Material Misstatement Risk Of Financial Statements And Audit Pricing

Foreign research has proved that risk of material misstatements(RMM) affects audit pricing.But domestic study has no clear results.What's the reason that causes such differences? Is it because there are some problems in Chinese audit market,or our study,including data or method,was not correct or perfect? In order to reply these questions more corrcetly,the author collected more data and use more accurate method in this dissertation.This dissertation first construct a theory frame about audit pricing on RMM,and then give the hypotheses on RMM audit pricing.Secondly,hypotheses are tested with the data of Chinese stock market from year 2001 to 2007.This dissertation not only used the traditional audit pricing study method,but also adopt Heckman(1979) two-stage method to control the self-selection affection on samples.The possible problems of heteroscedasticy,multicollinearity, or autocorrelation are all controlled by relatively appropriate method.Through hypothesis testing and analysis,some primary results can be concluded as follows:1.RMM affects audit pricing.The higher the RMM,the higher audit pricing,i.e.,RMM and audit pricing has positive correlation.RMM can increase the resources cost of auditing,and can also increase the material misstatements that cannot be founded by auditing,so increase the risk premium for potential losses.Both aspects mentioned above can increase audit pricing.2.Agency cost affects the RMM,and further affects audit pricing.More agency cost means more accurate agency conflicts,and brings higher RMM,so that increase audit pricing.3.Investors' supervision and law environment are two important aspests that affects audit pricing on RMM.The ability of investors' supervision and the completion degree of legal environment will both increase RMM audit pricing.These two environmental factors may singly,or cooperatively affects audit pricing on RMM,but the concrete conditions are different according to different auditor types.To big 4 auditors,investor' supervision is more significant, the legal environment effect is not significant;to domestic big 5 auditors,investor supervision is not significant,but if under perfect legal environment at the same time,investor supervision is significant.4.Auditor reputation has affected audit pricing on RMM.Auditors with Higher reputation will price higher on RMM.The mechanism of audit pricing means auditor's reputation is bringing an effect into efficiency of auditing market.In fact,audit pricing mechanism reflects the operating efficiency of audit market,so the conclusions mentioned above indicates that Chinese audit market is efficiency to a certian extent.In order to improve the operation efficiency of the audit marketplace further,legal environment,investors' supervision,auditor reputation are all needed to improve comprehensively.