Substantial Doubt and the Entropy of Auditors’ Going Concern Opinions

Journal of Contemporary Accounting and Economics, 13:2, 2017

Posted: 17 Mar 2018

See all articles by Kim Ittonen

Kim Ittonen

Hanken School of Economics - Department of Accounting

Per Tronnes

University of New South Wales (UNSW)

Leon Wong

UNSW Australia Business School, School of Accounting

Date Written: 2017

Abstract

Auditors need to establish a substantial doubt threshold in order to determine the type of audit report to issue, but substantial doubt is not defined in the auditing standards. Auditors are regularly criticized for having high thresholds, which results in too few going concern reports. We apply Shannon entropy from information theory as the criterion to evaluate the informational value of the audit report. Shannon entropy provides a measure of the expected information content associated with the realization of an uncertain event. First, we estimate the client’s probability of bankruptcy in our sample. Second, using the distribution of the probability of bankruptcy we calculate the entropy at each point of the probability of bankruptcy. We find that entropy is maximized at the 0.08 probability of bankruptcy.

Keywords: Bankruptcy, Going Concern Modifications, Substantial Doubt, Shannon Entropy, Policy and Regulation

JEL Classification: G33, G38, M42

Suggested Citation

Ittonen, Kim and Tronnes, Per and Wong, Leon, Substantial Doubt and the Entropy of Auditors’ Going Concern Opinions (2017). Journal of Contemporary Accounting and Economics, 13:2, 2017, Available at SSRN: https://ssrn.com/abstract=3141068

Kim Ittonen

Hanken School of Economics - Department of Accounting ( email )

FI-00101 Helsinki
Finland

Per Tronnes (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Leon Wong

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia
612 9385 5810 (Phone)
612 9385 5925 (Fax)

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