Research On The Relationship Of Internal Control Weakness And Audit Fee

On April26,2010, the Ministry of Finance, the Securities Regulatory Commission,the National Audit Office, the Banking Regulatory Commission and the InsuranceRegulatory Commission jointly issued three internal control guides including theapplication guide, the audit guide and the evaluation guide. In2011, the SecuritiesRegulatory Commission published a document which requested that the domestic andforeign listing Corporations should engage auditors to audit the internal control andreport the audit opinion. At the same time, the SFC encourages listed companies tomake a disclosure of Self-evaluation of Internal Control. The purpose of this thesis is tocontribute to the inquiry on internal control effectiveness by microcosmicallyinvestigates the effect of internal control deficiencies and their remediation on audit feebased on the view of an auditor.Based on the review of the relevant reference of internal control and audit fee areahome and abroad, we conclude that studies at present are mostly related to whetherfirms that disclose incur higher audit fees compared to firms that never disclosed aweakness. This finding suggests a research direction for the paper.On the part of theoretical analysis, we deduce the relationship between internalcontrol and audit by summarizing their common theoretical basis, thus we couldreasonably speculate that audit fee may connect to internal control deficiencies.Furthermore, in this thesis, internal control deficiencies are divided between internalcontrol weakness of accounting level and internal control weakness of company levelbecause it is necessary to analysis the relationship in audit’s eye. Then the thesisproposes its three research hypotheses.The research design section consists of four parts. Firstly, the description ofstatistical analysis is done so as to elaborating the situation of internal controldeficiencies during2010to2011; secondly, we preliminary find that internal controlweakness of accounting is highly relative to audit fee and the consistency of internalcontrol deficiencies are prone to be irrelevant to audit fee by through correlationanalysis; Thirdly, the conclusion of ordinary least squares estimation are draw:(1)firmswith internal control deficiencies are more likely to pay higher audit fee, this indicatesthat auditors in China are mostly focus on accounting events,(2) we document that firmswho have remediate previously reported internal control deficiencies lower their audit fees successfully,(3)whether firms disclose same deficiencies or not, it seems thatconsistency and audit fee are irrelevant statistically. At last, robustness test is done toensure the reliability of the conclusions by Treatment Effect Model and variableredefinition.After summarizing the conclusions, some suggestions are put forward to contributeto perfect internal control construction and regulate audit market.