Empirical Study On Relationship Between Internal Control And Audit Opinions In China’s Listed Corporations

A snafu appeared in Shanghai Securities Composite Index on August16,2013, with thehighest index up to5.62%. According to a later investigation from China Securities RegulatoryCommission, the main cause of this snafu lies in the flawed internal control system in the listedEverbright Securities, which indicates that a sound internal control system can effectively guardagainst risks. In fact, as early as in2008and2010, the Ministry of Finance and other fourministries jointly issued the Chinese “Basic Norms of Internal Control of Companies” and“Internal Control Guidelines” to guide and regulate companies to establish and perfect theinternal control system. Given the present situation of China’s listing Corporations, the vastmajority of listing Corporations are able to timely disclose their internal control self-assessmentreport. The Audit opinions can reveal a fairly objective evaluation of listed corporations’financial status. Risk assessment and control test are essential in the CPA’s audition. And allcan not manage without an internal control. Therefore, internal control and audit opinion areclosely related.In order to study the relationship between China’s listed corporations’ internal control andaudit opinions, after reviewing some previous researches both from home and abroad, thepresent paper chooses internal supervision, internal control deficiencies and external supervisionas a substitute index to evaluate the listed corporations’ internal control, through the empiricalanalysis of the relationship between the internal control and audit opinion, based on China’sactual situation, and some economic theories related with internal control including the principalagent theory, asymmetric information theory and signal transmission theory and with theoriesrelated to audit opinion formation including insurance theory and game theory. Throughdescriptive statistical analysis, Pearson double tail correlation analysis test and Logisticregression analysis of the sample statistics, it was found that there exist significant negativecorrelation between non-standard audit opinions and the internal supervision; positivecorrelation between non-standard audit opinion and internal control defects, though not significant; significant negative correlation between non-standard audit opinion and externalsupervision.Based on theoretical analysis and empirical research, in view of the existing problems ofinternal control and audit opinion in China listed corporations, this paper offers threesuggestions, which are expected to further improve internal control supervision system, andregulate the securities market in the practice, so as to promote voluntary disclosure of internalcontrol system and realize the integration of financial statements and internal control audit. Thesuggestions in the present study is expected to assist in perfecting the internal control system oflisted corporation in China, in terms of the disclosure of internal control information moretimely and comprehensive, help the company internal management to reduce risk, andultimately enhance the overall value of the company.