Factors influencing stakeholder’s judgment on internal audit function’s effectiveness and reliance

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Khurram Ashfaq ◽  
Shafique Ur Rehman ◽  
Moeez Ul Haq ◽  
Muhammad Usman
Keyword(s):  
Internal Control ◽  
Mixed Method ◽  
Work Performance ◽  
Qualitative Data ◽  
Internal Audit ◽  
Internal Controls ◽  
Significant Relation ◽  
Internal Auditor ◽  
Content Type ◽  
External Auditor

Purpose This study aims to explore the effectiveness and reliability of the performance of internal auditor by the stakeholders for their decision making. The absence of rules and regulations generates the debate that the non-standard reporting of the assessment of the internal controls system’s assessment by internal auditor and reliance by the external auditor. Design/methodology/approach The study used the mixed-method (triangulation) for the analysis quantitative data was used for regression with Smart PLS 3.2.8, and the qualitative data was used to prove and strengthen the results. The data is collected for five IVs (Objectivity of IAF, Work Performance, Competence, Internal Control System’s Assessment and Sourcing of IAF) and their impact on two DVs (Effectiveness and Reliance). This study used five areas as the target audience (Internal Auditor, External Auditor, Professional bodies, Shareholders, SECP and SBP). A total of 150 respondents were approached and received a valid response of 98 respondents. Findings The study explores the positive relationship between Objectivity of IAF, Work Performance, Competence, Sourcing of IAF on Effectiveness and Reliance. Internal Control System’s Assessment having significant relation with Effectiveness and non-significant with reliance because the absence of rules makes it unreliable for stakeholders. Originality/value The study found that the system for reporting the internal control needs rules and regulations advancement on the immediate basis for the betterment and safeguard of stakeholders to avoid the events like WorldCom and ENRON.

The Effect of Frequency and Automation of Internal Control Testing on External Auditor Reliance on the Internal Audit Function

2015 ◽  
Vol 30 (1) ◽  
pp. 21-40 ◽  
Author(s):  
Maia J. Farkas ◽  
Rina M. Hirsch
Keyword(s):  
Internal Control ◽  
Work Performance ◽  
Internal Audit ◽  
Internal Controls ◽  
External Auditors ◽  
Internal Audit Function ◽  
Remediation Strategies ◽  
Low Degree ◽  
External Auditor ◽  
Manual Testing

ABSTRACT Failure of the internal audit function (IAF) to detect a significant deficiency in internal controls is a significant shortcoming in the IAF's work performance. This shortcoming in the IAF's work performance reduces external auditors' willingness to rely on the IAF's work. Using a two-stage experiment, we investigate how the implementation of three different internal control testing remediation strategies (akin to CCM, ACL, and periodic manual testing), which vary in their automation and frequency, affect external auditors' perceptions of IAF strength and planned reliance on the IAF's work. We find that automated remediation strategies fully remediate external auditors' perceptions of poor IAF work performance and low degree of reliance on the IAF, whereas manual remediation strategies result in only partial remediation. Counterintuitively, less frequent remediation strategies are more effective at improving perceptions of poor IAF work performance and low levels of reliance on the IAF, relative to continuous remediation strategies.

Why did management and auditors fail to identify ineffective internal controls in their initial SOX 404 reviews?

2008 ◽  
Vol 7 (4) ◽  
pp. 338-354 ◽  
Author(s):  
Kam C. Chan ◽  
Picheng Lee ◽  
Gim S. Seow
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Controls ◽  
Control Group ◽  
Corporate Boards ◽  
Content Type ◽  
Factors Affecting ◽  
Factors Associated ◽  
Client Relationship

