CHAPTER I

INTRODUCTION

1.1 STUDY BACKGROUND

The survival of an entity, is always connected with the ability of

management to bring the business unit to survive as long as possible. Therefore,

it is natural if the first allegation viability of an entity is devoted to management.

But it also has great potential accusation extend to the auditor. through which

summarized his opinion in the audit report, is initially requested his

responsibility to reveal the continuity of business entities.

In general assignment, the auditor assigned to give an opinion on the

financial statements of a business. The opinions provide a statement of fairness, in

all material respects, the financial position, results of operations, and cash flows in

accordance with generally accepted accounting principles (GAAP, 1994: 410.2).

Based on this statement, in carrying out the audit, auditors are required not only

limitedly see the things in the financial statements, but also have look to other

things such as: the problem of existence and continuity of the entity, for all

activities or transactions that have taken place and what will happen implicitly

contained in the financial statements. Therefore, the auditor should be carefull to

consider any disturbance of the viability of the entity (going concern) for a period

that results in opinions to be qualified public accountants as the main product.

Going-concern audit opinion issue an opinion in that the auditor

determines whether the company can sustain its survival (GAAP, 2001). The

financial statement users consider spending going-concern audit opinion as a

corporate bankruptcy prediction. The auditor shall be responsible for the issued

going-concern audit opinion, because it will affect the decisions of users of

financial statements (Setiawan, 2006).

1. Expenditure going concern opinions are very useful for the users of financial

statements to make right decisions in investing, because they need to know the

financial condition of the company, particularly with respect to the company's

survival. This makes the auditor has a great responsibility to issue going

concern opinions that are consistent with the actual situation of the company.

Some research suggests that the factors driving the auditors to issue going

concern opinions vary and the results are not conclusive.

2. Reputation of a public accounting firm given stake when opinions were not

in accordance with the actual conditions of the company. Auditors must have

the courage to express concerns about the viability of (going concern) client

companies. Problems of going concern should be given by the auditor and

the audit opinions should be included in the audit opinion at the time it

published. Providing going concern status is not an easy task because it is

closely related to the auditor's reputation. Judgment against public

accountants is often done, both by the public and the government to see

whether or not the condition of bankrupt companies is audited. That means

that it now seems to stake the fate of public accountants on the ups and downs

bisnis their companies client (Purba, 2006). This indicates that the auditor's

reputation is at stake when providing audit opinion.

3. The financial condition of the company is the real company's soundness, and

the company discovers the problem of more or less going concern

(Ramadhany, 2004). According to Mckeownet al. (1991), the company is likely

in a disturbed or deteriorated condition when the company receives a going

concern audit opinion. In contrast to companies that have never experienced

financial hardship, auditors never issue going concern audit opinion.

4. The company's growth can be seen from how well the company maintains its

economic position in the industry and overall economic activity (Setyarno et.

al, 2006). Companies that have high earnings growth tend to have a

reasonable report, so the potential for a favorable opinion will be greater.

Altman (1968) in Petronela (2004) argue that companies that profit will not go

bankrupt, because bankruptcy is one of the reasons for the auditor to give a

going concern audit opinion. Companies with negative growth indicate greater

tendency towards bankruptcy.

5. Setyarno et.al. (2006) states that the auditor issue a going concern audit

opinion would consider going concern audit opinion received by the auditee in

the previous year. The study provides empirical evidence that the audit opinion

of the previous year has significant effect on revenues of going concern audit

opinion.

6. By McKoewn (1991) states that larger companies offer higher audit fees than

those offered to small firms. In relation to the loss of significant audit fee, the

auditor may hesitate to issue a going concern audit opinion on the company.

According to Mutchler (1985), the auditors more frequently issue going

concern opinions in smaller companies, because it can resolve the financial

difficulties faced by smaller companies. The research results of Santoso and

Wedari (2007) proved that the size of the company has a significant negative

effect on the going concern audit opinion. But research by Ramadhany (2005)

and januarti and fitrianasari (2008) prove that company size has no significant

effect on the reception going concern audit opinion.

7. The company's inability to meet its obligations as they mature reflects the

trouble condition of the company. The ratio of Debt to Equity Ratio can be

used to determine the capacity of the company to meet both short-term and

long term liabilities. Leverage ratios are generally measured using the debt

ratio that compare the total liabilities to total assets. The amount of the debt

that exceeds the total assets is caused by the company capital deficiency or

negative equity balance. The higher leverage ratio shows that a company's

financial performance is getting worse and can cause uncertainty about the

viability of the company. Companies that have assets less than liabilities will

face the danger of bankruptcy (chen and Chruch, 1992). However, Rudyawan

and Badera (2008) state that the ratio Levarage has no significant effect on the

possibility of acceptance of Going-concern audit opinion.

This study is a replication of the study conducted by setyarno and Juniarti

(2006) on the factors that influence opinion going concern, to distinguish the

variables of the study. This study adds the audit client tenure during the

research year from 2006 to 2010. Based on the explanation above, the title of the

study is “FACTORS INFLUENCING THE TENDENCY OF GOING

CONCERN AUDIT OPINION ACCEPTENCE ON MANUFACTURING

COMPANIES LISTED IN THE INDONESIA STOCK EXCHANGE ”

1.2 PROBLEM IDENTIFICATION

Based on the above information, the issue in this study is "What is the

influence of audit quality , the financial condition of the company, the company's

growth, the previous year's audit opinion, the size of the company, Debt to Equity

ratio and the audit client tenure relating to the going concern audit opinion?".

1.3 PROBLEM FORMULATION

Regarding from the problem identification , this research focus on

influence of the quality audit, the financial condition of the company, the

company's growth, the previous year's audit opinion, the size of the company,

Debt to Equity ratio and the audit client tenure. So the problem formulation is

follows:

1. Does the audit quality of companies positively influence the

acceptance going concern audit opinion?

2. Does the financial condition of companies negatively influence the

acceptance going concern audit opinion?

3. Does the companies Growth negatively influence the acceptance going

concern audit opinion?

4. Does the previous year audit opinion positively influence the acceptance

audit going concern opinion ?

5. Does the size of companies negatively influence the acceptance audit

going concern opinion?

6. Does debt to equity ratio positively influence the acceptance audit going

concern opinion?

7. Does the audit client tenure negatively influence the acceptance audit

going concern opinion?

1.4 RESEARCH OBJECTIVE

From the formulation of the problem formulation above, the purposes of

this study are as follow:

1. To test the influence of the audit quality on acceptence of going concern

audit opinion

2. To test the influence of the finacial condition on acceptence of going concern

audit opinion

3 .To test the influence of the companies growth on acceptence going-concern

audit opinion

4. To test the influence of the previous year's audit on acceptance going

concern audit opinion

5. To test the influence of the size of the company on going concern audit

opinion

6. To test the influence of the debt to equity ratio of the going concern audit

opinion

7. To test the influence of the audit client tenure of the going concern audit

opinion.

1.5 RESEARCH BENEFIT

The benefits that can be derived from the results of this study include the

following:

1.Academic benefit

These results are expected to contribute to the development of theory in

Indonesia, especially on the issue of going concern. this study is also expected

to increase the repertoire of knowledge and understanding and that can be used as

reference knowledge, discussion, and further study materials for readers on issues

related the audit opinion Going Concern.

2. Practical benefits

a. For investors and prospective investors

This research is expected to be useful to provide information and consideration

of the going concern (business continuity of a company) so that investors and

potential investors can make decisions in investing.

b. For independent auditors

This study can be useful as a guide, consideration and reference materials for

auditors in performing the audit process, especially in terms of providing an audit

opinion on the issue of providing clients regarding going concern audit opinion.

c. For the Company's management

The researchers hope that the study can be a reference for determining the

discourse and policies of the company and can be used as a material

consideration in decision making by the management of company.

d. For the government

This study can be useful as a material consideration in the making of economic

policy.

CHAPTER ll

REVIEW REALATED LITERATURE

2.1 Agency theory

Jensen and Meckling (1976) define an agency relationship as a contract in

one or more persons (principal) to ask the other party (the agent) to perform some

work on behalf of the principal which involves delegating some decision-making

authority to the agent. If the two parties involved in the contract want to

maximize their utility, it is possible that the agent will not always act in the best

interests of the principal. With the aim of motivating agents, the principal design

contract in such a way so as to accommodate interests of the parties involved in

the contract agency. Efficient contract is a contract that satisfies the two

assumptions, which are as follows:

1. Agents and principals have symmetric information. It means that both the agent

and the principal have similar quality and quantity of information so there is no

hidden information that can be used for his own gain.

2. Risks associated with the returns that received services agency are little, which

means that agents have a high certainty regarding his reward.

Eisenhardt (1989) states that there are three assumptions related to agency

theory of human nature, namely:

1. General human selfishness (self-interest)

2. Humans have a limited power of thought regarding the future perception

(bounded rationality), and

3. Humans always avoid risk (risk-averse)

Based on the assumption, naturally human will tend to act as managers

opportunistically, by prioritizing personal interests. This triggers the agency

conflict that fairness requires the financial statements to be presented by

management.

Auditor as an independent party is needed to oversee the performance of

management whether or not it has acted in accordance with the interest principial

through financial statements. Principals expect auditors to provide early warning

about the company's financial condition. Company data will be more easily

trusted by investors and other users of financial statements, if the financial

statements that reflect the company's performance and financial condition have

got a reasonable statement of the auditor (Komalasari, 2004). Auditor's duty is to

provide an opinion on the fairness of the company's financial statements, and

disclose going concern issues that the companies face when auditors doubt the

company's ability to survive.

