State Accountancy Regulators' Perceptions of Independence of External Auditors When Performing Internal Audit Activities for Nonpublic Clients

This study explores state accountancy regulators' perceptions of whether external auditors remain independent when also performing internal audit activities for nonpublic entities. The purpose of this study is to provide a more complete understanding of perceptions regarding auditor independence in the nonpublic entity environment. The primary issues are (1) whether performing the external audit and internal auditing services for the same entity affects perceptions of independence, and (2) whether a separation between the CPA firm's internal and external audit personnel significantly affects perceptions of independence when both services are performed. We use a between-subjects design and target state accountancy regulators from each of the 54 U.S. jurisdictions. Findings based on 206 usable responses indicate that state board members do not perceive a significant difference in the independence of a CPA firm performing a nonpublic entity's external audit versus a CPA firm performing that entity's external audit and internal audit, provided that separate personnel are used for the external and internal audit work. Board members do perceive a significant difference in independence when the CPA firm uses the same personnel to perform both the external and internal audit work.

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The Effect of Internal Audit Outsourcing on Financial Analysts' Perceptions of External Auditor Independence

Auditing A Journal of Practice & Theory ◽

10.2308/aud.2001.20.2.115 ◽

2001 ◽

Vol 20 (2) ◽

pp. 115-129 ◽

Cited By ~ 48

Author(s):

Susan L. Swanger ◽

Eugene G. Chewning

Keyword(s):

Phase 1 ◽

Financial Analysts ◽

Internal Audit ◽

Auditor Independence ◽

Internal Auditing ◽

External Audit ◽

Two Phase ◽

Phase Study ◽

External Auditor ◽

Cpa Firm

The practice of outsourcing the internal audit function to the external audit firm has raised fears by many parties such as the SEC of possible independence impairment. The fear stems from the increased economic bond that exists when additional services are provided to an audit client, as well as the long-held view that internal auditing is a management function and, as such, is incompatible with the external audit function. This paper reports the results of a two-phase study of the perceptions of financial analysts regarding external auditor independence when a CPA firm performs both external and internal auditing services. In phase 1, analysts' perceptions of auditor independence are greater when the client employs its own internal audit staff or outsources to a different CPA firm than when the external auditor also performs internal audit functions. Phase 2 results show that analysts' perceptions of auditor independence are higher when the internal audit services are provided by the staff of a different division of the CPA firm compared to a nostaff separation treatment. Perceptions do not differ between full and partial outsourcing treatments, which conflicts with the recent SEC rule limiting the extent of outsourcing arrangements.

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The effects of human resources in internal audit on external audit pricing decision

Corporate Ownership and Control ◽

10.22495/cocv15i4c1p4 ◽

2018 ◽

Vol 15 (4-1) ◽

pp. 165-180

Author(s):

Moon Kyung Cho

Keyword(s):

Small Firms ◽

Internal Audit ◽

Audit Fees ◽

Auditor Independence ◽

Professional Judgment ◽

External Audit ◽

Internal Auditor ◽

Internal Auditors ◽

External Auditors ◽

General Internal

This study presents evidence that external audit fees are negatively and significantly associated with the proportion of general internal auditors. Further, external audit hours are negatively and significantly associated with the proportion of general auditors without affecting external unit audit price. In addition, the results of the data adjusted for firm size suggest that audit fees and audit hours decrease for smaller firms as the proportion of general internal auditor increases. The result implies that both small firms and their external auditors are encouraged to utilize more general internal auditors in performing an external audit. The author finds no evidence that external audit fees are associated with internal auditor expertise or experience. This shows that external auditors are not likely to rely on internal auditors’ professional judgment in performing an external audit due to reduced auditor independence.

