The Effect Of Internal Control Weakness On Audit Fees

From the enterprise management point of view,a sound internal control system can reduce the possibility of material misstatement;For external investors,the audit services can provide reasonable assurance for the fairness and legitimacy of the audited financial statements.The audit pricing itself reflects the outcome of the consultations between the supply and demand sides of the audit services,and it is the key link of economic ties between the two sides.However,There is a correlation between these two behaviors.When the enterprise internal control defects,auditors are obliged to identify the risks of material misstatement through the implementation of audit procedures in a neutral third-party position.But the existence of this potential risk may increase the auditor's audit costs and risk premium.That is,the quality of internal control system will often affect the level of audit risk,then it affects the audit pricing.Meanwhile,the legalization of mandatory disclosure of internal control information and the availability of audit fee information makes research in this field increasingly concerned by domestic and foreign scholars.On the basis of introducing and reviewing the core viewpoints of existing literatures,this paper takes the audit pricing model as a starting point.The mechanism of internal control deficiency on audit pricing is expounded from cost-benefit principle and risk premium principle.Using intertemporal methods innovatively,this paper explores how do the defects and their corrections affect the subsequent years of audit pricing.Then using a combination of normative and empirical research methods,the paper takes 2010-2014 A-share listed non-financial companies in Shanghai and Shenzhen as a sample.Combined with the listed company earnings,internal control self-assessment report and CSMAR and Dibo database,Stata 12.0 software and Excel tools were used to organize the data and bring them into the model.The empirical study was conducted from descriptive statistics,correlation analysis,multiple regression analysis and robustness test.The hypotheses are validated in this paper via the above methods,which makes the view of this article have strictness.The main contents of the article include the following five parts:The first part is the introduction.This mainly introduces the research background,goal,content and writing ideas and research methods.The second part is literature review.Around the audit service price,the association between internal control and audit pricing,the effect of internal control defect and its rectification on auditing pricing this three dimensions,this paper reviews the core viewpoints of related literatures and comments on them.The third part introduces the institutional background,theoretical basis and hypotheses.Firstly,this paper analyzes China's audit pricing and internal control system of the real situation.Secondly,this paper defines the relevant concepts of this article,and based not only on the identification,classification and measurement of internal control defects,internal control risk theory and audit risk theory these three aspects,but also on Cost-benefit Principle and Risk Premium Theory,this paper analyzes the mechanism of internal control deficiencies on the audit pricing.ALL of these are with a purpose to support the article behind.Finally,based on institutional background and theoretical analysis,four hypotheses are presented.The fourth part is the model construction and the empirical test.Specific coverage is as follows:Firstly,the paper builds its models.Then,the internal control defects and their corrective impact on subsequent annual audit pricing are discussed.And the internal control defect types are subdivided,that is different internal control defect levels and whether a defect is related to a financial report.Research the impact of these differences in the extent of the audit pricing.Each section of 4.1-4.4 follows the empirical steps of the empirical study.Finally,the conclusion is verified by the robustness test.The fifth part of the main conclusions of this paper,policy recommendations and innovation and shortcomings.First of all,this paper lists the main conclusions of this study,and on the basis of this topic put forward three proposals for improvement.And then lists the innovation of this study,and finally elaborates the shortcomings of this paper and follow-up research directions,with a view to future generations in-depth exploration.Through theoretical research and empirical test,the following conclusions are obtained:(1)internal control deficiencies play an positive role in the next audit pricing.(2)There is a positive correlation between the internal control deficiencies and the audit pricing in subsequent years.(3)There is a negative correlation between effective rectification of internal control deficiencies and audit pricing.That is,the internal control defects rectification will help reduce audit pricing.(4)There is a positive correlation between the severity of internal control deficiencies and audit pricing.(5)The different impact between the defects of the internal control financial statements and the non-financial statements on the audit fees.Compared with the non-financial statements,financial statement defects have a greater impact on audit pricing.The innovation of this paper lies in the fact that many of the previous studies are based on the implicit assumption that the disclosure of internal control information is known.However,this does not meet the order of time points between the audit pricing and internal control information disclosure.The author of this paper using intertemporal approach to research the impact of internal control defects on annual audit pricing next year and beyond,which will also help to encourage enterprises based on long-term development and actively improve the overall quality of internal control.And also there will be a practical significance.Besides,this article further subdivides the internal control defects into different grades and financial reporting types,and this will help to analyze the impact of internal control deficiencies on audit pricing in more detail.The results of this paper have the following practical significance:As the internal control deficiencies will positively affect the audit pricing,the company should focus on improving the level of internal control construction and reduce the possibility of internal control defects to the utmost extent.As the above effects are persistent,this article inspires enterprises should look to long-term development,and constantly improve its internal control system.Even if the defect has occurred,companies should timely and effectively rectificate them positively to minimize the adverse impact on audit pricing.