PurposeThe purpose of this paper is to investigate the rationale for the failure of management and auditors to identify material internal control weaknesses (ICWs) in their initial Sarbanes‐Oxley Act of 2002 (SOX) 404 reviews, resulting in subsequent restatement of their opinions.Design/methodology/approachThe paper focuses on the factors associated with the failure of management and auditor to identify material internal controls weaknesses in their initial SOX 404 reports. Logistic regression is run on a sample of 56 firms that reported material internal controls weaknesses in their amended internal control reports and a control group of 344 firms that reported material internal controls weaknesses (i.e. ineffective internal controls) in their initial internal control reports for 2004.FindingsThe results show that firm size, the use of a Big 4 auditor, the ratio of non‐audit to total fees, and the need for accounting restatements are positively associated with the probability to file an amended internal control report. The number of ICWs and the number of audit committee meetings are negatively associated with the probability to file an amended internal control report.Practical implicationsThe paper's findings suggest that regulators and corporate boards should consider providing more guidelines on audit committee practices in addition to the audit committee structure. For example, more guidance by the board is needed to ensure that the audit committee is active in overseeing the company's auditor–client relationship and its internal audit function.Originality/valueEmpirical findings on factors associated with the failure of management and auditor to identify material ICWs in their SOX 404 review can contribute to an understanding of factors affecting the efficiency of the SOX 404 review by attributing such failure to either inherent factors such as operational complexity and industry membership or to managerial choices in auditor‐client relationship and corporate governance issues. An understanding of these factors can help companies and the Public Company Accounting Oversight Board and the Securities and Exchange Commission in their efforts to improve the effectiveness and the efficiency of the current SOX 404 process.

scholarly journals The Reliance of External Auditors on Internal Audit's Use of Continuous Audit

2014 ◽  
Vol 29 (1) ◽  
pp. 95-114 ◽  
Author(s):  
Irina Malaescu ◽  
Steve G. Sutton
Keyword(s):  
Internal Control ◽  
Internal Audit ◽  
Economic Consequences ◽  
Automated Control ◽  
Material Weakness ◽  
Internal Auditor ◽  
External Auditors ◽  
Prior Literature ◽  
External Auditor ◽  
The Impact

ABSTRACT As a response to the increased demand for timely and ongoing assurance over the effectiveness of risk management and control systems, companies are moving toward a more automated control environment through the implementation of continuous audit modules. The purpose of this study is to evaluate external auditors' reliance on internal audit's work when advanced audit techniques are introduced by the internal auditor and the impact this reliance has on budgeted audit hours. Prior literature suggests that internal control deficiencies also have an impact on external auditor reliance and the audit budget. The reliance decision of an external auditor has important economic consequences and implications for efficiency and effectiveness of the overall audit. In recent years, the PCAOB has encouraged greater such reliance to improve audit efficiency. An experiment is conducted with 87 experienced external auditors to investigate the theorized effects. Using a 2 × 2 between-subjects factorial design, the frequency of the internal audit (traditional versus continuous audit) and prior year material weakness (absent versus present) are manipulated. Consistent with predictions, we find that auditors are willing to rely more on internal audit work in a continuous audit environment than in a traditional environment, and this effect is magnified when the prior year audit report on the effectiveness of internal controls indicates that controls are working properly. The presence of a material weakness, however, negatively impacts judgments on the budget for the valuation of a complex account. In addition, both material weakness and continuous audit have an impact on the overall audit budget, which is reduced only when the company has no prior year material weakness and a functioning continuous audit module is put in place. The results show that auditors increase budgeted hours for the engagement at a higher rate when the client uses traditional internal audit procedures.

Internal audit quality: perceptions of Tunisian internal auditors an explanatory research

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Aida Krichene ◽  
Emna Baklouti
Keyword(s):  
Audit Quality ◽  
Internal Audit ◽  
Access To Information ◽  
Quality Model ◽  
Internal Auditor ◽  
Content Type ◽  
Internal Auditors ◽  
External Auditor ◽  
The Relationship

