Audit report forecast: an application of nonlinear grey Bernoulli model

Abstract

Purpose The widespread application of traditional grey model (GM) in different academic fields such as electrical engineering, education, mechanical engineering and agriculture provided the authors with an incentive to conduct the present empirical research in an accounting field, in particular, auditing practice. In this regard, the purpose of this paper is to employ the nonlinear type of the original GM to forecast the drastically changed data on audit reports, primarily due to the fact that the linear nature of GM is unable to forecast nonlinear data precisely. In essence, this paper adds value to the strand of audit report literature by examining the impact of different financial ratios on auditors’ opinion and then forecasting audit reports by employing GMs. Design/methodology/approach The grey forecasting model is known as a system containing uncertain information presented by grey numbers, equations and matrices. The grey forecasting model is employed by using a differential equation in an uncertain system with limited data set which is suitable for smoothing discrete data. In addition, the analyses are conducted by applying a sample of top 50 listed companies on the Tehran Stock Exchange during 2011-2016. Findings The findings suggest that audit reports are most influenced by the current ratio and conversely, least influenced by the ratio of working capital turnover. Moreover, the authors argue that the Nash nonlinear grey Bernoulli model is more precise than the nonlinear grey Bernoulli model and GM in forecasting audit reports. Originality/value The current study may give more strength to stakeholders in order to analyse and forecast audit report.