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Corporate Governance, Audit Quality, and the Sarbanes-Oxley Act: Evidence from Internal Audit Outsourcing

The Accounting Review ◽

10.2308/accr.2007.82.4.803 ◽

2007 ◽

Vol 82 (4) ◽

pp. 803-835 ◽

Cited By ~ 106

Author(s):

Lawrence J. Abbott ◽

Susan Parker ◽

Gary F. Peters ◽

Dasaratha V. Rama

Keyword(s):

Audit Quality ◽

Internal Audit ◽

Auditor Independence ◽

Audit Committees ◽

Internal Auditing ◽

External Audit ◽

Internal Auditor ◽

Sarbanes Oxley ◽

External Auditor ◽

Audit Activity

This study extends current literature related to nonaudit services by investigating internal audit outsourcing to the external auditor. We posit that certain types of internal audit outsourcing (i.e., those which are nonroutine, and thus tend to be nonrecurring in nature) are unlikely to lead to economic bonding, while offering significant potential for improvements in audit coverage and scope when provided by the external auditor. Alternatively, outsourcing routine internal audit tasks is more likely to lead to economic bonding, as well as potentially threatening internal auditor independence. Our results are consistent with firms with independent, active, and expert audit committees being less likely to outsource routine internal auditing activities to the external auditor. However, the outsourcing of nonroutine internal audit activities such as special projects and EDP consulting are not negatively related to effective audit committees. Additionally, outsourcing of either type of internal audit activity to an outside service provider other than the external auditor is not related to effective audit committees. Collectively, we interpret these findings as supportive of an effective audit committee's ability to monitor the sourcing of the firm's total (i.e., internal and external) audit coverage, while simultaneously exhibiting concern for external auditor independence.

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Disclosure Of Nonaudit Services Fees: Perceptions Of Investors And Accounting Professionals

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v19i4.2187 ◽

2011 ◽

Vol 19 (4) ◽

Author(s):

J. Gregory Jenkins ◽

Kathy Krawczyk

Keyword(s):

Internal Audit ◽

Audit Fees ◽

Auditor Independence ◽

Legal Services ◽

Software Training ◽

Big 5 ◽

Accounting Professionals ◽

Normal Text ◽

Final Rule ◽

Cpa Firm

This study examines investors’ and accounting professionals’ perceptions related to the necessity and form of disclosure of nonaudit service (NAS) fees pursuant to the Security and Exchange Commission’s Final Rule on auditor independence. A between-subjects design was used to examine participants’ opinions as to the need for disclosure of the performance of NAS and the particular form of disclosure that was preferred. The design incorporated four types of NAS (actuarial services, internal audit outsourcing, legal services, and software training), two levels of materiality (40 percent and 3 percent), and three categories of participants (non-Big 5 CPA firm professionals, Big 5 CPA firm professionals, and investors). A larger percentage of investors favored disclosure of NAS fees than either non-Big 5 CPA firm professionals or Big 5 CPA firm professionals. In addition, of those who favored disclosure, investors favored disclosure of the amount of NAS along with the total audit fees, regardless of the amount, while non-Big 5 CPA firm professionals and Big 5 CPA firm professionals both favored disclosure of the amount of NAS alone and only if those services exceeded a specified threshold. The investor results lend support to the SEC’s revised auditor independence rules.

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Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors

Accounting Horizons ◽

10.2308/acch-51309 ◽

2015 ◽

Vol 30 (1) ◽

pp. 143-156 ◽

Cited By ~ 17

Author(s):

Geoffrey D. Bartlett ◽

Joleen Kremin ◽

K. Kelli Saunders ◽

David A. Wood

Keyword(s):

Critical Role ◽

Internal Audit ◽

Job Applicants ◽

Internal Auditing ◽

Internal Auditors ◽

External Auditors ◽

Internal Audit Function ◽

Career Option ◽

Negative Perceptions ◽

Survey Results

SYNOPSIS While the internal audit function (IAF) plays a critical role in organizations, it faces challenges in finding sufficient numbers of high-quality job applicants to fill its ranks. The results of two experiments suggest that practicing external auditors are twice as likely to apply for positions that are labeled as accounting positions rather than either in-house or outsourced internal audit positions. The results also suggest that external auditors have negative perceptions of the profession and work environment of internal auditors—especially in-house internal auditors relative to outsourced internal auditors—and are more likely to recommend that mediocre rather than top students apply to work in internal auditing. We also provide survey results from experienced external auditors about aspects of internal auditing that may be improved to make it a more attractive career option. Taken together, the results suggest internal auditing faces significant hiring challenges, but also offer ways to mitigate these challenges.

