Internal capital market allocation efficiency depends on the effectiveness of internal capital allocation decisions． Based on the standard real options model，we construct an internal capital allocation decisions model and emphasize that internal auditing plays an important role in internal capital allocation decisions． Our results suggest that CEO compensation incentives can be effective in ameliorating inefficiencies in internal cap-ital allocation decisions． However，we cannot help but achieving suboptimal result which is a trade-off between rent extraction and allocation efficiency． Thus，it is necessary to embed auditing into compensation in-centives to bind them． We find that managerial auditing is better than financial auditing in improving efficiency． Finally，we verify the results of our model with an example of Nanjing P Group．