Research on the demand for audit quality has been described using the

literature and the contracting agency. Watts and Zimmermann state that the higher

the agency costs (cost of the conflict), the greater the demand for higher quality

audits, either by the manager or by the shareholders (1986). In the contracting

literature, it is mentioned that accounting is often used in contracts, such as debt

contracts, compensation planning, and others. The contracts also often include

restrictions that must be complied with by the parties involved in the contract.

Therefore, there are demands to perform the calculation and report the figures

before the start of the contract.

Auditors that function in this case are parties which give assurance of the

integrity accounting numbers produced by the auditee accounting technology.

Then, these figures are used as the basis for contracting agents and principals

(DeFond, 1992), (Francis and Wilson, 1988), and (Palmrose, 1984). Auditing also

plays an important role in monitoring contact. Auditor's report serves breach of

contract by the debtor's debt. In addition, the audited earnings figures are also

used in the bonus plan.

Further contracting or agency theory can be extended to explain the audit

brand name and industry specialization as a function of increasing cost agency.

Previous studies showed that the cross-sectional variation may affect the

company's cost agency. Factors of extensive industry are also expected to affect

the boarding industry agency. Characterisctics that may affect a company is

greater than in other companies. The existence of these differences requires a

certain skill to be able to better detect how much influence it has. Thus, this

condition indicates the need for auditor specialization.

 Setiawan (2006) in Praptitorini and January (2007) states that, it takes an

independent third party as a mediator in the relationship between principal and

agent. These third parties are used to monitor the behavior of managers (agents) if

it is acting in accordance with the wishes of the principal. Auditors are those who

are considered being capable of bridging the interests of the principals

(shareholders) with the manager (agent) in managing the company's finances.

Auditors to monitor the work of managers through an annual report. Auditor's

duty is to give the opinion about the fairness of the financial statements. In

addition, the auditor should also consider the going concern of it company’s

If accounting is an important part of the contracting process and cost

agency and accordance with the type of contract that is different, then the

accounting procedures affect firm value and compensation manager. Based on

agency theory, which assumes that man is always self-interest, then the presence

of an independent third party as a mediator in the relationship between principal

and agent is necessary, in this case it is the independent auditor. Agency theory

states that a conflict of interest between the agent and the principal requires the

presence of an independent third party to mediate the conflict between the

two parties.

2.2 Audit Quality

As in the United States, the emergence of accounting manipulation cases

trigger the issuance of Bapepam Kep-20/PM/2002 numbers as on 12 November

2002 and the Decree of the Minister of Finance no. 423/KMK-06/2002. In the

attachment, the Chairman of Bapepam Regulation numbers are Kep-20/PM/2002

containing VIII.A.2 number of them restrict the auditee and the auditor's

relationship during a certain period, the issuer must replace accounting firms

every 5 year and every 3 year for auditors . Moreover, the provision of non-audit

services are provided by, for example, a tax consultant and management

consultant.

Palmrose (1998) suggests that auditors from the accounting firm of non-

Big Eight are more often faced with litigation risk than auditors from the Big

Eight accounting firms. On the other hand, than the auditors of the Big Eight

accounting firm is more accurate than the auditors of the accounting firm non-Big

Eight. However, the reality of which seems late in involving large accounting

firms (Big Eight).

Some cases of accounting scandal are the length of client relationships and

audit the auditor to be the cause of failure. Knapp (1991) suggests that the length

of the relationship between the auditee and the auditor can interfer auditor

independence and accuracy to perform auditing tasks. Research results indicate

that auditors who have a service life of more than 20 years and less than 5 years

can not find fault reporting material.

St.Pierre and Anderson (1984) find that audit failure auditors are

apparently common in that era assignment having less than 3 years. Metcalf

Committee (US.senate, 1997) states that the long relationship between the auditor

and the client may impair the quality of professional accounting firms such as the

case in several countries including Indonesia. To overcome these problems, a

mandatory rotation policy among auditors is important. However, some research

results show that the change of auditors that are mandatory provide negative result

(Lennox, 2011).

Measurement of audit quality is something that is still not clear, but

regular users of financial statements relate to the auditor's reputation. Teoh &

Wong, (1993) and Craswell et al. (1995) state that clients generally perceive that

auditors are derived from a large accounting firm that has affiliation with the

international accounting firm which will have higher quality, because the auditor

has characteristics that can be attributed to the quality of such training,

international recognition, and the peer review. Auditors who have a good

reputation will tend to maintain their reputation of quality audit to awake and not

lose clients.

De Angelo (1981) concludes that the larger the firm can generate higher

audit quality that have a greater incentive to avoid criticism reputational damage

than small scale KAP, KAP large scale are more likely to reveal the problems that

exist because they are more robust in the face of court process risk . this

Argumen shows that a large accounting firm has more incentive to ditection and

report on business continuity issues the client .Palmrose (1988) proved in his

research that the group auditor litigation big 8 has a low level compared to non-

big 8. It shows that the auditor big 8 provides a higher quality because it has the

motivation to maintain his reputation.

Prior to 2003, there were five major accounting firms in the world called

The Big Five Auditors namely Arthur Andersen, Ernst & Young, Deloitte

Tohmatsu toucher, KPMG, and Price water house Coopers. Five local accounting

firms affiliated with The Big Five Auditors are:

1.KAP Prasetio Utomo & Co afiliated with Arthur Andersen

2. KAP Hanadi, Sarwoko, dan Sandjaja afiliated with Ernst & Young,

3. KAP Hans Tuanakotta & Mustofa afiliated with Deloitte Touche Tohmatsu,

4. KAP Siddharta, Siddharta, dan Harsono afiliated with KPMG, dan

5. KAP Drs. Hadi Susanto dan Rekan afiliated with Price water house coopers.

But since 2003, the Big Five Auditors became the Big Four Auditors. The

fourth KAP is Ernst & Young, Deloitte Touche Tohmatsu, KPMG, and Price

water house coopers. In 2003-2004 four local accounting firms affiliated with

The Big Four Auditors are:

1. KAP Prasetio, Sarwoko, Sandjaja affiliated with Ernst & Young,

2. KAP Hans Tuanakotta and Mustafa affiliated with Deloitte Touche

Tohmatsu,

3. KAP Siddharta, Siddharta, and Harsono affiliated with KPMG, and

4. KAP Drs. Hadi Susanto and Partners affiliated with Price water house

coopers.

In 2005, four local accounting firms affiliated with The Big Four Auditors are

as follows:

1. Purwantono, Sarwoko, Sandjaja affiliated with Ernst & Young,

2. KAP Satria Ramli Osman and colleagues affiliated with Deloitte Touche

Tohmatsu,

3. KAP Siddharta, Siddharta, and Harsono affiliated with KPMG, and

4. KAP Drs.Hadi Susanto and Fellow affiliated with Price water house

coopers.

In 2006-2008, four local accounting firms affiliated with The Big Four Auditors

are as follows:

1. Purwantono, Sarwoko, Sandjaja affiliated with Ernst & Young,

2. KAP Satria Ramli Osman and colleagues affiliated with Deloitte Touche

Tohmatsu,

3. KAP Siddharta, Siddharta, and Harsono affiliated with KPMG, and

4. KAP Haryanto Sahari affiliated with Price water house coopers.

In 2009, four local accounting firms affiliated with The Big Four Auditors are:

1. Purwantono, Sarwoko, Sandjaja affiliated with Ernst & Young,

2. KAP Satria Ramli Osman and colleagues affiliated with Deloitte Touche

Tohmatsu,

3. KAP Siddharta, Siddharta, and Harsono affiliated with KPMG, and

4. KAP Tanudireja Wibisana and Partners affiliated with Price water house

coopers.

2.3 Financial condition of the companies

Most of the previous studies have used financial ratios to identify the

company's going concern problem (Koh and Tan, 1999), (Chen and Church,

1992), and (Mutchler, 1985). Alman and McGought (1974), Levitan and Knoblett

(1985), Mutchler (1985), and Menon and Scwarchtz (1987), investigate the

importance of financial variables in explaining the going concern modification to

the opinion received by the company. Altan and McGough (1974), Koh and

Killought (1990), and Koh (1991) conclude that a bankruptcy prediction model

using financial ratios are more accurate than the auditor's opinion in classifying

whether the company bankrupt and not bankrupt.

McKeown et al. (1991) find evidences that auditors almost never issued a

going concern opinion on companies that are not experiencing financial distress.

Going concern opinion is unwanted result in falling share prices (Fleak and

Wilson, 1994). This shows symptoms of the company's bankruptcy (Chen and

Church, 1996) and will lead the company to difficultly obtain capital (Firth,

1980).

Soundness of the company can be seen from the company's financial

condition. On the company which has good financial condition auditors tend to

not issue a going concern audit opinion (Ramadhany, 2004). This is supported by

Carcello et al. (2000) which states that the company's financial condition is

compromised, then the company is likely to receive a going-concern audit

opinion. Opinion was also supported by Setyarno et al. (2007), and Wedari

Santoso (2007) and Rudyawan and Badera (2009) stating that, the better the

financial condition of the company, the less likely the auditor going concern audit

opinion.

