Research On The Relationship Between Internal Control Risk And Audit Pricing

In December 2001, China Securities Regulatory Commission issued an announcement that requiring listed companies to disclose audit fees in the annual report as an important item. The issue of this provision has great significance in the audit pricing history of China, not only making the creditors, the public and other stakeholders aware of listed companies’audit costs incurred easily, but also taking the audit fees disclosed as an important reference to research audit pricing factors in the specific context of our country. In recent years, the audit pricing research has made great development. More and more experts and scholars devote themselves to this issue, and the achievements that they have got are quite fruitful.In 1980, Simunic who established a model of audit pricing factors began an Empirical Study about audit pricing. In 2002, Zhen-Lin Wang’s doctoral thesis applied empirical research methods systematically to study the problem of local audit pricing, opening the empirical method of audit pricing precedent.The audit pricing study at home and abroad is for a more in-depth, stepping toward maturity.With the rapid development of the world economy, listed companies face a higher challenge in management. Internal control in the enterprise becomes more and more valued. To some extent, internal control determines the development of enterprises as a control mechanism, and even life and death. In 2002, United States issued the famous "Saao Act" to require listed companies to disclose the reports of internal control in their annual reports system. Since then, some scholars in abroad who are the empirical study of audit pricing have already begun to shift perspective into internal control risk factors. Western researchers in this field study have found that there is a positive correlation relationship between internal control risk and audit pricing. But in our country, because the disclosure of internal control system is not perfect the internal control information is not readily available, and the pricing factors of the audit of internal control in the literature are referring little. In 2006, the Shenzhen Stock Exchange and Shanghai Stock Exchange separately issued the "Shenzhen Stock Exchange Guidelines for Internal Control of Listed Companies" and "Shanghai Stock Exchange Guidelines for Internal Control of Listed Companies", which marks internal control supervision of listed companies in China entering a new era. After the implementation of the "Guide", listed companies in China Securities Market started full disclosure of internal control self-assessment report. In 2008, the Ministry of Finance issued the "basic norms of internal control", putting into practice on July 1,2009. In our context of this particular system, as already reported from the internal control self-assessment of internal control in the access to business information, making the study of internal control risks associated with the audit pricing possible. To context of China’s new system, internal control risk and audit pricing have the correlation relationship with the purpose of this paper lies.Based on the literature review and theoretical analysis, we first summarize the previous research achievements, from the asset size, business complexity, risks of finance, corporate governance structure, firm size and reputation, the audit term, low-cost Showmanship, Non-audit services and internal control risk etc over the years by experts and scholars review the pricing of the audit outcome. Based on the review of the literature, the research direction of this paper is drawn from the perspective of the internal control to discuss audit risk pricing. In the following theoretical analysis, we first define the concept of audit pricing, then analyzing audit costs, audit risk and audit the quality of the three fundamental factors on audit pricing, and the last is the internal control risks of audit pricing.Part in the design of this study, the first theoretical analysis based on derived risk and internal control relationship between audit pricing, the existence of internal control deficiencies, internal control deficiencies exist in the number and severity of internal control deficiencies are three levels variables to measure the internal control risk. To study the risks and the audit of internal control related to pricing, we propose the following theoretical analysis based on three assumptions: H1:Internal Control and Audit Pricing vulnerability disclosure are related; H2: Internal Control and Audit Pricing number of defects are related. H3:Vulnerability disclosure or substantial positive correlation with the audit pricing. Then, selecting the A-share listed companies in Shenzhen in 2009 as a research sample, we obtain 377 samples which meet the requirements after collecting and electing information of the huge influx of CSMAR database and tidal wave network.Definition of variables in order to disclose the audit fees of listed companies to measure the level of audit pricing, according to the literature review part of the summary of previous research, we viewed customer size, the complexity of the audited entity, financial risk, corporate governance structure, transaction size and reputation, the audit opinion and other factors as control variables. In the variable definition based on the three assumptions in this paper, three regression models were established.In the empirical part, we first describe the sample corporate data statistical analysis and found that the sample companies which disclosed internal control deficiencies in the company have a higher proportion. On the one hand that after the guidelines and norms promulgated and implemented, Shenzhen A-share listed companies in Shenzhen to disclose the enthusiasm of the internal control information is relatively high; on the other hand also shows that Shenzhen A-share listed company’s internal control exist certain risks, which need improved on the quality of internal control. When statistics on substantive flaws, we found that the internal control self-assessment report internal control deficiencies disclosed in the sample companies, the disclosure of internal control deficiencies in the vulnerability of the listed companies have substantial 27.8%, indicating that some listed companies among A-shares in Shenzhen have the existence of substantial flaws, but because of the lack of substantive concept of vulnerability, a listed company disclosure only as an internal control deficiencies in internal control self-assessment report disclosed. Next, we conducted a correlation analysis of variables which was found among the three models that do not exist independent variable multiple linear problems. Therefore, in testing hypotheses, we carried out directly on the three models of multiple linear regression analysis. Regression results show that:assumptions and hypothesis of the first and the second set up, but the result of the three assumptions is not significant.Through empirical testing, the paper reached the following conclusions: whether to disclose internal control deficiencies and audit pricing have a significant positive correlation relationships, and whether to disclosure the number of internal control deficiencies and audit pricing disclosure have a significant positive correlation relationship, and whether to disclose material flaws and Audit Pricing have a positive correlation relationship, but they are not significant. This internal control disclosure of the actual situation is consistent. "Guide" and "norms" have been issued since the implementation of most of our public awareness of the company’s internal control were disclosed by a significant increase, although the disclosure of internal control self-assessment report and the need to constantly improve quality, but the internal control report reflects the real part of the company’s internal control information, revealing the existence of the company’s internal control risk. Auditors in the audit, on the part of the internal control information to the reception and adoption, as a reference in the audit pricing one of the factors, so whether to disclose the number of internal control deficiencies and internal control weaknesses and audit pricing are significantly correlated. The loopholes in the system, the concept of substantive norms and the lack of criteria for the classification, leading listed companies in the internal control report did not separate disclosure of such flaws, when the audit firm is not the existence of such defects as the audit important reference pricing factors, therefore, whether to disclose material flaws and audit pricing relationship is not significant.The main contribution of this paper has two following aspects:First, based on the special regime in China, doing a study from the perspective of the internal control audit of the factors affecting the pricing, we draw the conclusion that there is a positive correlation relationship between internal control risk and audit pricing, adding a new factor for audit pricing; Second, having relevant conclusions for research policy recommendations:the information of audit fee disclosure system should be further improved, and further improved disclosure information of the internal control system of the legal status, enhancing the aspect of requirements of mandatory and authority, having a clear concept of deficiencies in relevant system of internal control and substantive flaws, requiring self-evaluation report in internal control disclosed in the separate substantive flaws. However, because of the limited knowledge and time, the paper may be the following limitations:Firstly, few samples may have a negative effect on the empirical results of the representation. Secondly, in the collection of internal control deficiencies, and substantial vulnerability data, there is certain subjectivity due to the artificial collected by the standard error and other factors is not clear. What’s worse, the empirical results may have a negative effect in the persuasiveness. The selection of control variables is not comprehensive enough. Therefore, it still should be improved on the regression model.