Factors influencing audit opinion of the Indonesian municipal governments’ financial statements

Figures & data

Table 1. The development of audit opinion and audit findings on local governments in Indonesian during the 2015 and 2016 financial years

Financial years	Number of audited local governments’ financial statements	Audit opinion				ICS findings	Non-compliance findings
		U	Q	A	D	Number of cases	Number of cases	Cases value (Rp million)
2015	542	312	187	4	39	6150	6016	2.522.796,10
2016	537*	375	139	0	23	6053	6115	2.087.491,45
Sum	1079	687	326	4	62	12,203	12,131	4.610.287,55

* Five Local Government Financial Statements have been late submitted to BPK.

Description: (U) Unqualified Opinions, (Q) Qualified Opinions, (A) Adverse Opinions, (D) Disclaimer

Source: Audit Results Summary for Semester I Year 2016 and 2017 (BPK, 2016, 2017).

Figure 1. Conceptual research framework.

Description: Y = Audit Opinion, (X11) = Deficiency in the Structure of Internal Control (IC), CSREBE (X12) = Deficiency in Control System of Revenue and Expenditure Budget Execution, ARCS (X13) = Deficiency in Accounting and Reporting Control System, RL (X21) Regional Losses = PRL (X22) = Potential Regional Losses, RS (X23) = Revenue Shortfall, ADM (X24) = Administration, GAS (X3) = Non-conformance with Government Accounting Standards.The organization of research variables is on Table 2.

Table 2. Operational variables

	Variables	Indicators	Scales
Deficiency in ICS (X1)	- Structure of IC (X11)	Number of findings	Ratio
	- CSREBE (X12)	Number of findings	Ratio
	- ARCS (X13)	Number of findings	Ratio
Non-compliance (X2)	- RL (X21)	Value of findings x 100 Total Expenditures	Ratio
	- PRL (X22)	Value of findings x 100 Total Expenditures	Ratio
	- RS (X23)	Value of findings x 100 Total Expenditures	Ratio
	- ADM (X24)	Number of findings	Ratio
Non-conformity (X3)	GAS (X3)	Number of accounts do not presented in accordance with the GAS	Ratio
Opinion (Y)	Audit Opinion (Y)	Scoring: Unqualified = 4; Qualified = 3; Adverse = 2; Disclaimer = 1	Ordinal

Description: Y = Audit Opinion, Structure of IC (X11) = deficiency in structure of internal control, CSREBE (X12) = deficiency in control system of revenue and expenditure budget execution, ARCS (X13) = deficiency in accounting and reporting control system, RL (X21) = regional losses, PRL (X22) = Potency of regional losses, RS (X23) = revenue shortfall, ADM (X24) = Administration, GAS (X3) = Non-conformance with Government Accounting Standards.

Thus, the empirical model developed to test the research hypotheses can be seen in the following equation:

$\mathrm{O}\mathrm{p}\mathrm{i}\mathrm{n}\mathrm{i}\mathrm{o}\mathrm{n}=\alpha +{\beta }_1\mathrm{S}\mathrm{t}\mathrm{r}\mathrm{u}\mathrm{c}\mathrm{t}\mathrm{u}\mathrm{r}\mathrm{e}\mathrm{o}\mathrm{f}\mathrm{I}\mathrm{C}+{\beta }_2\mathrm{C}\mathrm{S}\mathrm{R}\mathrm{E}\mathrm{B}\mathrm{E}+{\beta }_3\mathrm{A}\mathrm{R}\mathrm{C}\mathrm{S}+{\beta }_4\mathrm{R}\mathrm{L}+{\beta }_5\mathrm{P}\mathrm{R}\mathrm{L}+{\beta }_6\mathrm{R}\mathrm{S}+{\beta }_7\mathrm{A}\mathrm{D}\mathrm{M}+{\beta }_8\mathrm{G}\mathrm{A}\mathrm{S}+\epsilon$

Description: Audit Opinion = Municipal Governments Financial Statement Audit Opinions; α1 = Constant structure value; β = regression coefficient of each variable; ε = error term; Structure of IC = deficiency in structure of internal control, CSREBE = deficiency in control system of revenue and expenditure budget execution, ARCS = deficiency in accounting and reporting control system, RL = regional losses, PRL = Potency of regional losses, RS = revenue shortfall, ADM = Administration, GAS = Non-conformance with Government Accounting Standards.

Table 2. Operational variables

	Variables	Indicators	Scales
Deficiency in ICS (X1)	- Structure of IC (X11)	Number of findings	Ratio
	- CSREBE (X12)	Number of findings	Ratio
	- ARCS (X13)	Number of findings	Ratio
Non-compliance (X2)	- RL (X21)	Value of findings x 100 Total Expenditures	Ratio
	- PRL (X22)	Value of findings x 100 Total Expenditures	Ratio
	- RS (X23)	Value of findings x 100 Total Expenditures	Ratio
	- ADM (X24)	Number of findings	Ratio
Non-conformity (X3)	GAS (X3)	Number of accounts do not presented in accordance with the GAS	Ratio
Opinion (Y)	Audit Opinion (Y)	Scoring: Unqualified = 4; Qualified = 3; Adverse = 2; Disclaimer = 1	Ordinal

Description: Y = Audit Opinion, Structure of IC (X11) = deficiency in structure of internal control, CSREBE (X12) = deficiency in control system of revenue and expenditure budget execution, ARCS (X13) = deficiency in accounting and reporting control system, RL (X21) = regional losses, PRL (X22) = Potency of regional losses, RS (X23) = revenue shortfall, ADM (X24) = Administration, GAS (X3) = Non-conformance with Government Accounting Standards.