SA Section 341 paragraph 06 states that the auditor can identify

information about certain conditions or events that indicate a big doubt about the

entity's ability to maintain its viability within a reasonable time (not more than

one year from the date of the financial statements being audited).

 Arens and Lobbecke (1996:52) states several factors that cause

uncertainty about the viability of the company is (1) substantial operating losses

over and over or shortage of working capital, (2) the company's inability to pay its

obligations as they mature in the short term, (3 ) loss of key customers, occured

unusual disaster, and (4) litigation, lawsuits or similar problems that often occur.

2.4 Auditor opinion

In doing general assignment, the auditor is assigned to provide an opinion

on the financial statements of the company. Opinion given a statement of fairness

in all material respects, the financial position and results of operations, and cash

flows in accordance with accounting principles AISPE (Auditing information

system profession ethic ) which is generally acceptable (SPAP, 2001). In

performing the audit process, the auditor is required not only to see the things

revealed in the financial statements but also to wary of things that could

potentially interfere with survival (going concern) of a company. This is the

reason why the auditor is asked to evaluate the viability of the company within a

certain time limit (SPAP SA 341).

PSA 29, paragraph 11, letter d, states that great doubts about the ability of

the business unit continued survival (going concern) is a condition that requires

the auditor to add an explanatory paragraph (or other explanatory language) in the

audit report. While not affecting the unqualified opinion expressed by the auditor,

the term is used to encompass language paragraphs, sentences, phrases, and when

used by a public accountant to communicate the results of its audit report to the

user.

McKeown et al. (1991) found that the auditor may fail to give an opinion

on the indication of the bankruptcy of a company that turned out to be bankrupt in

the next few years. This is because the company is in a position between the

threshold of bankruptcy by the continuity of his own efforts (for example, it is in

the process of debt restructuring). PSA 30 and SA Section 341 provide guidance

to auditors about the impact the ability of the business unit continued survival of

the auditor's statement of opinion.

According to the Public Accountants Professional Standards (SPAP) SA

Section 110, the purpose of an audit of financial statements by the independent

auditor in general is to express an opinion on the fairness in all material respects,

the financial position, results of operations, changes in equity and cash flows in

accordance with accounting principles commonly applied in Indonesia. Opinion

of the auditor (audit opinion) is part of the audit report which is the main

information of the audit report. Audit opinion is given by the auditor through

several stages of the audit so that the auditor can give a conclusion that opinion

should be given in the financial statements that was audited. There are five types

according to the auditor's opinion Mulyadi (2002), namely:

1. Unqualified opinion

With an unqualified opinion, the auditor states that the financial statements

present fairly in all material respects in accordance with generally acceptable

accounting principles in Indonesia. Audit report with an unqualified opinion is

issued by auditors if the following conditions are met:

a. All balance sheet, income statement, statement of changes in cash flows

and statements contained in the financial statements

b. In the implementation of the engagement, all common standards can be

met by auditors

c. Enough evidence can be gathered by the auditor, and the auditor has

conducted the engagement in order to make it possible to carry out the

field work standards.

d. The financial statements are presented in accordance with generally

acceptable accounting principles in Indonesia

e. No state requires the auditor to add an explanatory paragraph or

modification of words in the audit report.

2. Unqualified opinion with explanatory language

In certain circumstances, the auditor adds an explanatory paragraph or

other explanatory language in the audit report, although it does not affect an

unqualified opinion on the financial statements being audited. Included an

explanatory paragraph after paragraph of explanatory or modification of words

in the standard audit report are:

a. Inconsistencies in the application of accounting principles are generally

acceptable.

b. Grave doubts about the viability of the entity.

c. Auditor agrees with a deviation from the accounting principles issued

by the Financial Accounting Standards Board.

d. Emphasis on one thing.

e. Audit reports involving other auditors.

3. A qualified with exception (qualified opinion)

Reasonable income with the exception is granted if the auditee financial

statements fairly present all material respects in accordance with generally

acceptable accounting principles in Indonesia, except for the impact of the

excluded. Reasonable income declared in a state with the exception of:

a. Not sufficient competent evidence or a limitation on the scope of the

audit.

b. Auditor believes that the financial statements contain departures from

generally acceptable accounting principles in Indonesia, which have a

material effect, and the auditor concludes that not expressing an opinion is

not fair.

4. adverse opinion

Improper revenue is provided by the auditor when the financial statements

do not fairly present auditee financial statements in accordance with generally

acceptable accounting principles.

5. Disclaimer opinion

Auditor does not express an opinion if the auditor does not perform

sufficient audit to allow the auditor to give an opinion on the financial

statements. This opinion is also given if the condition is not independent

auditor in the relationship with the client

2.5 Companies growth

The company's growth indicates a company's ability to maintain its

survival. The company's growth can be proxied by the ratio of sales growth. This

ratio measures how well the company maintains its economic position, both in

industry and in the overall economic activity (Weston & Copeland, 1992 in

Setyarto et al, 2006). Companies experiencing growth, indicate the operational

activities of the company to run properly so that the company can maintain its

economic position and its survival. While the ratio of companies with potentially

large negative sales growth decrease earnings so the management need to take

corrective action in order to maintain its viability.

High profits generally signify high cash flow (Weston & Bringham, 1993).

Altman (1968) and Petronela (2004) suggested that companies with negative

growth indicate a greater tendency towards bankruptcy because bankruptcy is one

of the basis for the auditor to give a going concern audit opinion.

2.6 Size of Companies

Firms with positive growth give a sign of the company's growing size and

reduce the tendency towards bankruptcy. McKeown et al. (1991), Mutchler et al.

(1997), and Carcello and Neal (2000) find evidences of a significant negative

relationship that exist between the size of the auditee company with going-

concern audit opinion.

McKeown et al. (1991) said that larger companies offer higher audit fees

than those offered by smaller companies. Mutcler (1985) states that auditors more

frequently issue going concern audit opinion on small firms, as auditor needs to

believe that a large company can resolve its financial difficulties of the small

companies. Mutchler et al. (1997) provide empirical evidences that there is a

negative relationship between firm size and going-concern audit opinion.

2.7 Debt To Equity Ratio

To measure the extent how far the company financed with debt. can be

seen through the debt to equity ratio. Debt to equity ratio reflects the proportion

between the total debt to total shareholders' equity. Total debt is total liabilities

(both short-term debt and long-term), while total shareholders' equity is total

equity (total equity shares deposited and retained earnings) that a company has.

According to Robert Ang (1997) this composition show composition from ratio

of debt to total equity. The higher the debt to equity ratio,the greater the

composition of total debt the total equity capital. Thus, it gives impact to the

greater burden of the company to outsiders (creditors).

To expand the company in the face of competition, it is necessary the

existence of a financing that could be used for meet those needs. Funding sources

can be obtained from the company within the company (internal) and outside the

company (external). In practice, the resources available to the company should be

managed well, because each of these funding sources contains accountability

obligations to the owner of the funds. The proportion between capital and equity

(internal) with loan capital (external) should be considered, so that the company

can know the burden against the owners of the capital. the financial management

of the proportion between the number of outside funds is commonly referred to as

capital structure or capital structure (capital structure).

Brigham (1983) states that in developing the capital structure targets

require analysis of many factors to take into consideration the financial condition

of the company. External sources of funds are obtained from loans or debt (both

forests short and long term), while the internal sources of funds a rderived from

capital stock (equity) and undivided profits (retained earnings).

2.8 Audit Client Tenure

Auditor tenure is a term client engagements that exists between public

accounting firms (KAP) with the same auditee. the fearness of losing a large

amount of the fee would cause the auditor occurs doubts to give going concern

audit opinion. A report issued by the Securities Practice Section of Exchange

Commission (SEC) Executive Committee (American Institute of Certified Public

Accountants (AICPA), 1992 in Sinason et al., 2001) revealed some of the

arguments that were made about audit tenure. This argument states that in the long

term, the relationship between auditor and client companies will cause the

following problems:

(1) The auditor has a closer relationship with the client's management that

causes the auditor to identify management problems and loss of

professional skepticism.

(2) The auditor may consider testing conducted as a repetition of a previous

engagement so that the auditor felt already know in advance the results of

such testing. This causes the auditor to less able to evaluate significant

changes in the client's condition.

(3) The auditor may wish to solve the problem of client companies in order to

maintain relationships with clients. Meeting the wishes of the client's

management may be a priority auditor, than to follow professional

standards.

2.9 Opini Audit Going Concern

Going concern audit opinion is opinion that published by the auditors to

determine whether the company can maintain its viability (SPAP, 2004). Gray and

Manson (in Praptitorini and Januarti, 2007), going concern is one of the most

important concepts that underlies financial reporting. Setiawan (in Praptitorini and

Januarti, 2007) states that it is an auditor's responsibility to determine the

appropriateness of the financial statements using the going concern basis, and that

the use of the going concern basis by the company is viable and adequately

disclosed in the financial statements.

Arens (in Fanny and Saputra, 2005) states that there are several factors

that give rise to uncertainty about the viability of the company:

1. Large business losses are recurring or shortage of working capital.

2. The company's inability to pay its obligations as they mature in the short term.

3. Loss of key customers, uninsured disasters, such as earthquakes or floods or

unusual labor issues.

4. Litigation, lawsuits or similar problems that have occurred and may endager

the company's ability to operate.