Purpose The purpose of this study is to understand how internal auditors perceive the internal audit quality and to highlight the different profiles of internal auditors based on their perception of internal audit quality determinants. Design/methodology/approach The authors’ methodological approach is based on the submission of a self-administered questionnaire. The final sample consists of 104 internal auditors. The first stage of the study is in the lead of a certified public accountants (CPA), which highlights seven factors of the internal audit quality. The second step is a confirmatory factor analysis (CFA) that allowed the authors to validate the model proposed by the CPA. Finally, the authors carry out a typological analysis of the auditors according to their way of perceiving the factors extracted by the CPA. Findings The authors’ model, validated by the CFA, shows that the knowledge of the internal auditor, the independence of reporting, compliance with professional standards of internal audit, the relationship with the external auditor, the personal relationship of the internal auditor, the access to information and the field of intervention of the internal auditor have a positive association with the internal audit quality but with a different degree of significance. For example, the field of intervention of the internal auditor and the access to information explain better the internal audit quality. However, the knowledge of the internal auditor and the relationship with the external auditor are not significant to explain the internal audit quality. From the hierarchical cluster analysis, four groups of internal auditors emerged: the autonomous, the perfectionists, the rigorous ones and the objectives. Originality/value In offering these findings, the paper contributes to the existing internal audit literature by introducing evidence from an emerging country, namely, Tunisia, of the internal audit quality model. In addition, the authors proposed a new measure to the internal audit quality model which is the use of the work of the internal auditor by the external auditor. This study is also interesting to managers and professional internal audit organizations in recognizing the characteristics of the quality of the internal audit and advance reflections on the effectiveness of internal audit practices. The authors’ study proposes a typology of certified internal auditors through their perceptions of the quality of the internal audit while taking into account the specificities of the Tunisian audit market. This provides insights to managers and audit committees on the measures necessary to ensure the relevance of the internal audit work within their companies.

Effects of reporting relationship and type of internal control deficiency on internal auditors’ internal control evaluations

2018 ◽  
Vol 33 (3) ◽  
pp. 318-335 ◽  
Author(s):  
Audrey Gramling ◽  
Arnold Schneider
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Controls ◽  
Material Weakness ◽  
Content Type ◽  
Internal Auditors ◽  
Tone At The Top ◽  
Internal Audit Function ◽  
Professional Guidance

Purpose This paper aims to explore whether an internal auditor’s evaluation of internal control deficiencies are influenced by the party with primary influence over the internal audit function and by the type of internal control deficiency. Design/methodology/approach A behavioral experiment is conducted with internal auditors as participants in a 2 × 2 between-subjects factorial design. Findings Results indicate that internal auditors are less likely to evaluate a pervasive control deficiency related to “tone at the top” as a material weakness than a process-specific control deficiency. Furthermore, internal auditors are somewhat less likely to evaluate a process-specific internal control deficiency as a material weakness when management has primary influence over the internal audit function than when the audit committee has primary influence. It is also found that the best practice of internal audit oversight (i.e., primary oversight of internal auditors by the audit committee) may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal control. Research limitations/implications Limitations of this research include lack of economic consequences (e.g. future pay and job loss) associated with the internal control decisions made by the participants; less concise information provided to the participants than would generally be available to them; and lack of generalizability of the findings beyond the specific company setting and internal control scenario portrayed in the case materials. Practical implications Not evaluating a pervasive control deficiency related to “tone at the top” as a material weakness seems to not fully align with relevant professional guidance and can possibly result in inaccurate internal information about the quality of internal controls. Furthermore, having an internal auditor’s evaluation of a process-specific internal control deficiency influenced by the party with primary influence over the internal audit function would not appear to align with relevant professional guidance. Finally, primary oversight by the audit committee of the internal auditors may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal controls and, thus, possible communication of inaccurate internal control information. Originality/value This study is the first to address whether the party with primary influence over the internal audit function influences an internal auditor’s evaluation of internal control deficiencies.

