to predict auditor's opinion.