An Entropy Testing Model Research on the Quality of Internal Control and Accounting Conservatism: Empirical Evidence from the Financial Companies of China from 2007 to 2011

Table 3

Indicator system for the index of the internal control quality².

Variables	Variable definitions
Internal control deficiencies	“not exist” = 1, “common defects” = 3, “material weaknesses (for example, punished by the authorities etc.)” = 5;
Internal control self-assessment report	“exist” = 1, “not exist” = 5, if the annual report says that the Report has been disclosed and yet in fact the opposite is true, then it shall be regarded as no disclosure;
Internal control assurance reports	“exist” = 1, “not exist” = 5, if the annual report says that the Report has been disclosed and yet in fact the opposite is true, then it shall be regarded as no disclosure;
Types of the assurance reports	“reasonable assurance” = 1, “limited assurance” = 3, “low assurance or no assurance” = 5;
Auditor	“the internal control assurance report is audited by one of the big four accounting firms” = 1, “the internal control assurance report is not audited by one of the big four accounting firms, but the financial report is” = 3, “none of the reports are audited by the big four accounting firms” = 5;
Two-position in one person	“not exist” = 1, “vice chairman and general manager are the same people” = 3, “chairman and general manager are the same people” = 5;
The level of detail for internal control information	It is divided into five levels from 1 to 5; the smaller the level is, the more detailed it would be;
The proportion of independent directors	“>=0.4” = 1, “>=0.3 and <0.4” = 3, “<0.3” = 5.

2(a) The types of internal control assurance report: Given the extent that the internal control assurance report guarantees, there’s a big difference in assurance targets, evidence collection, requirements of the assurance reports, responsibility of accountingfirms and so on Liu [21]. This article specifies three situations: when firms provide internal control audit reports, it is seen as reasonable assurance; providing other types of internal control assurance reports is seen as limited assurance, and providing no internal control assurance reports or only the examination report of internal control from its sponsors is seen as no or low guarantee. (b) The levels of detail for internal control information: According to Yang and Wang [22], we divide the level of detail for internal control information into five levels.