Going concern assumption used in financial reporting as a whole does not

prove the existence of information that suggests the opposite (Contrary

information). Significant information is deemed contrary to the assumption of the

survival of business units typically the business unit associated with the inability

to meet obligations when due,,without making major asset sales to outsiders

through regular business, restructuring of debt, operating improvements imposed

from the outside, and other similar activities (SPAP 341, 2004). SPAP (PSA 30)

provides guidance to auditors about the impact of the ability of the business unit

to continue to survive:

1. If the auditor believes that there are doubts about the ability of the unit

continue to survive within a reasonable period of time, the auditor should:

a. obtain information regarding the management plan gives impact and

reduces future conditions and events.

b. determine whether the plan can be effectively implemented

2. If management does not have a plan that reduces the impact of the conditions

and events of the ability of the business unit’s continued survival, the auditors

consider giving a statement that did not have an opinion.

3. If management has the plan, the next step should be done by the auditor is

making conclusion that the effectiveness of the plan should include:

a. if the auditor concludes that the plan is not effective, the auditor does

not express an opinion

b. if the auditor concludes that an effective plan and clients are disclosed

in the notes of financial statements, the auditors express an unqualified

opinion

c. if the auditor concludes that the plan will be effective but the client did not

disclose in the notes to the financial statements, the auditor provides no

reasonable opinion.

4. If the auditor concludes hesitations or doubts over the company's ability to

continue its business, an unqualified opinion with an explanatory paragraph needs

to be made, regardless of the disclosures in the financial statements. PSA 30

permits, but does not suggest the statement did not give an opinion because theirs

survival.

2.10 Previous Research

Ramadhany (2004) conducted a study entitled "Analysis of the factors that

affect the going concern audit opinion on manufacturing companies experiencing

financial distress at the Jakarta Stock Exchange. The factors used are the audit

committee, debt default, financial condition, previous year's audit opinion, the

auditor firm size and scale. With logistic regression data analysis techniques it

was found that, financial condition, debt default, and previous audit opinion

significantly influence the going-concern audit opinion. While the audit

committee, company size, and scale the auditor do not significantly influence the

going-concern audit opinion.

Research conducted by Fanny and Saputra (2005) with the title of "going-

concern audit opinion studies are based on bankruptcy prediction model, the

growth of the company, and the reputation of KAP (Office of Public Akuntan)

study on the JSE listed companies. Research uses the dependent variable and the

going-concern audit opinion, independent variables bankruptcy prediction model,

the growth of the company, and the reputation of the firm (public accounting

firm). By using logistic regression analysis, it was found that, using a bankruptcy

prediction model developed by Altman affect the provision for granting a going

concern audit opinion. Results also found that the company's growth and

reputation of the firm (public accounting firm) does not affect the provision going

concern audit opinion.

In the study conducted by Santosa and Wedari (2007), it was concluded

that receipt of an audit opinion can be demonstrated through the company's

internal conditions of observation, the previous year's audit opinion, the

company's growth, and the size of the company. As a result, audit quality and firm

growth does not affect the going concern opinion. However, the auditor's opinion

on the previous year has a positive influence on the going concern opinion.

Research conducted Praptitorini and Januarti (2007) use a slightly

different variable. The study shows that the quality of the audit did not

significantly influence the acceptance of a going concern opinion. Meanwhile,

debt default significant positive effect on the going-concern audit opinion.

Companies in Indonesia are likely to receive non going-concern opinion when the

auditor does not make the turn. It indicates a lack of auditor independence level in

Indonesia.

In the next study, Setyarno and Januarti (2006) showed that the company's

financial condition gives a negative effect on the possibility of receiving a going

concern opinion, and the previous year's audit opinion gives positive effect on the

probability of going concern audit opinion. In comparison, audit quality and firm

growth does not affect the possibility of receiving a going concern opinion.

In a study conducted by Rudyawan and Badera (2009) regarding the going

concern opinion by using variable model of bankruptcy prediction, corporate

growth, leverage, and the auditor's reputation, it is suggested that bankruptcy

prediction variable model influemce the going-concern audit opinion. In contrast,

growth, leverage, and the auditor's reputation have no impact on the going-

concern audit opinion.

AUDIT QUALITY

FINANCIAL CONDITION OF THE COMPANY

COMPANIES GROWTH

AUDIT OPINION PREVIOUS YEAR

SIZE OF THE COMPANY

DEBT TO EQUITYRATIO

H1+

H2-

H3+

H4+

H5-

H6+

ACCEPTANCE OF AUDIT OPINION GOING CONCERN

Junaidi and Hartono’s research (2010) entitled "non-financial factors on

the going concern opinion" lead to the conclusion that the hypothesis testing

results showed three non-financial variables tested that were significant (tenure,

reputation, disclosure) and a non-financial variable that was not significant (size )

2.11 Research method development

Research method

H7-AUDIT CLIENT TANURE

2.11.1 Audit Quality

Junaidi and Hartono (2010) state that the auditor is responsible for

providing high quality information useful for decision making. Reputable auditors

tend to issue going concern audit opinion if the client has problem related with

going concern of the companies. Craswell, et al. (in Fanny and Saputra, 2005)

states that the client usually has perception of auditor from a large public

accounting firm that is affiliated with the international public accounting firm. It

has higher quality because the auditor has characteristics that can be associated

with quality, such as training, international recognition, as well as a peer review.

Sharma and Sidhu (in Fanny and Saputra, 2005) classify public accounting

firm's reputation into six big scale firms and non-big six firms to look at the

degree of independence, as well as the tendency of a public accounting firm to

audit the costs it receives. Mutchler (in Fanny and Saputra, 2005) uses scale proxy

variables of public accounting firm for the public accounting firm's reputation in

order to see the trend of the audit opinion given to the troubled company.

Based on previous research, proxies are often used to assess the reputation

of the auditor in using scale public accounting firm. McKinley et al. (In Fanny and

Saputra, 2005) state that when a public accounting firm claims to be a major

accounting firm as is done by the big four firms, then they will try hard to keep

the big names. They avoid actions that could disrupt the reputation of their name

that is often used as a proxy for auditors and audit quality. However, a lot of

research competence and independence are still rarely used to see how big the

actual audit quality is (Barbadillo Ruiz et al. 2004). Auditor reputation is based on

trust service user auditor and that auditor has the power monitoring in general can

not be observed. DeAngelo (1918) stated that large-scale auditors have incentives

to avoid criticism and this is more reputational damage than the small-scale

auditor. That argument means that the big auditor has more incentives to detect

clients report going concern problem.

Mutchler et al. (1997) found evidences that univariate big 6 auditors are

more likely to publish going concern audit opinion on the company experiencing

financial distress than non-Big 6 auditors. Auditors can provide a large-scale audit

of a better quality than the small scale auditor, including in exposing the going

concern issue. The larger the scale of the auditor, the more likely the auditor will

issue a going concern audit opinion.

In the study, Craswell et al. (1995) in Setyarno (2006), auditor quality is

measured using specializion auditor. Craswell suggests that specialized auditors in

certain areas are another dimension of audit quality. Research results show that

the specialist audit fee is higher than non-specialist auditors. Mayangsari (2003)

conducted a study presenting the influence of auditor industry specialization as

another proxy of audit quality on the integrity of financial statements. Research

results indicate that auditor specialization has positive effect on the integrity of the

financial statements.

In previous studies, testing on the relationship between the behavior of the

auditor's going concern opinion with the administration was carried out. Altman

(1982), Chen and Church (1992) compared the type of audit opinion issued by

auditors in corporate bankruptcy using bankruptcy prediction models. In general,

these studies found that the majority of the bankrupcy’s of the studied companies

were the companies that received a going concern opinion. The other results stated

that the bankruptcy prediction model which was used is more accurate than the

given auditor's opinion. The results of these studies indicate that the audit

profession has failed to undertake the professional responsibilities.

H1: Audit quality negatively influences the possibility of going concern audit

opinion acceptance

2.11.2 Financial condition of the company

Some previous studies concluded that bankruptcy prediction models used

traditional financial ratios which were more accurate than the auditor's opinion in

classifying bankrupt and not bankrupt companies (Altman & McGough, 1974,

koh & Killough, and Koh 1991).

Altman (1993) revised the model which was developed previously and

underwent revision whose goal is to make the model predictions are applicable

not only in manufacturing companies but also in the company besides

manufacturing. Altman revised the model as follows:

Z’= 0,717Z+ 0,874Z2 + 3,107Z3 + 0,420Z4 + 0,998Z5

Z1= working capital/ total asset

Z2= retained earnings/total asset

Z3=earnings before interest and taxes /total asset

Z4= book value of equity /book value of debt

Z5= sales/total asset

Z value is obtained by calculating the ratio of five based on data on the

balance sheet and profit / loss, multiplied by the coefficient of each ratio, then the

results are summed. This calculation results Z score is a ratio scale.

H2: financial condition of the company negatively influence the possibility of

going concern audit opinion acceptance

2.11.3 Companies Growth

In this study, the company's growth is proxied by the ratio of sales growth.

This ratio measures how well the companies maintain its economic position, both

in industry and in the overall economic activity (Weston and Copeland, 1992).

Sales are the main operating activities of the auditee. Auditees that have positive

sales growth ratio indicate that the auditee can maintain its economic position and

better able to survive (going concern). Sales that continue to increase from year to

year will be the opportunities of the auditee, and the auditor will be less likely to

issue a going concern audit opinion.