A summary of the global Common Body of Knowledge 2006 (CBOK) study in internal auditing

2009 ◽  
Vol 24 (9) ◽  
pp. 813-834 ◽  
Author(s):  
Priscilla Burnaby ◽  
Susan Hass
Keyword(s):  
Internal Control ◽  
World Wide ◽  
Value Added ◽  
Internal Audit ◽  
Internal Auditing ◽  
Internal Auditor ◽  
Ongoing Research ◽  
Content Type ◽  
Internal Auditors ◽  
Body Of Knowledge

PurposeThe 2006 global Common Body of Knowledge (CBOK) study is part of an ongoing research program designed to document how internal auditing is practiced. The purpose of this paper is to summarize responses to three global surveys of internal auditors.Design/methodology/approachBased on literature reviews and a pre‐scope questionnaire, the researchers develop three questionnaires that are answered by internal auditors world wide. Topics in the questionnaires, which are translated from English into 16 languages, include the attributes of an effective internal audit activity (IAA); compliance with The Institute of Internal Auditor (IIA) Standards; internal auditor skills, competencies, and knowledge; internal audit tools and techniques; and emerging roles of the IAA.FindingsThe profession of internal auditing is a rich resource for organizations as the IAA monitors the adequacy and effectiveness of management's internal control framework and contributes to the integrity of corporate governance; risk assessment; and financial, operating, and IT systems.Practical implicationsThe participation of IIA members from 91 countries and 9,366 usable responses provides information about the evolving role of internal auditing as a value‐added activity that helps an organization manage its risks and take advantage of opportunities. The CBOK 2006 database can be used to improve the understanding of the current state of internal auditing practices; anticipate the use of new skills, tools, and technologies; and promote the enhancement of standardization and performance of internal auditing world wide.Originality/valueThis paper summarizes information in the most comprehensive database ever to capture a current view of the global state of the internal audit profession.

External Auditors' Involvement in the Internal Audit Function's Work Plan and Subsequent Reliance Before and After a Negative Audit Discovery

2016 ◽  
Vol 35 (4) ◽  
pp. 159-173 ◽  
Author(s):  
Byron J. Pike ◽  
Lawrence Chui ◽  
Kasey A. Martin ◽  
Renee M. Olvera
Keyword(s):  
Internal Control ◽  
Internal Audit ◽  
Internal Controls ◽  
Professional Standards ◽  
Data Availability ◽  
Internal Auditors ◽  
External Auditors ◽  
Internal Audit Function ◽  
Anchoring Bias ◽  
Before And After

SUMMARY To reduce redundancies and increase efficiency in the evaluation of internal controls (PCAOB 2007, 402–403), professional standards encourage coordination between external auditors and their clients' internal audit function (IAF). Recent surveys of internal auditors find that a component of this coordination is external auditors' involvement in developing the IAF's audit plans. Nevertheless, it is not known how such involvement affects external auditors' reliance on the internal control test work of the IAF, either before or after a negative audit discovery. Based on an experiment with 107 experienced auditors, we find that external auditors involved in the development of the IAF's audit plan perceive the IAF as more objective and that both objectivity and involvement contribute to these auditors' placing more reliance on the IAF as compared to external auditors with no involvement. This initial reliance results in the involved auditors' proposing reductions to the audit budget and re-performing less of the IAF's work. Consistent with an anchoring bias, we find that involvement leads to external auditors' continuing to place greater reliance on the IAF's work, even after they become aware of a negative audit discovery that should not have occurred had the client's controls been effective. Data Availability: Data are available from the authors on request.

Organizational identity, professional identity salience and internal auditors’ assessments of the severity of internal control concerns

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ian Burt ◽  
Theresa Libby
Keyword(s):  
Professional Identity ◽  
Internal Control ◽  
Organizational Identity ◽  
Internal Audit ◽  
Identity Salience ◽  
Content Type ◽  
Internal Auditors ◽  
Internal Control Weaknesses ◽  
The Impact ◽  
Benefits And Costs

