Probabilistic Neural Networks for the Identification of Qualified Audit Opinions

Prior studies that examine the application of neural networks in auditing investigate the efficiency of artificial neural networks (ANNs). In the present study, considering the well known disadvantages of artificial neural network, we propose the application of probabilistic neural networks (PNNs) that combine the computational power and flexibility of ANNs, while managing to retain simplicity and transparency. The sample consists of 264 financial statements that received a qualified audit opinion over the period 1997-2004 and 3069 unqualified ones, from 881 firms listed on the London Stock Exchange. The results demonstrate the high explanatory power of the PNN model in explaining qualifications in audit reports. The model is also found to outperform traditional ANN models, as well as logistic regression. Sensitivity analysis is used to assess the relative importance of the input variables and to analyze their role in the auditing process