Internal control risk and audit fees: Evidence from China

Abstract

This study examines the association between internal control risk and audit fees under the voluntary adopting regime of the Basic Standard of Enterprise Internal Control in China. We find that audit fees are positively related to disclosed internal control weaknesses (ICWs). In particular, they are significantly associated with non-financial reporting-related, but not with financial reporting-related, ICWs.Our results also indicate that voluntary assurance in internal control reports can mitigate higher audit fees associated with ICWs. Our study provides timely evidence relating to the debate on whether the scope of internal control should be expanded to non-financial reporting-related areas.