Thus, the empirical model developed to test the research hypotheses can be seen in the following equation:

$\mathrm{O}\mathrm{p}\mathrm{i}\mathrm{n}\mathrm{i}\mathrm{o}\mathrm{n}=\alpha +{\beta }_1\mathrm{S}\mathrm{t}\mathrm{r}\mathrm{u}\mathrm{c}\mathrm{t}\mathrm{u}\mathrm{r}\mathrm{e}\mathrm{o}\mathrm{f}\mathrm{I}\mathrm{C}+{\beta }_2\mathrm{C}\mathrm{S}\mathrm{R}\mathrm{E}\mathrm{B}\mathrm{E}+{\beta }_3\mathrm{A}\mathrm{R}\mathrm{C}\mathrm{S}+{\beta }_4\mathrm{R}\mathrm{L}+{\beta }_5\mathrm{P}\mathrm{R}\mathrm{L}+{\beta }_6\mathrm{R}\mathrm{S}+{\beta }_7\mathrm{A}\mathrm{D}\mathrm{M}+{\beta }_8\mathrm{G}\mathrm{A}\mathrm{S}+\epsilon$

Description: Audit Opinion = Municipal Governments Financial Statement Audit Opinions; α1 = Constant structure value; β = regression coefficient of each variable; ε = error term; Structure of IC = deficiency in structure of internal control, CSREBE = deficiency in control system of revenue and expenditure budget execution, ARCS = deficiency in accounting and reporting control system, RL = regional losses, PRL = Potency of regional losses, RS = revenue shortfall, ADM = Administration, GAS = Non-conformance with Government Accounting Standards.

Table 3. Case processing summary

		N	Marginal percentage
Opinion	Disclaimer	1	0.5%
	Qualified	37	20.3%
	Unqualified	144	79.1%
Valid		182	100.0%

Table 4. Model fitting information

Model	−2 Log Likelihood	Chi-Square	df	Sig.
Intercept Only	195.744
Final	111.738	84.007	8	.000

Table 5. Goodness of fit

	Chi-Square	df	Sig.
Pearson	174,130	354	1.000
Deviance	111,738	354	1.000

Table 6. Test of Parallel Lines

Model	−2 Log Likelihood	Chi-Square	Df	Sig.
Null hypothesis	111,738
General	110,869	.868	8	.999

Table 8. Pseudo R²

Cox and Snell	.370
Nagelkerke	.561
McFadden	.429

Table 7. Descriptive statistic

	N	Minimum	Maximum	Mean	Std. Deviation
Deficiency in ICS-Structure of IC (X11)	182	0	9	2.74	1.985
Deficiency in ICS – CSREBE (X12)	182	1	18	4.90	2.964
Deficiency in ICS – ARCS (X13)	182	1	18	5.07	2.844
Non-compliance-RL (X21)	182	.0000	.9884	.136407	.1740693
Non-compliance-PRL (X22)	182	.0000	.6200	.034745	.0860842
Non-compliance-RS (X23)	182	.0000	.8422	.042042	.1018647
Non-compliance-ADM (X24)	182	0	12	4.05	2.451
Non-conformity with GAS (X3)	182	0	7	1.35	1.120
Audit Opinion (Y)	182	1	4	3.78	.453
Valid N (listwise)	182

Description: ICS = internal control system; IC = internal control; CSREBE = control system of revenue and expenditure budget execution; ARCS = accounting and reporting control system; RL = regional losses; PRL = Potency of regional losses; RS = revenue shortfall; ADM = Administration; GAS = Government Accounting Standards.

Table 9. Parameter estimates result

		Estimate	Std. Error	Wald	Df	Sig.	95% Confidence Interval
							Lower Bound	Upper Bound
Threshold	[y = 1]	−13.418	2.654	25.561	1	.000	−18.620	−8.216
	[y = 3]	−4.902	.795	38.046	1	.000	−6.459	−3.344
Location	x11	.102	.140	.525	1	.469	−.174	.377
	x12	−.096	.111	.744	1	.388	−.315	.122
	x13	−.005	.126	.002	1	.968	−.251	.241
	x21	−5.217	1.385	14.186	1	.000	−7.932	−2.502
	x22	1.755	2.559	.470	1	.493	−3.262	6.771
	x23	1.883	2.617	.517	1	.472	−3.247	7.012
	x24	−.070	.114	.377	1	.539	−.293	.153
	x3	−1.450	.280	26.805	1	.000	−1.999	−.901

Description: y = Opinion, x11 = Weakness of Internal Control System – Structure, x12 = Weakness of SPI-SPPAPB, x13 = Weakness of SPI-SAPP, x21 = Non-compliance-KN, x22 = Non-compliance-PKN, x23 = Non-compliance- KP, x24 = Non- ADM, x3 = Non-compliance with SAP.

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