Internal Control Deficiencies And Rectification Effects On Audit Pricing

In response to a series of frequent financial fraud cases(for example, "Enron", "World Com" and other financial fraud cases), the US Congress promulgated the 《Sarbanes- Oxley Act》(referred as SOX Act) in July 2002, the problems relevant to internal control have become a hot issue for discussion.In June2008, in order to regulate the internal control of enterprises, improve enterprise management level and risk prevention capacity and promote sustainable development of enterprises, learning from American experience, the Ministry of Finance, Audit Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission jointly issued the 《Enterprise Internal Control Basic Specifications》. The release of the specification not only raises claims for the internal control of listed companies, but also provides reference for other companies’ construction of internal control,moreover,lays the foundation for further expansion of the scope of internal control. Currently,how to identify internal control deficiencies, how to regulate the disclosure of internal control deficiencies, the influence of the disclosure of internal control defects has become an important topic and made a lot of research results. From the perspective of external audit, this paper study the relationship between the internal control weakness and audit pricing. The audit service that the CPAs provide to customers is different from general merchandise. It has the commonness of general merchandise, namely not only affected by market supply and demand; but also needed to consider the particularity of audit market, namely the particularity of audit services. The audit service quality is not only to satisfy the needs of audited entities, but also supervised by the government, investors and other stakeholders. So there is a need for the CPA to provide high-quality audit service to ensure the healthy development of the accounting firm. The audit pricing has an important impact on the quality of audit service. And the previous research considers the audit cost, audit risk to be the two most critical factors determining auditing price. Audit cost is the price to pay auditors during the audit, the existence of audit risk makes the CPA to require of a part ofrisk premium. In addition, normal profit(risk-free returns) is also an integral part of the audit pricing. However, the internal control defects have impact on audit pricing through the audit cost, the audit risk.This paper is based on the theory of cost-benefit, risk premium, signaling. And regarded three theories as basic bridge, it establishes the relationship among the internal control defects,the rectification of internal control defects and the audit pricing, selects the listed companies of Shanghai and Shenzhen A-share as research samples, analyses the relationship between internal control defects and audit pricing by descriptive statistics and multivariate linear regression. The main contents of this article are as follows: firstly, from the inter-temporal perspective, studies the relationship between internal control defects and audit pricing, namely the internal control defects of the year, in the second year and third year whether there is any impact?; secondly,further reducing the initial sample, compares the audit pricing between two groups of companies, companies with two consecutive annual disclosure of internal control defects and companies with only the second annual disclosure of internal control defects, studies the differences of the company’s audit pricing between the two types of audit risk; thirdly, tests whether the rectification of existing internal control deficiencies will reduce audit pricing. The main purpose of the study of this paper is to enhance the motivation of business focusing on their quality of internal control rectifying the internal control deficiencies through the research about the relation between internal control defects and audit pricing.From a new perspective,this paper study the the relationship between internal control weaknesses and audit pricing. Compared with the previous studies, the research contents of this paper are more comprehensive and more systematic. It not only considers the influence of internal control defects on audit pricing from the inter-temporal perspective, but also studies whether the audit pricing will reduce after the rectification of internal control defects. The empirical results show that internal control deficiencies are not only positively correlated with the audit pricing of the year, but also with the audit pricing subsequent annual. However, for the study of the relationship between the rectification of internal control defects and audit pricing, the research conclusions of this paper are different from previous studies. It does not draw the conclusion that the rectification of internal control defects can reduce the audit pricing, and gives the corresponding explanation. Finally, according to the conclusions of this study, I put forward the corresponding policy recommendations.