Research On Validity Of Internal Control Andaudit Pricing

CPA’s audit services as a paid labor provided to the customers, its pricing methodmust reflect the rules and characteristics of the production of audit services, in addition toto consider the supply and demand like the pricing of general goods and services. This canensure that CPA firms are able to develop healthily, but also able to provide the auditreport with high quality to the public, so the issue of pricing of audit services has been ahot area of research. In theory, there are two basic factors that influence the pricing ofCPA’s audit service: the first is the audit costs and the second is the audit risk. Effectiveinternal control not only saves the cost that CPA provides the audit service, but alsoreduces the risk of material misstatement of financial statements. However, since Simunic(1980) pioneered the study of audit pricing, the majority of sino-foreign scholars in thestudy haven’t brought the level of Enterprises’ Internal Control into the model of auditpricing. The reason may be related to the complexity to measure the level of internalcontrol and data availability. So in this paper, the author makes the evaluation of theeffectiveness of internal control as a breakthrough to start the research on the pricing ofCPA’s audit services.Effectiveness of internal control indicates the establishment and implementation ofthe internal control that can provide reasonable assurance for the realization of controlobject. In the basic NORMS OF INTERNAL CONTROL promulgated by China’s Ministryof Finance, the objective of internal control is defined as providing reasonable assurancefor the legal compliance of business management, assets’ security, financial reports andrelated information that is true and complete and improves operational efficiency andeffectiveness, and promotes the development strategy. The overall objective of thisdefination can be divided into five sub-aims: that is strategic objectives, operationalobjectives, reporting objectives, asset security objectives and compliance objectives.Based on the public data that can be obtained, the author has converted these sub-aimsinto a set of quantifiable evaluation system and constructed a evaluation system of internalcontrol that suits for China’s listed companies through the calculation of weights and thedetermination of evaluation criteria and scoring method. In order to ensure the validity ofthe evaluation system, this paper empirally tested the evaluation system from theperspectives of effectiveness of its identification and prediction by selecting1033companies of manufacturing and wholesale and retail that listed in Shenzhen andShanghai Stock Exchange in2008as samples and employing the level of informationdisclosure of internal control standards as the alternative variables of the true level of a business’ internal control, the results show that the evaluation system has high reliabilityand practical value.In order to further reveal the true rules of CPA’s audit pricing in China’s market, byusing the evaluation results of internal control as the the alternative variable of the level ofcontrol risk and including it in the audit pricing model, the author studied empirically on1395companies that listed in the Shanghai and Shenzhen Stock Exhchange in2009. Theresults show that there isn’t statistically significant correlation between the audit fees thelevel of risk control despite that CPAs issue more audit reports of non-standard unqualifiedopinion to companies with higher risk. This implied that China’s accounting firms didn’ttake the level of enterprises’ internal control into consideration when making pricingstrategies of audit service. Secondly, the paper has also examed the changes in audit fees(compared with2008) and has found that the firms still adjusted the level of audit feeswhen the companies changed the quality of internal control.In this paper, via the theoretical analysis and empirical research on the evaluation ofthe effectiveness of internal control, the author builds a goal-oriented evaluation system ofinternal control so as to provide theoretical guidance and empirical evidence for China’senterprises to improve the internal control system and carry out the evaluation of internalcontrol. Second, this paper enriches the current research on CPA’s audit pricing and furtherreveals true rules of pricing of CPA’s audit services in China’s market. It also providesuseful empirical evidence and decision-related information for the relevant governmentdepartments to restrain the unfair competition and regulate the development of the CPAindustry.