The Research On The Influence Of Litigation Risk Of Listed Company And Auditor Size On Audit Opinion

Litigation risk as the benchmark of the overall risk of the listed companies, isalso an important factor of quality of listed companies. It reflects the level ofcorporate governance and management capacity. In modern risk-based audit mode, itcan better examine whether CPA consider the risk factors of listed companies whenwe research the relationship from the microscopic point of view between every singlelisted company’s litigation risk and audit opinions. However, there is little empiricalresearch in the country. Meanwhile, a large number of studies show that auditor size isthe important factor of the type of audit opinion. But, most of them consideredseparately the impact of auditor size on audit opinion which overall estimated theaudit opinions differentiation between different scale auditors. There is a lack ofresearch of the difference in audit opinion decisions based on the listed companycharacteristics between different scale auditors.Firstly, according to the “prospect theory” of behavioral economics, we find therelationship between litigation risk and audit opinion type by derivation the CPA’sopportunist tendencies when face the “bounded rationality” investors. Then, based onreputation theory and deep-pocket theory, we analyze the impact of auditor size on theaudit opinion type. With a sample of companies listed in Shanghai and ShenzhenStock Exchange during2009-2010, we examine the relationship between litigationrisk, auditor size and audit opinion type. the results show that: the litigation risk andnon-standard audit opinion was a significant positive correlation; Based on thecharacteristics of litigation risk,big10is more likely to issues non-standard auditopinions than non-big10when clients with high litigation risk. However, on thewhole, there is no significant difference of audit opinions between big10and non-big10.This paper believe that it related to the low legal risk of CPA, the lack ofspontaneous demand for high-quality audit services, the big auditor big but not strong.Finally, based on theoretical and empirical findings, we make the followingrecommendations: to establish and improve litigation risk management system; tooptimize the CPA’s civil liability arrangements; to foster the spontaneous demand forhigh-quality audit; to promote the development of large-scale auditor firms.