Sale growth is used to measure the effectiveness of the company to

maintain its economic position, both in the industry and overall economic activity

(Weston & Copeland, 1992) in Setyarno et al. 2006). Companies experiencing

growth indicate that the operational activities of the company run properly so that

the company can maintain its viability and economic position, while firms with

negative growth indicates a greater tendency towards bankruptcy (Altman, 1968).

H3: Growth of companies has a negative effect on the possibility of going concern

audit opinion acceptance .

2.11.4 Prior Year Audit Opinion

Auditee that receives a going concern audit opinion in the previous year

shall be deemed to have continuity problems, so it is more likely for the auditor to

issue a going concern audit opinion on the current year. Companies that have

problems will experience problems such as loss of public confidence so that

management will increasingly find it difficult to overcome the existing difficulties

(Ramadhany, 2004).

Ramadhany (2004) Setyarno et al. (2007), January and Fitrianasari (2008),

Fanny and Saputra (2000), and January (2007) found evidences that the previous

year's audit opinion significantly affect the going concern audit opinion. This

suggests that the auditee receiving a going concern audit opinion in the previous

year will have the possibility to accept similar audit opinion in the current year.

The hypothesis is presented as follows:

H4: Audit opinion given in the previous year has positive effect on the possibility

of going concern audit opinion Acceptance

2.11.5 Company Size

The size of the company is a large-scale in which small firms can be

clarified by way of total assets, log size, the value of the stock market, and so on.

Bigger companies offer higher audit fees than smaller companies. In the hook of

the significant loss of the audit fee, auditors may question spending on going

concern audit opinion on the big companies.

Januarti and Fitrianasari (2008), Junaidi and Hartono (2010) found that

firm size does not affect the going concern audit revenues, while Santosa and

Wedari (2007) find evidence that firm size affects the going concern opinion. This

shows that the larger the company, the less likely it receives going-concern audit

opinion. The hypothesis is presented as follows:

H5: Company size has negative effect on the possibility of going concern audit

opinion acceptance .

2.11.6 Debt to Equity Ratio

Debt to equity ratio shows the proportion of the use of debt to finance

investment (Sartono, 2001:120). Debt to equity ratio is measured by comparing

the total liabilities and equity toatal. This ratio measures the percentage level of

corporate debt to total assets owned or how big the percentage of total assets is

financed with debt. The higher level of debt compared to equity ratio causes

doubts about the ability of the company to maintain the continuity of their

business in the future. This is due to the fact that most of the funds raised by the

company will be used to refinance debt and fund to operate will decrease.

Creditors generally prefer low numbers of debt ratio , because the greater

the likelihood of losses suffered by creditors in the event of liquidation. The

greater debt ratio would be more likely to give the auditor going concern audit

opinion. The results Praptitorini and Januarti (2007), Januarti and Fitriasari

(2008), as well as Januarti (2009) found that the ratio of debt default significant

positive effect on the going-concern audit opinion. Based on the description, the

sixth hypothesis in this study is as follows:

H6: Debt to equity ratio possitively influence the possibility of going-concern

audit opinion acceptance

2.11. 7 Audit Client Tenure

Client auditor tenure is the number of years in which the firm does the

audit engagement with the same auditee. Long time of audit engagement the

auditor will make affect losing its independence, so it is likely to provide a going

concern opinion will be hard, or it will make the firm better understand the

financial condition and will be easier to detect problems going concern To

maintain its independence some countries establish regulations regarding KAP

rotation. In Indonesia, regulations require a change of 5 years public accounting

firm and auditor who audited the company in 3 year in a row (Bapepam, 2002).

Based on the description, the seventh hypothesis in this study is as follows:

H7: Client Audit Tenure negatively influence the possibility of going concern

audit opinion acceptance

CHAPTER III

RESEARCH METHOD

3.1 Sample

The sample used in this study are all listed manufacturing companies in

Indonesia Stock Exchange (IDX) in 2006 to 2010. The manufacturing company

sector was chosen because to avoid the industrial effect, industry risk is different

between an industrial sector with each other. Year 2006 to 2010 was selected due

to the economic situation in Indonesia which is relatively stable, so as to reflect

the movement of shares on the IDX (Indonesia Stock Exchange), which is

actually after the economic crisis in previous years.

This study uses purposive sampling method that is sampling technique with

specific considerations or criteria (Sugiyono, 2007:78). The criteria considered in

this study sample are as follows:

1. Auditee is listed on the Indonesia Stock Exchange (IDX) .

2. Published financial statements that were audited by independent

auditors during the year 2006- 2010

3. Has undergone a net profit after tax of at least two negative period

financial statements in two consecutive years. Because auditor almost

never issued a going concern opinion on the companies that have a

positive net profit after tax (McKeown et al.1991).

3.2 Types and Sources of Data used in this study are as follows:

1. The quantitative data, the data in the form of numbers or qualitative data

in the form of numbers (Sugiyono, 2007:13). Quantitative data in this study is the

annual financial statements companies listed in Indonesia Stock Exchange 2006-

2010.

2. The qualitative data, the data in the form of words, sentences,

schematic, and images (Sugiyono, 2007:13). The qualitative data in this study is

the auditor's independent report.

Sources of data in this study were secondary data in which researchers

obtained data indirectly through intermediaries, such as other people or

documents (Sugiyono, 2007:129) The secondary data in this study is data of

independent auditors' report and annual financial statements of companies listed

Indonesia Stock Exchange in the period of 2006-2010. The data used in this study

were obtained from the website of the Indonesia Stock Exchange (IDX)

www.idx.co.id and ICMD (Indonesian Capital Market Directory)

3.3 Research variables, Operational Definitions and measurement

1. Independent variable

Independent variable is the variable that affects or cause of the

amendment or the emergence of an independent variable or bound (Sugiyono,

2007:33). Independent variables in this study are the quality of the audit, the

financial condition of the company, the previous year's audit opinion, the growth

of the company, company size, debt to equity ratio, and the audit client tenure

and the operational definition of a variable measurements are as follows

a. Audit Quality

Audit quality is measured based on the auditor's reputation. Auditor

reputation in this research is the firm auditing the financial statements which are

derived from the big four or not. GAP is the purpose with the big four, namely,

(1)affiliated with KPMG Siddharta & Widjaja, (2) Ernst and Young is affiliated

with Purwanto, Sarwoko & Sandjaja, (3) Satria bing Osman and associates

affiliated with Deolitte Touche Tohmatsu, and (4) Haryantono Sahari and

colleagues affiliated with audit Price water houseCoopers. Audit quality is

measured using a dummy variable, which is coded 1 if the firm is affiliated with

the big four accounting firm,given code 0 if the firm is not affiliated with the big

four accounting firm (Setyarno et al, 2006).

b. Financial condition of the companies

In this study the company's financial condition is peroxide by using

bankruptcy prediction models Zscore Altman. The formula used is :

Z = 0,717Z1 + 0,874Z2 +3,107Z3+0,420Z4+0,998Z5

Z1 = working capital / total asset

Z2 = retained eaarnings / total asset

Z3 = earnings before interest and taxes / total asset

Z4 = market capitalization / book value of debt

Z5 = sales/total asset

Z value is obtained by calculating the ratio of five based on data on the

balance sheet and profit / loss, multiplied by the coefficient of each ratio which

then summed the results. This calculation results in the form of ratio scale Zscore.

c. Companies Growth

The company's growth in this study is proxied by the ratio of sales

growth (Setyarno et al, 2006). Sales growth ratio is used to measure the ability of

firms in the current growth rate of sales compared to that in the previous year.

This data was obtained by calculating the ratio of sales growth based on profit /

loss of each auditee. The calculation results are presented with the sales growth

ratio scale.

d. Pevious audit opinion

Defined as audit opinion received by the auditee in the previous year,

measured by using the dummy variable, coded 1 if auditee received a going

concern audit opinion, whereas if auditee received non going-concern audit

opinion given code 0 (Ramadhany, 2004). This data was obtained from the

independent auditor's report on the year before the year of observation that is

2005-2009.

Sales Growth = Net Sales - Net sales 1-t

Net sales -t

e. Size of the Companies

Company size is a scale that can classify companies into big, medium, or

small companies. Company size in this study was measured by the logarithm of

total assets. The total assets chosen as a proxy for the size of the company, with

consideration , that the asset value is relatively more stable than the capitalized market

value and sales (Wuryatiningsih, 2002 in Sudarmaji and Sularto, 2007)

Size= Logaritma (Total aset)

f. Debt to equity Ratio

Debt to equity ratio shows the proportion of the use of debt to finance

corporate investment. Debt to equity ratio in this study was measured by

comparing total liabilities to total equity (Sartono, 2001: 121). This ratio measures

the extent to which the company's assets are spent with the obligations derived from

creditors and equity capital from shareholders

G. Auditor Client Tenure

Client Auditor Tenure is measured by counting the same year in which

the firm has conducted the engagement to the auditee.(Januarti ,2009).

Debt to equity ratio = Total laibilities

Total Equity

2. Independent Variable

Independent variable is the variable that is affected or which become

due because of the independent variable (Sugiyono, 2007: 33). The dependent

variable in this study is a going concern audit opinion. Going concern audit

opinion is modified audit opinion in which the auditor judges that there is an

inability or significant uncertainty over the viability of the company in running its

operations in the foreseeable future. Included in this is a going concern opinion,

qualified opinion, adverse opinion, and no opinion (Mutchler, 1986, Ramadhany,

2004: Rahayu, 2006).

