Enterprise Internal Control Audit Research

Accompanying with the economic and social development, from the beginning of the21st century, corporation governance and internal control has become one of the hottest topics both domestic and international economic fields. From2001, the continuous outbreak of the fraud scandals including Enron, WorldCom and Xerox, which exposes the material weakness of US listed companies internal control system, and directly resulting US Congress quickly published Sarbanes-Oxley Act in2002. This act requires certified public accountants to audit internal control over financial reporting. Since then internal control audit has become a statutory business of American CPA profession and played a significant impact on audit profession around the world.Currently Chinese listed companies frequently occurred internal control failures and financial frauds which seriously affects the health development of capital market. Especially from2010, some Chinese companies listed in U S capital market have been investigated and punished by SEC, and delisted from stock exchange. In2012, some auditors resigned as auditors for some Chinese private controlled listed companies. All these companies have a common problem that these companies exist material internal weakness and financial problems. As a key link in corporate governance and an important management measures, internal control plays a very important role to prevention, detection, suppression and correction the occurrence of financial fraud and accounting false cases. So, establishing valid internal control system, effectively control the various types of risks which has become one of the priorities of all kinds of enterprises in order to improve Chinese companies image and reputation both domestic and abroad, further maintain investors confidence.Chinese government has been aware the importance of internal control system mechanism. In May2008, the Ministry of Finance and other Five ministries jointly issued the basic standards of internal control (referred to as "basic standards"). On April26,2010, the five ministries again jointly issued the internal control guidelines (referred to as " guidelines"), which represents that the internal control system for Chinese enterprises have been set up. According to the Standards and Guidelines, Chinese CPAs start to perform internal control audit over financial reporting from2011.Since internal control audit is a new audit practice, the theoretical study of internal control audit is still relatively rare and sporadic both domestic and international, which has not set up a more systematic theory and lags behind the audit practical development needs. From the internal control construction, assessment and audit performance results in2011for compulsory and voluntary listed companies, which shows most companies management and auditors have different understanding and application, even confusion about how to identify, classify internal control deficiency, perform integrated audit, produce internal control audit report, disclose internal control effective information, etc. Therefore, it is an urgent need for realistic and long-term meaning to start the internal control audit study in order to better guide the audit practice, solve the difficulties and doubts encountering in practice, further improve China’s internal control auditing standards and application guidelines.Around this theme, the author performs profound study by theoretical, empirical, questionnaire and case study from the following five aspects and reaches relevant conclusions.Firstly, after studying the internal control theoretically.comprehensively summing up the historical evolution, the dissertation comes to the conclusion that internal control has theoretical rationality, advance and practical necessity. The dissertation recounts and elaborates the historical development of internal control theory and practice, reveals internal control occurrence and development motivators and external driving forces. Through recounting and elaborating the audit theory and practice of the historical development, the dissertation illustrates different theoretical views about internal control audit from audit angle, and analyzes the internal control audit development trend from management angle. All these theories and views make the solid foundation for internal control audit practice.Secondly, through studying international advanced countries’ experiences and practices which provides useful reference for China internal control audit practices. The author earnestly study internal control and internal control audit historical development process through USA and Japanese practical experience, modifications and improvement.future development trend, from that give us some useful experience and help.Thirdly, the dissertation explicitly assures that there exists many problems and challenges in performing internal control audit through questionnaires and visiting study due to China just starting the internal control audit practice. Although central government published the Basic Standards in2008, China just starts internal control audit from2011due to many reasons including to reach unified understanding, publish supporting policies and regulations, cultivate talents etc. There are absolutely many problems, difficulties and challenges in audit practice because2011is the first year for internal control audit. The author summarizes these issues and analyzes the main reasons through questionnaires and visiting discussions, then put forward relevant suggestions and solutions, in which the most important two methods are integrating audit process and perfecting audit report.Fourthly, as for audit of internal control over financial reporting and financial statement audit, the author performed integrated audit study. These two audits have a common goal that is to enhance the reliability of financial reports and related information, to increase investors confidence and make a good foundation for capital market health development. The dissertation theoretically elaborates the necessity and feasibility, integrated points and different points, top-down audit method about integrated audit, etc.Fifthly, because2011is the first year of internal control audit in China, it is vital and core to properly produce internal control audit report which undoubtedly affect the smooth enforcement of internal control audit. Through analyzing and studying the elements, content, applicable conditions, and so on, the dissertation puts forward improvement for audit report model choices. The dissertation provides an integrated audit report model, integrated the internal control over financial reporting audit report and financial statement audit report together, and five case illustrations for the "non-financial reporting internal control material weakness" description paragraph. In addition, the dissertation illustrates the integrated audit process and comprehensive internal control audit report by case study.Based on the above-mentioned study and innovation, the dissertation presents value-oriented audit future development direction of comprehensive internal control audit from value chain management theory with internal control five goals. The dissertation also points out that the main goals of comprehensive internal control audit are to help enterprises to improve business efficiency and effectiveness, to avoid and minimize damage and create value for enterprises, and to promote sustainable and healthy development in order to realize strategic goals which also includes preventing, minimizing and resolving risk goal. Therefore, the comprehensive internal control audit goals are consistent with comprehensive internal control goals.Finally, in order to promote internal control audit smoothly in China, the author proposes four recommendations as follows.1. Some policy recommendations are proposed to relevant government authorities, including Ministry of Finance, CICPA, Auditing firms, Certified Public Accountants respectively in order to better guiding internal control audit in China.2. Government departments and judicial authorities must protect CPAs legal interest, mitigate CPAs audit responsibility, and clearly distinguish the management and audit responsibility in order to perform comprehensive internal control audit smoothly.3. Further improvement the audit standard and guidance, the internal control deficiencies may simplify from three types into two types, namely cancel the significant deficiency, only keep material weakness and general deficiency in order to avoid practical confusion.4. The dissertation increases four qualitative criteria to find probably internal control material weakness for better guiding internal control audit practice.