Going-Concern Assumption in Auditing Practice

Date of Submission

3-1995

Document Type

Thesis

Degree Name

Master of Science in Accounting

Department

Accounting

Advisor

Michael Rolleri

LCSH

Business failures --Auditing, Business enterprises --United States --Evaluation.

Call No. at the Univ. of New Haven Library

AS 36 .N29 Acc. 1995 no.4

Abstract

Under the going-concern assumption, an entity is assumed to be a going concern only in the absence of information to the contrary.

To determine the criteria for substantial doubt about the entity's ability to continue as a going concern and guidelines to evaluate them can present problems to the auditors. One solution is a quantitative model for predicting business failure based on financial ratios that supplement the auditor's subjective evaluation. This study examined two multiple discriminant models. One is Altman's Z-score model representing the oldest, yet leading, model since 1968; the other one is the Hian Chye Koh's model (1991), representing the most recent development in this field. Two multiple discriminant models were applied to a sample of 50 companies selected randomly from the period 1989-1994. Out of 50 companies, 25 are bankrupt fims; and each bankrupt firm is matched with a nonbankrupt firm on the basis of industry and size. Altman's Z-score model (1968) proved to be more accurate (92%) in predicting bankrupt firms, while Koh's model (1991) was less accurate (76-s) . In terms of nonbankrupt companies, Koh's model resulted in an accuracy rate of 84%, while the accuracy rate of Altman's Z-score model was only 36%. With an overall accuracy level of 85%, Koh's model was recommended to auditors as a tool in dealing with goingconcern consideration. In addition, some recommendations and critiques, regarding going-concern evaluation in audit planing and final review, were made that would improve auditing standards.

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