Going concern audit opinion is measured using a dummy variable where 1

category for the auditee received a going concern audit opinion and 0 for auditee

category that receives non going-concern audit opinion. These data were obtained

by analyzing the independent auditors' report on the observation of the years 2006

to 2010.

3.4 Hypothesis Testing

Hypothesis testing is done by multivariant analysis using logistic

regression Logistic regression is a specialized form of regression analysis with the

dependent variable is the independent variable and the category is a combination of

metric and non-metric Ohlson (1980) used logistic regression to predict financially

distressed companies. Analysis of logistics is one of the best alternative

techniques to overcome the limitations of MDA. The analysis must be done

separately between each variable. Logistic regression was predicted by the

independent variable. This analysis technique does not require the normality test

and test again the classical assumptions on the independent variable (Ghozali,

2005). Gujarati (2003) states that ignore heteroscedasity logistic regression, the

dependent variable means that not require homoscedacity for each independent

variable. Logistic regression models were used to test the following hypothesis :

GCO = opini going concern (variable dummy, 1 for auditee with audit going

concern opinion (GCAO) and 0 for auditee with audit non going concern opinion

(NGCAO).

α = konstanta

β1 = regression coefficient

ADQ = auditor quality proxy dummy variable (1 for auditors who are members

of a large scale (big 4) and 0 for non-(non big 4)

Zsc = financial condition are proxied by using five Zscore Altman's bankruptcy prediction model for manufacturing companies.

PRO = audit opinion received in the previous year (category 2 if the going concern audit opinion (GCAO), 0 if not (NGCAO).

SLR = Ratio of sales growth auditee

Siz = Size of Company

DER = Debt to equity ratio

ε = Residual Erorr

GCO= α+β1 ADQ+ β2 ZSC+ β3 PRO+ β4 SLR + β5 SIZ+ β6 DER + β7 ACT ε

1. Assess the feasibility of Regression Model

Feasibility regression model was assessed using Hosmer and Lemeshow's

Goodness of fit Test. If the statistical value of Hosmer and Lemeshow Goodness

of fit is greater than 0.05 then the null hypothesis can not be rejected, and it means

that the model is able to predict the value of observations or the model can be said

to be acceptable because it fits with the observation data (Ghozali, 2005)

2. Assessing Model Fit

A reduction in the value of the - 2LL initial (initial-2LL function) with

the-2LL values in the next step shows that the hypothesized model fit to the data

(Ghozali, 2005). Log likelihood in logistic regression similar to definition "Sum

of Square Error" in the regression model, so the decrease in log likelihood

regression model showed the better.

3. Parameter estimation and interpretation

Parameter estimation is seen through the regression coefficients.

Regression coefficients of each of the tested variables indicates the relationship

between the variables. Hypothesis testing is done by comparing the probability

value (sig) with a significance level (α).

Tabel 3.1

Hypothesis

Hipotesis Statements Expectation

H1 Audit quality negatively influences the possibility of

going concern audit opinion acceptance

β1 Positive

H2 financial condition of the company negatively

influence the possibility of going concern audit

opinion acceptance

β2 Negative

H3 Growth of companies has a negative effect on the

possibility of going concern audit opinion acceptance

β3 Negative

H4 Audit opinion given in the previous year has positive

effect on the possibility of going concern audit

opinion acceptance

β4 Positive

H5 Size of the company has negative effect on the

possibility of going concern audit opinion acceptance

β5 Negative

H6 Debt to equity ratio possitively influence the

possibility of going-concern audit opinion acceptance

β6 Positive

H7 Client Audit Tenure negatively influence the

possibility of going concern audit opinion acceptance

β7 Negative

Chapter IV

Data analysis and discussion

A financial statement basically shows that the company will continue its

efforts in the future. Consideration of an entity's business continuity needs to be

done as a way to identify the condition of the company, identifying the condition

of the company seen from the performance appraisal firm, which is important to

be done by the parties concerned in the company's accounting information. In

determining the decision to invest in a company, it is important for investors to

know the financial condition of the company, especially regarding survival. Audit

opinion containing survival information (going concern) the company will be very

useful to investors, when an investor will invest in a company.

Related with the company's continuance and by using financial statements

that have been issued by companies especially manufacturing companies that have

been listed on the Indonesia Stock Exchange (BEI), so in this study will be

described on the effect of variables that include : audit quality , financial condition

of the company, companies growth , audit opinion previous year , company size ,

debt to equity ratio and audit client tenure into audit opinion on going concern

manufacturing companies in Indonesia Stock Exchange.

Based on sampling techniques that have been mentioned in the previous

section, using purposive sampling can be seen from all the manufacturing

company from 2006 to 2010 who had criteria. The details of the number of firms

sample used in this study are as follows:

Tabel 4.1

Rincian Hasil Seleksi Sampel Perusahaan

Kriteria Sampel Jumlah

1. Auditee listed on the Indonesia stock exchange

2. Companies that do not publish annual financial

statements and audited by an independent

auditor for the period 2006 – 2010

3. Companies that have negative profits for two

consecutive years

150

(15)

(112)

Total company has criteria 25

4.1 Measurement research variable

4.1.1 audit quality

Audit quality is the level of achievement and reputation of an auditor in

the presence of users. To determine where the auditor is included into the

prestigious group, used considering the auditor's market share in Indonesia, which

is dominated by the big 4 accounting firm (the big four) are: Haryanto Sahari and

Partners, Purwantono, Sarwoko and Sanjaya, Osman Bing Satrio and Partners and

Siddharta & Widjaja. For example Abadi Tbk PT Davomas 2006 audited by

Kanaka Puradireja, Robert Yogi, Suhartono, including the auditor's non-Big Four

and scored 0. Further calculations auditor reputation on the entire sample of firms

in this study can be found in appendix.

4.1.2 financial condition of the company

The financial condition of the company is measured by Altman

model are as follows:

Z = 0.717Z1 + 0.874Z2 + 3.107Z3 + 0.420Z4 + 0.998Z5

Z1 = working capital/total asset

Z2 = retained earnings/total asset

Z3 = earnings before interest and taxes/total asset

Z4 = market capitalization/book value of debt

Z5 = sales/total asset

For example PT Davomas Abadi Tbk in the year 2006 have value of

working capital/total asset in the amount of 0,3175, retained earnings/total asset

sebesar 0,1307, earnings before interest and taxes/total asset amounted 0,1033,

market capitalization/book value of debt sebesar 0,5635, and sales/total asset

amounted 0,6118 so it can be calculated the magnitude of Z-Score

Z = 0.717 x 0,3175 + 0.874 x 0,1307 + 3.107 x 0,1033 + 0.420 x

0,5635 + 0.998 x 0,6118

Z = 1,5102

The amount of Z-Score of 1.5102 means that the company's financial

condition Abadi Tbk PT Davomas 2006 in good condition because it has a Z

Score <1.81 which is in the category of potential bankruptcy. Further calculation

of the company's financial condition on the entire sample of firms in this study

can be found in appendix.

4.1.3 The company growth

Company growth can be calculated using sales growth, with the following

formula :

Net salest – Net sales t-1

Net sales = X 100%

Net sales t-1

For example Davomas Abadi Tbk PT, in 2007 had net sales of Rp.

2,800,084 million and the previous year's net sales amounted to Rp 1,656,584

million, so the magnitude of the company's growth can be calculated as follows:

2.800.084 - 1.656.584

Net sales = X 100%

1.656.584

= 69,03%

Value of the company's growth by 69.03% indicates that sales on

Davomas Abadi Tbk PT, in 2007 an increase of 69.3% from the previous year's

sales, resulting in sales growth with an increasing trend. Further calculations on

the company's growth throughout the sample firms in this study can be found in

appendix

4.1.4. Audit opinion previous year

auditor's opinion measured using dummy with a category , company that

gets going concern audit opinion in the previous year’s given dummy rated 1 and

the company is not get a going-concern audit opinion was given dummy 0. For

example Davomas Abadi Tbk PT in 2007, in 2006 this company does not get a

going-concern audit opinion that given a dummy value 0. Further calculations

going concern audit opinion on the entire sample of firms in this study can be

found in appendix.

Calculations for variables going concern audit opinion can be done the

same way, and the results of calculations going concern audit opinion can be

found in appendix.

4.1.5 Company Sizes

Firm size is measured by the logarithm of total assets. This is done to

simplify the measurement scale total assets whose value is very large compared to

other variables. For example, the PT Davomas Abadi Tbk, in 2006 had total assets

of Rp. 2,707,801 million, the size of the company can be calculated:

Size = log (2,707,801) = 6.43

So also for the calculation of the size of the other companies that can be

done in the same way and can be seen in the attachment.

4.1.6 Debt to equity ratio

DER is the ratio of debt to equity. For example Davomas Abadi Tbk PT in

2006 had a total debt of Rp. 1,731,849 million and equity of Rp. 975 951 million,

then the amount of DER is as follows:

1.731.849

DER =

975.951

= 1,77

DER of 1.77 indicates that the amount of debt the company is still much

higher than the capital itself, reaching 1.77 times. For the DER calculation periods

and other companies can be found in appendix.

