Research On Validity Of Internal Control And Audit Pricing

CPA's audit services as a paid labor provided to the customers, its pricing method must reflect the rules and characteristics of the production of audit services, in addition to to consider the supply and demand like the pricing of general goods and services. This can ensure that CPA firms are able to develop healthily, but also able to provide the audit report with high quality to the public, so the issue of pricing of audit services has been a hot area of research. In theory, there are two basic factors that influence the pricing of CPA's audit service:the first is the audit costs and the second is the audit risk. Effective internal control not only saves the cost that CPA provides the audit service, but also reduces the risk of material misstatement of financial statements. However, since Simunic (1980) pioneered the study of audit pricing, the majority of sino-foreign scholars in the study haven't brought the level of Enterprises'Internal Control into the model of audit pricing. The reason may be related to the complexity to measure the level of internal control and data availability. So in this paper, the author makes the evaluation of the effectiveness of internal control as a breakthrough to start the research on the pricing of CPA's audit services.Effectiveness of internal control indicates the establishment and implementation of the internal control that can provide reasonable assurance for the realization of control object. In the basic NORMS OF INTERNAL CONTROL promulgated by China's Ministry of Finance, the objective of internal control is defined as providing reasonable assurance for the legal compliance of business management, assets'security, financial reports and related information that is true and complete and improves operational efficiency and effectiveness, and promotes the development strategy. The overall objective of this defination can be divided into five sub-aims:that is strategic objectives, operational objectives, reporting objectives, asset security objectives and compliance objectives. Based on the public data that can be obtained, the author has converted these sub-aims into a set of quantifiable evaluation system and constructed a evaluation system of internal control that suits for China's listed companies through the calculation of weights and the determination of evaluation criteria and scoring method. In order to ensure the validity of the evaluation system, this paper empirally tested the evaluation system from the perspectives of effectiveness of its identification and prediction by selecting 1033 companies of manufacturing and wholesale and retail that listed in Shenzhen and Shanghai Stock Exchange in 2008 as samples and employing the level of information disclosure of internal control standards as the alternative variables of the true level of a business'internal control, the results show that the evaluation system has high reliability and practical value.In order to further reveal the true rules of CPA's audit pricing in China's market, by using the evaluation results of internal control as the the alternative variable of the level of control risk and including it in the audit pricing model, the author studied empirically on 1395 companies that listed in the Shanghai and Shenzhen Stock Exhchange in 2009. The results show that there isn't statistically significant correlation between the audit fees the level of risk control despite that CPAs issue more audit reports of non-standard unqualified opinion to companies with higher risk. This implied that China's accounting firms didn't take the level of enterprises'internal control into consideration when making pricing strategies of audit service. Secondly, the paper has also examed the changes in audit fees (compared with 2008) and has found that the firms still adjusted the level of audit fees when the companies changed the quality of internal control.In this paper, via the theoretical analysis and empirical research on the evaluation of the effectiveness of internal control, the author builds a goal-oriented evaluation system of internal control so as to provide theoretical guidance and empirical evidence for China's enterprises to improve the internal control system and carry out the evaluation of internal control. Second, this paper enriches the current research on CPA's audit pricing and further reveals true rules of pricing of CPA's audit services in China's market. It also provides useful empirical evidence and decision-related information for the relevant government departments to restrain the unfair competition and regulate the development of the CPA industry.