Impact Of Internal Control Audit On Financial Reporting Audit

Enron, WorldCom and a series of financial fraud incidents caused the public’s attention at the beginning of the21st century. And the quality of accounting information of listed companies has been seriously questioned the credibility by the public. In2002the United States passed the "Sarbanes-Oxley Act," which the provision of Section404requires companies must disclose the audit report on the effectiveness of internal control over financial reporting (ICFR). Thus, the ICFR audit and the information of internal control becomes a mandatory disclosure requirement in the US.In order to comply with the trend of international regulatory changes, China passed the "Enterprise Internal Control Audit Guidelines" in April,2010. The provisions require listed companies and large enterprises should be self-evaluation of the internal control, and must disclose the audit report of internal control during the period of accounting. The guidance requires companies listing both in domestic and overseas began to carry out the internal control audit since2011.After the promulgated of the guidelines, the system of internal control environment has undergone major changes in disclosure. From the study of the current views to the internal control audit, mostly concentrated in the status and problems of internal control information disclosure, the necessity of ICFR audit, and the function the internal control audit. But there is few articles research on the influence of the changes brought about by the institutional environment.This paper collects the data of public listed companies in Shenzhen Stock Exchange which provided the internal control audit report during the period of2008to2011.Using the companies’accrued profits as the substitution variable of audit quality, tests the connection between the two assurance services, and whether the internal control audit makes the fee changes. And the objective of this study is providing theoretical basis and data support for the market pricing of internal control audit and the improvement of policy and regulatory measures about ICFR. In this paper, the author used the modified Jones model to calculate the accrual profits of the companies. And in the second part of the empirical analysis, this study tests the impact of ICFR audit on audit fees by the Simunic model. Finally, on this basis, the study analyzed and summarized suggestions from the external auditors and relevant departments.The research frameworks are arranged as follows:Part1:Introduction. The research indicates the research context of this study as well as theoretical and practical significance, and the article expounds the research contents and methods, finally, lists the mentality and main contribution.Part2:literature review. In this part, based on the study of related literature at home and abroad, summarizes the opinions of domestic and foreign literature for ICFR audit, the financial statements audit quality and audit fees, and to review these points. At last, the part points out the deficiency of the existing literature, and make the supplement to the development direction of follow-up study for ICFR audit and the related content.Part3:summary of the theory. This part introduces the connotation and influence factors of financial reporting audit quality, and the development of ICFR audit in our country. In addition, the article analyzes the impact of ICFR audit on the audit fee by using the theory of audit pricing with audit risk premium.Part4:research design and test of empirical research. First, this study compares the audit quality of financial reports between the companies which disclosed the internal control audit reports and the rest companies listed in SZSE. Secondly, this paper calculates the accrual quality of the sample by the modified Jones model. Then, put the data into the model of multiple regression, and analysis of the influence of the internal control audit on the quality of financial reporting audit after the promulgation of the regulations. Finally, in the second part, this study tests the impact of ICFR audit on audit fees by using Simunic model.Part5:The main conclusions and suggestions. This part analysis the date of empirical research, and provides some suggestions from two aspects:certified public accountants and external regulators. Finally the article points out the research limitation and the research direction of future in the related field.The research conclusion in this article:after the enforcement of this provision, the author find that earnings quality of listed companies that disclosed internal control audit report is higher than that of those did not disclose significantly. In other words, the internal control audit can improve the quality of quality of financial reporting audit. So the conclusion of this paper supports the decision of "Enterprise Internal Control Audit Guidelines" treat disclosure of internal control audit as statutory requirement. In addition, we find that the audit fee of companies first time disclosing internal control audit reports is higher than that of other companies in the sample significantly. This shows that the CPA more seriously and more carefully in the work because of the risk. Therefore, the costs of audit and the risk premium increased the audit fee.The contribution of this paper is reflected in the following two aspects:(1) Research perspective. This study research the connection between the quality of financial reporting audit and internal control audit combined with the changes of the institutional background. There is few articles research the changes of institutional background on internal control audit. And the study fills the gaps in the field.(2) Practical significance. The author analysis and summarizes the results of the impact of "Enterprise Internal Control Audit Guidelines", and provides reference of theoretical and practical for the guidelines.This paper has the following deficiencies:Because of the short period, the effect of the guidance can’t be proved adequately. In addition, select the earnings management as alternative variables might be having deviation. In the future, scholars should collect the relate data of ICFR audit more detailed, and studied on a longer time span.