Research On The Relationship Between Internal Control Quality, Executive Authority And Audit Pricing

In recent years, there are a series of major events of financial fraud and bankruptcy in China's listed companies, which results in the authorities realize that only depends on the governance mechanism of companies and the constraint of external supervision is seriously inadequate for a good operation of listed companies. In that case, especially for the state-owned enterprises which can guide the whole economic market, it is extremely important to strengthen the construction of internal control system and implementation efforts of companies.Internal control as an important method to prevent business daily operational risks and fraud of companies, its level of quality not only affects the business situation, determine the success or failure of business, while greatly affect the degree of difficulty of the work for CPA audit. Furthermore, it also affects the ultimate formation of audit pricing. But in our particular period of economic restructuring, the excessive power expansion of business executives will directly affect the efficiency of various enterprise systems, or even directly involved in the implementation of related internal control system for controlling and restricting the power of executives, which is in particular in state-owned enterprises. The key of the formation of internal control quality is that through the constraint of the power of central members and the good communication of organization information, limiting damages of company rules and regulations, which made by the board of directors and shareholders, caused by a few people including senior executive. Therefore, listed companies should not only have a sound internal control system, but also the system is capable to be performed well by all the members of businesses including executives. Such internal control can play an important role in restricting the over expansion of executive power. However, the hand down properties such as upholding authority, dictatorship of executives or the effects of political background of state-owned listed enterprises are likely to lead to senior managers take advantage of unchecked power to directly manipulate the implementation efficiency of the internal control system, thereby affecting the authority and implementation strength of the entire internal control. The damage of authority and implementation strength of internal control's quality will directly result in the increase of audit risk of the third party independent audit, which will eventually cause the increase of audit pricing. Therefore, there is a interaction relationship between executive authority and internal control system, even in some cases, the executive authority can be regarded as an influence factor of the quality of internal control, thus influences caused by executive authority in terms of the relationship between internal control and audit pricing cannot be contempt, which is important to enrich the research of this field.In this thesis, a method of the combination of theoretical and empirical is used. Firstly collect and read the literature of internal control quality, executive authority and audit pricing, and then make a summary of classical literature which present the relationship between two factors mentioned above. Then, make the analysis based on the principal-agent theory, game theory, and the theory of insurance and managerial power theory. The method of principal component analysis to build on executive power index, followed by empirical research quality of internal control audit pricing effect, the impact on audit pricing power, and executives how to suppress the negative effects of the internal control audit executive power pricing, and make recommendations based on the conclusions. This thesis is divided into seven parts, the first part is an introduction which focus on the research background and significance, framework and methods, and the innovation of the definition and expectation of three related research topics. The second part is literature review, in this part it shows the contents of related literature for the influence of audit pricing caused by internal control quality all over the world, the interaction between executive authority and internal control, and by which means the audit pricing are influenced by executive authority. Meanwhile the shortcomings of previous research are summarized. The third part is about the theoretical basis, focuses on why principal-agent theory, game theory, and the theory of insurance and managerial power theory can be established as a research topic of this paper, and shows the theoretical basis of each theory and conception of this article. The fourth part is the establishment of problem analysis and theoretical models. Through the literature review and theoretical foundation, detailed analysis of the influence of various variables, and make assumptions. The fifth part design variables and sample collection, focuses on variable selection and presentation based on the source of the sample. Part six is empirical research, through descriptive analysis, correlation analysis, multiple linear regression and other methods to empirical analysis, then make the conclusion and results. The last part is conclusion and discussion, through the analysis of empirical results to draw conclusions and make recommendations on this basis.The empirical results shows that, the better the quality of internal control of the company, the lower the audit pricing. And the greater the power of executive authority, the higher the audit pricing, the CPA may have a higher risk of this part calculated in audit pricing; when the quality of internal control is higher, the audit pricing can be decreased by suppressing the executive authority to power rent-seeking, because this method decreases the risk of material misstatement. The conclusion of this thesis can be treated as a empirical evidence which provide a possibility to increase the quality of internal control and constrain the over expansion and selfish behaviour of corporate executives, thus enriching the research results of the consequences of internal control economic, meanwhile, it may promote the reasonable standardization construction of audit pricing.