4.1.7 Audit client tenure

Audit client tenure is measured by counting the same year in which the

firm has conducted the engagement to the auditee. For example Davomas Abadi

Tbk PT in 2006 and 2007 audited by Kanaka Puradireja, Robert Yogi, Suhartono,

so for two years, from 2006 obtained a score of 1, and in 2007 obtained a score of

1 to its total score is 2.

4.2 Descriptive Analysis

Descriptive analysis between companies that receive going-concern audit

opinion and a company that gets non going-concern audit opinion can be given in

the following table :

Tabel 4.2

Hasil Analisis Deskiptif

Opini Audit Going

Concern N Mean

Std.

Deviation

Financial condition Opini Audit Non Going

Concern

69 1.81574 3.463637

Opini Audit Going

Concern

56 2.07321 9.447440

Company

Growth

Opini Audit Non Going

Concern

69 .14622 1.126731

Opini Audit Going

Concern

56 .15439 .909371

Size Opini Audit Non Going

Concern

69 12.66326 1.512145

Opini Audit Going

Concern

56 13.49907 1.605742

DER Opini Audit Non Going

Concern

69 2.60510 6.100780

Opini Audit Going

Concern

56 1.62631 7.085402

Auditor Client Tenure Opini Audit Non Going

Concern

69 2.41 .551

Opini Audit Going 56 2.34 .514

Sumber : Hasil olah data, 2013.

Descriptive results in Table 4.2 shows that the company that getting going

concern audit opinion has better financial conditions (2.07321). Poor financial

condition of the company said if the value of the proxy Z - Score low (Z <1.81),

and vice versa when the value of the Z-Score of the company's financial condition

is healthy. So, if the average comparing among companies that received a going

concern audit opinion and that does not receive audit going concern has Z -

Score> 1.81, so that both companies have been going concern audit opinion and

audit firms that do not receive going concern are both healthy companies.

The results in Table 4.2 shows that the company received a going concern

audit and non-going concern, the majority experienced positive sales growth in

the amount of 14.622% for companies that receive non going concern and

15.439% for companies that receive audit.

The results on the size of the company towards that companies that

received a going concern audit opinion has a higher size (12.66) compared to

companies that do not get a going-concern audit opinion. The results on the Debt

Ratio shows that companies that do not get a going-concern opinion has a larger

debt ratio (2.605) from those of companies that received a going concern audit

opinion (1,626). And companies that do not get a going-concern opinion has a

longer tenure client auditors (2.41) from those of companies that received a going

concern audit opinion (1,34)

Tabel 4.3

Audit quality frequently

Opini Audit * Audit Crosstabulation

Kualitas Audit

Total

KAP Non

4 Four

KAP 4

Four

Opini

Audit

Going

Concern

Opini Audit

Non Going

Concern

Count 53 16 69

% of Total 42.4% 12.8% 55.2%

Opini Audit

Going Concern

Count 28 28 56

% of Total 22.4% 22.4% 44.8%

Total Count 81 44 125

% of Total 64.8% 35.2% 100.0%

Based on the results of the descriptive analysis shows that companies that

received a going concern audit and did not receive a going-concern audit the same

majority that is equal to 22.4% is a company which is not audited by the Auditor-

quality (non-Big Four) and a quality auditor (Big Four). Then the company

received a going concern audit is not audited by the majority of non big four

accounting firm that is equal to 42.4% and the company is audited by a qualified

auditor (Big Four) was by 12.8% .. This indicates that the firm has not been

affected in the delivery of going concern audit opinion.

Tabel 4.4

Opini Audit previous year frequent

Opini Audit * previous opini audit Crosstabulation

Opini Audit Going Concern * opini audit previous year Crosstabulation

Audit opinion previous year

Total

Opini Audit

Non Going

Concern

Opini Audit

Going

Concern

Opini Audit

Going

Concern

Opini Audit

Non Going

Concern

Count 54 15 69

% of Total 43.2% 12.0% 55.2%

Opini Audit

Going

Concern

Count 0 56 56

% of Total .0% 44.8% 44.8%

Total Count 54 71 125

% of Total 43.2% 56.8% 100.0%

Descriptive results of the previous year's audit opinion variable indicates

that companies that received non-concern opinion by 43.2% tendency that the

company previously received non-going concern opinion then in later years the

company will get the same opinion is non going concern. Other wise , the

company received a going concern opinion in the previous year will be tendencies

will get the same opinion in the year after the going concern. Based on Table 4.4

shows that the company received a going concern audit opinion on the previous

year, the current year is likely to receive the same opinion that in the previous

year, the current year is likely to receive the same opinion that the going concern

with a percentage of 44.8%.

4.3 Logistic Regression Analysis

To avoid significant errors in the use of linear regression using the Least

Square formula as a result of which the dependent variable is the nominal scale /

ordinal, then in this study used logistic regression the expected results obtained

regression equation is good or according to research data

4.3.1 Test of appropriate regression model

In logistic regression this value will be Hosmer Lemeshow's Goodness of

Fit Test. Value will be known on the suitability of the model was evaluated

between the models predicted the observed data, testing these models by using the

criteria of Goodness of Fit, the Chi-Square and probability. Models are

categorized as good or better must have a small chi-square value and

recommended acceptance level of significance was p 0.05 if that means the

actual input matrix with the predicted input matrices were not statistically

different. If the significance of the results obtained is equal to or less than 0.05,

then it means that there is a significant difference between the models with

observations values, then testing being done with simultaneous multivariate, and

multivariate testing separately by issuing one or more independent variables that

ultimately testing only conducted on the independent variables that have the

smallest significance level. Results Hosmer and Lemeshow Goodness-Off-Fit

Test with SPSS program can be shown in Table 4.5 below

Tabel 4.5

Nilai Hosmer Dan Lemeshow Goodness-Off-Fit Test

Hosmer and Lemeshow Test

Step Chi-square df Sig.

1 4.436 8 .816

source : result of data, 2013.

Based on Table 4.5 above shows that the significant value of Hosmer and

Lemeshow Goodness-Off-Fit Test was 0.816, which means that the obtained

results of significance greater than 0.05, then this means that the regression model

feasible for use in subsequent analyzes, because it is not there is a marked

difference between the predicted classification with the classification of the

observed.

4.3.2 Assessment Model Fit

This step is a test of the overall model (overall model fit). Testing is done

by comparing the values between -2 Log Likelihood (-2LL) at the start (Block

Number = 0) with a value of -2 Log Likelihood (-2LL) at the end (Block Number

= 1). A reduction in the value of the - 2LL early (initial - 2LL function) by value -

2LL in the next step (-2LL end) shows that the hypothesized model fit the data.

4.3.3 Coefficient of Determination

The test is performed to determine the contribution the effect of

independent variables on the dependent can be indicated by the value of R2 Kerke

Nagel. Results of testing this model are as follows:

Tabel 4.7

Nilai Nagel Kerke R2

Model Summary

Step

-2 Log

likelihood

Cox & Snell

R Square

Nagelkerke R

Square

1 59.863a .592 .792

a. Estimation terminated at iteration number 20

because maximum iterations has been reached.

Final solution cannot be found.

Source : Result of data, 2013.

Based on Table 4.7 R2 values obtained by Nagel Kerke 0.792: this means

that the influence of seven variables consisting of audit quality, the company's

financial condition, the growth of the company, the previous year's audit opinion,

company size, debt to equity ratio and audit client tenure into acceptance of going

concern audit opinion on companies listed in Indonesia Stock Exchange amounted

to 79.2%. The remaining 20.8 percent is explained by other variables outside the

research model.

4.3.4 Parameter Estimation Results and Interpretation

The logistic regression analysis aimed to determine the effect of financial

ratios as independent variables namely: quality audit, financial condition, the

growth of the company, previous year's audit opinion, firm size, debt-to-equity

ratio and the audit client tenure into the dependent variable that is a going

concern audit opinion on companies listed in Indonesia Stock Exchange. Of

calculations performed using SPSS for windows, logistic regression coefficients

obtained results as follows:

Tabel 4.8

Hasil Regresi Logistik

Variabel B SE Wald Sig. Keterangan

Audit quality 1.711 .840 4.150 .042 Signifikan

Financial condition of the

company

.009 .057 .027 .869 Not Signifikan

Company growth -.009 .414 .000 .983 Not Signifikan

Audit opinion previous

year

22.798 5040.802 .000 .996 Not Signifikan

Company size .557 .283 3.865 .049 Signifikan

Debt to equity ratio -.005 .050 .012 .912 Not Signifikan

Audit client tenure -1.594 .661 5.818 .016 Signifikan

Constant -25.504 5040.803 .000 .996

Chi Square : 112,069

p-value : 0,000

Cox & Snell R Square : 0,592

Nagelkerke R Square : 0,792

source : result of data, 2013.

4.4 Test of hypothesis

Test this hypothesis aims to determine whether there is influence of

variable quality audit, the financial condition of the company, the company's

growth, the previous year's audit opinion, company size, debt to equity ratio and

audit client tenure into going concern audit opinion on companies listed on the

Stock Exchange Indonesia (BEI). Based on the results of the calculation are

shown in Table 4.8 above can be interpreted as follows:

For variable audit quality get regression coefficient of 1.711 and a

probability of 0.042 <0.05, its mean audit quality significantly affect the going

concern audit opinion. The results support the first hypothesis which states that

audit quality has positive influence on the possibility of going concern audit

opinion.

