Internal Control, Audit Risk and Audit Pricing: Empirical Evidences from China's Listed Companies

Internal control level directly affects the quality of financial report of a firm and CPA's audit input and risk. Do CPAs take such a relation into account when they decide the level of audit fees charged to firms? In this paper, the author conducts an empirical study on the relationship between the internal control quality, audit risk and audit fees, using a sample of 1395 companies listed on Shanghai and Shenzhen Stock Exchange in China. The results show that CPAs issue more non-standard unqualified opinions to the companies with higher control risk, and there is a statistically significant correlation between the audit fees of companies and their internal control quality. Furthermore, by analyzing the incremental model, the author finds that CPAs adjust the level of audit fees accordingly when the internal control quality of companies' changes.