Purpose This paper aims to examine whether increasing the salience of the internal auditor’s professional identity, defined by the expectations of their professional group, increases internal auditors’ judgments of the severity of internal control concerns when their organizational identity is high. Design/methodology/approach This paper tests the hypothesis using a laboratory experiment with internal auditors as participants. Findings The results support the hypothesis that professional identity salience moderates the relation between organizational identity and the assessed severity of identified internal control weaknesses. Increasing the salience of professional identity results in a more severe assessment of identified internal control weaknesses when organizational identity is high than when it is low. Originality/value Prior research in the lab and in the field provides mixed results about the impact of organizational identity on internal auditors’ judgments of the severity of identified internal control concerns. This paper contributes to the discussion on this issue. In addition, the results have implications for the debate about the benefits and costs of in-house versus out-sourced internal audit functions.

scholarly journals ANALISIS EFEKTIVITAS PENGENDALIAN INTERN PERSEDIAAN BARANG DAGANGAN PADA PT. KIMIA FARMA APOTEK 74 MANADO

2017 ◽  
Vol 12 (2) ◽  
Author(s):  
Sitti Amanah Tontoli ◽  
Inggriani Elim ◽  
Victorina Z. Tirayoh
Keyword(s):  
Inventory Management ◽  
Internal Control ◽  
Good Control ◽  
Internal Controls ◽  
Retail Sector ◽  
Internal Auditor ◽  
Important Resource ◽  
Trading Company ◽  
Pharmacy Management ◽  
And Storage

At a trading company, inventory is an important resource for the survival of the company because in addition to an asset whose value is greater than other current assets is also due to the main source of revenue comes from the sale of inventory. Therefore, effective internal controls are needed to manage the inventory to avoid errors and irregularities. The company is engaged in the pharmaceutical retail sector to manage existing company pharmacies in an effort to increase sales contribution, so that management of inventory management becomes important. The purpose of this study is to determine whether the internal control of merchandise inventory has been effective. The object of this research is PT. Kimia Farma 74 Manado. This research uses descriptive  qualitative The results showed that the internal control of inventory at PT. Kimia Farma Apotek has been effective in applying pharmacy management management, which can be seen in the implementation of the elements of adequate internal control, good control of the inventory. However, there are still weaknesses in the form of duplicate duties on the function of receipt and storage of merchandise inventory and cash, as well as internal auditor functions captured by the accounting and finance.

scholarly journals PERANAN AUDIT INTERNAL DALAM MENUNJANG EFEKTIVITAS PENGENDALIAN INTERNAL ATAS BIAYA PRODUKSI AIR MINUM DALAM KEMASAN 240ML PADA PT. AQUA GOLDEN MISSISSIPPI TBK.

2016 ◽  
Vol 2 (1) ◽  
pp. 46-65
Author(s):  
Arief Tri Hardiyanto
Keyword(s):  
Internal Control ◽  
Production Cost ◽  
Rank Correlation ◽  
Internal Audit ◽  
Internal Controls ◽  
Bottled Water ◽  
Production Costs ◽  
Control Cost ◽  
Strongly Agree

This study shows how the role of internal audit is adequate can play a role in supporting the effectiveness of internal controls over the production cost of bottled water 240ml at PT. Aqua Golden Mississippi Tbk. (Branch Mekarsari). The method used in this research is descriptive statistic by using Spearman Rank correlation coefficient with n = 15 and a significant level of 0.05. Based on the research that has been described, it can be concluded that the respondents in the role of internal audit is adequately provide answers strongly agree and agree amounting to 96.1% of respondents regarding the effectiveness of internal control over production costs by 97.02% answered strongly agree and agree, The role of internal audit in supporting the effectiveness of internal controls over the production cost of bottled water 240ml including a very strong, which is 89.96%. While the remaining 10.04% influenced by other factors not included in the research conducted by the author. Thus it can be said that adequate internal audit was instrumental in supporting the effectiveness of internal controls over the production cost of bottled water 240ml at PT. Aqua Golden Mississippi Tbk. (Branch Mekarsari).Keywords: Internal Audit, Internal Control, Cost of Production

Sign in / Sign up

Export Citation Format

Share Document