Towards Understanding the Current State of Auditing Practices in China: Client Acceptance Decisions, Structuring of Audit Approaches, and the Stringency of Imposed Reporting Standards

Abstract

This study explores factors potentially related to the ability of Chinese audit firms to ensure a high level of integrity in Chinese business enterprises' financial reporting. Its scope of investigation encompasses how Chinese audit firms evaluate potential clients, how they structure the audit process and to what extent the audit procedures are different from the international audit practices. It also considers the effects of a wide range of factors on auditors' risk assessment and the stringency of the reporting standards to which they hold clients. These factors include those suggested as important by extant research, as well as unique characteristics of the Chinese setting (e.g., the importance of interpersonal relationships (guanxi) and most listed companies' origins as state-owned-enterprises). The major difficulties encountered by Chinese auditors in the course of an audit also are explored. Structured interviews and questionnaire surveys are used to solicit quantitative and open-ended responses to the above questions from 102 auditors at partner and manager levels of Big 4 and large and medium-sized domestic audit firms.