For the financial condition variable regression get coefficient of 0.009 and

a probability of 0.869> 0.05, meaning financial condition does not significantly

affect the going concern audit opinion. Results of this study do not support the

second hypothesis which states that the negative effect on the financial condition

of the possibility of going concern audit opinion.

For the company's growth variable regression get coefficient of -0.009 and

a probability of 0.983> 0.05, mean growth companies do not significantly affect

the going concern audit opinion. Results of this study do not support the third

hypothesis which states that the growth of the company negatively affect the

possibility of going concern audit opinion.

For the previous year's audit opinion variable regression get coefficient

obtained by 22.798 and probability of 0.996> 0.05, meaning the previous year's

audit opinion does not significantly affect the going concern audit opinion.

Results of this study do not support the fourth hypothesis which states that the

previous year's audit opinion on the possibility of receiving a positive influence

going concern audit opinion.

For firm size variable regression get coefficient of 0.557 and a probability

of 0.049 <0.05, mean firm size significantly affect the going concern audit

opinion. The results support the hypothesis that states that the five firm size

negatively affects the possibility of going concern audit opinion.

Debt to equity ratio variable regression get coefficient of -0.005 and a

probability of 0.912> 0.05, meaning the debt equity ratio does not significantly

affect the going concern audit opinion. Results of this study do not support the

sixth hypothesis which states that the debt equity ratio has a positive effect on the

possibility of going concern audit opinion.

For the client auditor tenure variable regression get coefficient of -1.594

and a probability of 0.016 <0.05, means the client auditor tenure significantly

affect the going concern audit opinion. The results support the hypothesis that the

seven states that auditor tenure client negatively affect the possibility of going

concern audit opinion.

4.5 Discussion

Based on the results of hypothesis testing with logistic regression models

showed that audit quality variables simultaneously, the financial condition of the

company, the company's growth, the previous year's audit opinion, company size,

debt to equity ratio, and the audit client tenure significantly influence the going-

concern audit opinion. However, if viewed only partial test audit quality variables,

company size, and audit client tenure that proved significant effect on the going

concern audit opinion, while the company's financial condition, the growth of the

company, the previous year's audit opinion, and debt to equity ratio is not

significant effect on the going-concern audit opinion.

4.5.1. The influence of the audit quality on acceptance of going concern audit

opinion

The study found that audit quality significantly influence the acceptance of

a going concern opinion, which is shown with sig (p-value) of 0.042 <0.05. These

results are well received the first research hypothesis. This result is consistent

with the opinion Junaidi and Hartono (2010) which states that the auditor is

responsible for providing high quality information useful for decision making.

These results imply that the use of the auditor has the different responsibility to

going concern audit opinion, so when the company has not and does not explain

the going concern in their audit opinion indicates that the auditor has less quality.

This impacts both the auditor and the image of the high investor confidence in the

company's audit. Thus the image of both GAP will be applied to both the qualified

and non-qualified. Public accounting firm, whether large or small, will always be

objective in giving opinions. If a company having doubts in the viability of their

business will then be given audit opinion going.

4.5.2 the influence of the audit quality on acceptance of going concern audit

opinion

The results found that the financial condition of the company as measured

by the bankruptcy prediction models Altman Z-Score does not significantly

influence the going-concern audit opinion. This is evidenced by the p-value of

0.869> 0.05. The results while rejecting the second hypothesis which says "the

financial condition of the company negatively affect the possibility of going

concern audit opinion". The results are not in accordance with the results of

Altman & McGouch, 1974) which states that a bankruptcy prediction model using

financial ratios are more accurate than the auditor's opinion in classifying the

company bankrupt and not bankrupt.

This is because for the auditor to provide an auditor's going concern

opinion, if a company said to be bankrupt or difficult to continue its survival. This

is in accordance with the opinion of Mc Keown et al (1991) which says that the

auditor is almost never give an audit opinion on the company's going concern is

not having financial difficulties. In measuring doubts about the viability of the

company, in terms of losses suffered by the company continuously. While the

Altman Z-Score measures are not only refer to the conditions of new income, but

also pay attention to five aspects of the working model, retained earnings,

earnings before taxes, equity and the book value of the company's sales. This is of

course only a few parameters are related directly to the doubts about the survival

of the company.

Used in the study is the Revised Model Altman (1993) called the Z93.

This model is a revision of a previous Altman capital that can be applied to

measure the company's financial condition is not only manufacturing, but also in

the non-manufacturing companies. The results Santoso and Wedari (2007) found

that the financial condition as measured by the Z93 does not significantly

influence the going-concern audit opinion.

4.5.3 influence of the company’s growth on acceptance going-concern audit

opinion

Research results found that the company growth as measured by the ratio

of sales growth does not significantly influence the going-concern audit opinion.

This is proven by the p-value of 0.983> 0.05. The results while rejecting the third

hypothesis which said "the company growth has a positive effect to the

probability of audit opinion going concern acceptance ". The results are not in

accordance with the opinion of Altman (1986) which states that companies

experiencing growth, operational activities of the company shows running

properly so that the company can maintain its viability and economic position,

while companies with negative growth indicates a greater tendency towards

bankruptcy. This condition explains that the company's growth can not be used as

the primary benchmark that the company will get a good assessment audit

opinion.

4.5.4 influence of the size of the company on going concern audit opinion

The results found that size of the company significantly influence the

acceptance of a going concern opinion, which is shown with sig (p-value) of

0.049 <0.05. These results are well received fifth research hypothesis. This result

is consistent with the opinion and Wedari Santoso (2007) who found evidence that

firm size significantly influence the acceptance of a going concern opinion. This

shows the huge size of the company will be less likely to receive going-concern

audit opinion. Thus the larger companies in the audit, the audit quality given KAP

also getting bigger. KAP means in carrying out auditing affect the size of the

company that may provide fee greater than the size of a smaller company.

4.5.5 The influence of the previous year's audit on acceptance going concern

audit opinion

The results found that the previous year's audit opinion does not

significantly influence the going-concern audit opinion. This is evidenced by the

p-value of 0.996> 0.05. The results at the same time reject the fourth hypothesis

which says "the previous year's audit opinion positive effect on the probability of

going concern audit opinion". The results are inconsistent with Ramadhany study

(2004) which states that the previous year's audit opinion significantly affect the

going concern audit opinion. Thus the previous year's audit opinion was not used

as a major factor of consideration in issuing an audit opinion on returning next

year.

4.5.6 The influence of the debt to equity ratio of the going concern audit opinion

The results found that the debt equity ratio as measured by the ratio of

liabilities and equity does not significantly influence the going-concern audit

opinion. This is evidenced by the p-value of 0.912> 0.05. The results at the same

time reject the hypothesis that a sixth said "debt equity ratio has a positive effect

on the possibility of going concern audit opinion". The results are inconsistent

with research Praptitorini and Januarti (2007) which states that the debt equity

ratio has a positive effect significantly affects the going concern audit opinion. It

is clear that the magnitude of the use of debt by the company do not affect the

auditor's assessment, the use of debt by the company is an important asset in the

company's activities, with a note that the company has the ability in the payment

of debt.

4.5.7 The influence of the audit client tenure of the going concern audit opinion.

The results found that the audit client tenure significantly influence the

acceptance of a going concern opinion, which is shown with sig (p-value) of

0.016 <0.05. These results are well received seven research hypotheses. This

study describes the results of that audit engagement with the same auditee and

significant negative effect on revenues going concern opinion. Long audit

engagement the auditor will make a loss of independence, so the chances for

survival would be difficult to give an opinion, or it will make the company better

understand the financial condition and would be easier to detect any problems

going concern.

Chapter V

Conclusion and Recommendation

5.1 Conclusion

Based analysis the influence of the variables on financial statements

include: audit quality , financial conditions, growth of the company, the previous

year's audit opinion, company size, debt to equity ratio and audit client tenure to

the acceptance of going concern audit opinion on manufacturing companies in

Indonesia Stock exchange can be concluded as follows:

1. Audit quality is positively and significantly influence to the going concern

audit opinion.

2. Financial condition of the company does not influence to the going concern

audit opinion.

3. The company's growth does not influence to the going concern audit opinion.

4. The previous year's audit opinion does not influence to the going concern audit

opinion.

5. Company size is positively and significantly influence to the going-concern

audit opinion.

6. Debt to equity ratio does not influence to the going concern audit opinion.

7. Audit client tenure is negatively and significantly influence to the going

concern audit opinion.

5.2 Research limitation

There are several limitations to this research , including:

1. At least that is only a sample of 25 companies, these conditions can affect

the results of the study, so that the results of this study can not be generalized to

the entire company in Indonesia Stock Exchange.

2. Measurement of a company's financial condition is merely the Altman

model calculations, where there are some other models that are used to measure

a company's financial condition. Eg The Zmijewski and The Springate Model.

5.3 Recommendation

The suggestions are proposed by the authors of the research that has been

done:

3. In determining investment, investors should consider audit quality,

company size, audit client tenure , as proven in this study those three variables

significantly influence to the going concern audit opinion on manufacturing

companies in Indonesia Stock Exchange.

4. The next study should be able to expand research on the same sample,

where the sample is limited to the company's manufacturing only. Further

research can be done by adding besides manufacturing company.