Environment Uncertainty, Internal Control And Audit Fees

In the field of audit theory, there are agency hypothesis and insurance hypothesis. At present, the research of audit from the perspective of agenc y theory has gained considerable experiences, while the test of audit insurance hypothesis has become a difficult problem. In 2003, the Supreme People's Court promulgated the "Regulations on the trial of civil compensation cases caused by the false statement of securities market", which marked the formal establishment of the risk of civil liability for the securities market audit in our country; in 2006, China officially released the new "Certif ied Public Accountants Auditing Standards", which fully ref lected the requirements of risk-oriented auditing, auditors should optimize the allocation of audit resources according to the audit risks. The promulgation of the law or the industry standard fully reflects the function of audit insurance.Today, the impact of economic globalization has touched on all aspects of a company's business, companies are facing more and more complex environment and prominent uncertainty, leading to the improvement of the overall risk of enterprises. Audit is a kind of risk transfer mechanism, the owner of an enterprise can transfer some parts of the risks he beared to the auditors by paying the audit fees which are equivalent to the premium of the insurance contract. So these offer a great opportunity for us to examine the implementat ion effect of the new auditing standards and the audit insurance hypothesis.More important, internal control is a series of effective rule contracts and a kind of internal governance mechanism running through the whole process of operating activities.Although the existing researches pointed out that internal control can not only reduce the risks of false financial statements and fraud, but also improve earnings quality, protect the interests of investors, these problems still lack empirical evidences: How does the internal control face the challenges of high degree of environment uncertainty? Whether the managers generate the power to improve the quality of internal control? What roles does internal control play in the relationship between environment uncertainty and audit feees? Whether the high quality of internal control can ease the positive relationship between environment uncertainty and audit fees?Based on the above considerations, taking the Chinese listed firms between 2007 and 2012 as samples, this paper tries to explore the path of the auditor's behaviors influenced by the overall risks of the companies from the perspective of external environment and its interaction with internal control. We find that environment uncertainty can lead to a significant increasing of audit fees,and with the the increasing uncertainty of external environment, the quality of internal control has got promoted, thus the positive relationship between environment uncertainty and audit fees has been eased. This may indicate that the mode of risk-oriented auditing can be applied effectively in China's audit market, auditors will charge a premium to avoid the audit risks when facing the perceived customers' risks. Further, as a kind of internal governance mechanism, internal control will be updated, because of the increasing uncertainty of external environment, to adapt the changes and to reduce the risks. These research conclusions confirm that the construction and promoting of internal control imposed by the governments and regulators are necessary and important.