Audit Opinion On The Decision Usefulness

Auditing, as a mechanism for verifying and monitoring economic activities, is of vital significance in an economic system characterized with high specialization, high mutual-reliance among economic entities, high demand for communication and trust, as well as the affliction of information asymmetry. Audit opinion, as CPA's written opinion upon carrying out, in compliance with the auditing standards, auditing procedures for the financial statements of the clients, is the most condensed presentation of the final output of CPA's work, and therefore, might exert significant influence upon the decision-making of economic entities concerned. Regarding the researches on the resource allocation function of audit opinion, one major area, where numerous in-depth researches have been done by both overseas and domestic scholars, is focused on its role in stock market, examining its influence on stock price, or its information content or value relevance; while another area, which has rarely been picked up by domestic scholars, is focused on its role in bank loan decision-making, examining its influence on bank credit resource allocation, or its information content or value relevance in bank loan decision-making. In this regard, the paper chooses the perspective of the debtor-creditor relationship, makes a close study of the functioning and information content of audit opinion in the credit market of China, and makes policy proposals for further enhancing the value of audit opinion in the country.The paper starts with a review of the basic theories upon bank loan decision-making and audit, reviewing, from the "supplier's" perspective, the value of auditing in economic activities, as well as the evolution, types and implication of audit opinion; and then reviewing, from the "demander's" perspective, the mechanism of bank loan decision-making and the function of audit opinion in the decision-making process, especially the credit rationing process. The second part reviews the basic concepts and regulatory background of audit opinion, as well as the evolution of credit management system and the credit decision-making mechanism in China. The third part is a literature review of the studies on the information content of audit opinion in the stock market and the credit market, followed with an analysis and comparison of the application of the EMH-based empirical study approach and the experimental study approach in those studies. Thereafter, the paper examines the information content of audit opinion in the credit decision of China's commercial banks through an EMH-based empirical study and an experiment with credit officers, respectively. The empirical study could be regarded as an indirect test of the usefulness of audit opinion by using relevant data of China's listed companies, while the experiment could be regarded as a direct test of its usefulness by observing the reaction of bank credit officers to different types of audit opinions. The two approaches support and supplement each other, and therefore, strengthen the basis of the positive study.The results of the empirical study indicate that, compared with companies with unqualified audit opinion, companies with qualified audit opinion are less able to obtain bank loan. The study doesn't find significant difference in the ability of obtaining bank loan between companies with "unqualified with additional explanatory language opinion" and companies with qualified, adverse or disclaimer of opinion. The study also finds that banks are insensitive to whether unqualified audit opinion is issued by Big 4 or non-Big 4, or involves accounting firm changes or not. In addition, it is more difficult for companies with qualified opinion to obtain bank loan in the regions with light government intervention into the market than in the regions with heavy government intervention.The results of the experimental study show that, compared with the company with qualified audit opinion, the company with unqualified audit opinion get significantly lower credit risk assessment, higher possibility of obtaining bank loans and lower interest premium.Based on the examination, the paper makes policy proposals for further enhancing the value of audit opinion in China.