Internal Control Audit, Integrated Audit Impact On The Quality Of Financial Reporting Information

Internal control audit (ICA) began with the fraud of Enron and WorldCom in the early21st century. In order to solve quality problems of financial information, the United States enacted the "Sarbanes-Oxley Act" in July,2002. It defined the responsibility of regulators and managers in listed companies, it forced the corporate implementing the internal control audit. The auditing standards AS5published in May2007. It cleared the standards of internal control audit, and proposed a concept called Integrated Audit (ITA). From then on, the internal control audit got widespread attention of academe and economic community.In China, the ICA started in2010, when the Ministry of Finance issued "Guidelines for Enterprise Internal Control", which ruled that the listed companies in China must execute internal control audits in2011, and mentioned that the enterprise can either use ITA or not. The Ministry of Finance decided to fully implement the ICA all over the listed companies in three years. CICPA propose the main idea of ITA and hope that it will help the development of the audit work in our country.This thesis investigates the economic consequences of ICA and ITA. Firstly, it reviews the relevant documents and theories to summarize the relationship of the ICA, ITA and the quality of financial reporting information. Based on these analyses, it put forward the hypothesis and then designs empirical models to get the conclusions. The results are significant in two aspects:in the practical aspects, it inspects the efficiency of the new institution, and in the theoretical aspects, it aims to broaden the theory of ICA and ITA’s research.This thesis is divided into six parts and each chapter is arranged as follows:The first chapter is Introduction. This section describes the major research background and significance, roughly summarizes the contents of the article, and describes the research methods and the framework of this paper.The second chapter is the Literature review of ICA, ITA and their impacts on the quality of financial reporting information. And finding that few scholars have studied the impacts on the quality of financial statements, and these researches are still in their infancy. Therefore this thesis will focus on these two aspects.The third chapter is the institutional background and theoretical analysis. Firstly, this chapter describes the domestic and foreign development process of ICA and ITA. Secondly, it describes the theory of the relationship among ICA, ITA and the quality of financial reporting information.The fourth chapter is the research hypothesis and research design. This chapter begins with the assumption made on the basis of theoretical analysis in the third chapter of this paper:firstly, listed companies which performs ICA will have higher quality of the financial reporting information; secondly, listed companies which performs ITA will also have higher quality of the financial reporting information; thirdly, the fee of ICA negatively correlates with the quality of the financial reporting information.The fifth chapter is empirical testing and analysis, including descriptive statistics, correlation analysis of the main variables and regression results analysis.The sixth chapter is conclusion and implication, which summarize the findings, limitations, contributions, policy recommendations and future research direction according to the analysis results.This thesis gets the following conclusions:(1) Executing ICA can improve the quality of financial statements of listed companies, and the development of a mandatory policy to regulate corporate behavior is also able to achieve the same results.(2) Based on the implementation of ICA, the implementation of ITA can also improve the quality of the information.(3) The higher the internal control audit fees, the higher risk the company’s internal control may have. And the high risk may cause worse quality of the company’s financial reporting information.The contribution of this dissertation mainly contains two aspects, which are listed below:Firstly, latest data is used to empirically examine the effect of ICA and ITA on the quality of financial reporting information. Since ICA was enforced to implement in2012and related research is insufficient in China, we study their effects on the quality of financial reporting information, and examine the effectiveness of ICA in the latest institutional background. It has obtained reliable results from the empirical study, which provides more evidence for China’s research in the academic area.Secondly, information contained in the internal control audit report is fully used to study the relationship between internal control audit fees disclosed in2012and the quality of financial reporting information, which enriches their researches.However, due to the new institutional background, the disclosure of some data is not complete, so a method to expand the sample size is used in this study, which, to some extent, still cannot guarantee the absolute consistency of the data. Meanwhile, because of the insufficient sample, the conclusion of this study may not so convincing.Based on the research outcomes, this paper put forward the following policy suggestions:(1) Strengthen the ICA guidance and supervision and improve the relevant policies and regulations.The empirical outcomes show that implementing ICA helps to improve the quality of financial reporting information. In China, the ICA system is currently being implemented gradually. Related departments should implement policies to strengthen the guidance and supervision of this system and improve related policies and regulations to make use of the internal control audit in improving the quality of information of listed companies.(2) Promote the implementation of ITA and introduce relevant policies to enforce the implementation.The conclusion of this paper shows that the implementation of ITA can enhance the quality of financial statements. However there is not enough research outcomes compared to developed countries, which already demonstrate that ITA plays a very important role. So, we suggest that related departments in China should build related policies and regulations to enforce the implementation of ITA.(3) Study further of the internal control audit fee disclosure and encourage the disclosure of fees.The empirical outcomes show that internal control audit fees are related to the quality of financial report information. In other countries, the fee is not enforced to disclose, while in China some companies voluntarily disclose the cost when disclosing the fees is required. Taking the newest disclosure of fees into account, related theory research is not sufficient. So further study is needed, and related departments should encourage listed companies to disclose their internal control audit fees.