Abstract The purpose of this study is to examine the financial statement variables most useful in foreshadowing bankruptcy, as well as those most helpful in predicting the issuance of a going concern exception in the auditor's report. In the ferment surrounding the publication of Statement on Auditing Standards No. 34, the Auditing Standards Board agreed that criteria should be developed for issuing a "subject to" qualification based on, among other measures, the probability of an adverse outcome. This study describes the construction of a model that successfully used financial ratios to identify companies approaching bankruptcy. Further, two principal implications emerge in this study. First, in issuing exceptions, auditors appear to use somewhat different criteria than a straightforward "bankruptcy-predicting" function would suggest. Second, the issuance of a "subject to" opinion seems to indicate virtual hopelessness, while the lack of such an exception indicates nothing conclusive.
Levitan et al. (Sun,) studied this question.