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Characteristics of the internal audit and external audit hours: evidence from S. Korea

Managerial Auditing Journal ◽

10.1108/maj-05-2015-1193 ◽

2016 ◽

Vol 31 (6/7) ◽

pp. 629-654 ◽

Cited By ~ 9

Author(s):

Ho-Young Lee ◽

Hyun-Young Park

Keyword(s):

Internal Audit ◽

Financial Statement ◽

External Audit ◽

Content Type ◽

Internal Auditors ◽

External Auditors ◽

Audit Efficiency ◽

Financial Statement Audit ◽

Legal Expertise ◽

Practical Implications

Purpose Using 5,055 sample firm-years in Korea between 2009 and 2013, this paper aims to examine the association between the characteristics of the internal audit and the number of external audit hours as a proxy for audit efficiency. Design/methodology/approach This study is motivated by the International Standard on Auditing No. 610: “Using the work of internal auditors”. This auditing standard guides external auditors in using the work of internal auditors to obtain audit evidence and consult internal auditors for direct assistance. The authors expect that external audit efficiency will increase when the work of competent internal auditors is used. Findings The authors find that the number of internal auditors relative to the number of employees is associated with the number of external audit hours. This result suggests that the greater the availability of internal auditors, the greater their contribution will be to the financial statement audit and the more efficient the audit. The authors find evidence that external auditors use the work of internal auditors with accounting and legal expertise to improve audit efficiency. They also find some evidence that the work of internal auditors with greater availability is more effective during initial external audit engagements. Originality/value This study adds to the extant literature on the contributions of internal auditors to external audits by using archival data and by measuring audit effort using a large database of audit hours. In addition, our findings have practical implications for firms and external auditors who are evaluating the role and value of using the work of internal auditors. The authors also believe that the findings will be of interest to regulators or auditing standards boards.

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Internal Audit Assistance and External Audit Timeliness

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-10296 ◽

2012 ◽

Vol 31 (4) ◽

pp. 3-20 ◽

Cited By ~ 61

Author(s):

Lawrence J. Abbott ◽

Susan Parker ◽

Gary F. Peters

Keyword(s):

Internal Control ◽

Audit Quality ◽

Resource Constraints ◽

Cost Savings ◽

Internal Audit ◽

External Audit ◽

External Auditors ◽

Audit Fee ◽

External Auditor ◽

Regulatory Filing

SUMMARY Professional standards guide external auditors to consider the effect of the client's internal audit work and opportunities to utilize the direct assistance of the internal audit function when planning and conducting audits. We examine the effect of internal audit assistance on external audit timeliness via the extent of external audit delay. We hypothesize and find that internal audit assistance is negatively associated with external audit delay. We also document moderating relationships between internal audit assistance and other internal audit environment characteristics, such as the extent of internal control reliance, coordination with the external auditor, and the investment in internal audit quality. Overall, our findings have implications for firms and external auditors who are evaluating the role and use of internal audit functions. Namely, our findings suggest that internal audit assistance may not only result in audit cost savings, but also in greater audit efficiencies. These findings are particularly germane given the challenges faced by external auditors in the form of greater audit requirements, shorter regulatory filing deadlines, resource constraints, and audit fee pressures.

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The Influence of Internal Audit on External Audit

Organizational Auditing and Assurance in the Digital Age - Advances in Finance, Accounting, and Economics ◽

10.4018/978-1-5225-7356-2.ch001 ◽

2019 ◽

pp. 1-25

Author(s):

Ana Silva ◽

Helena Inácio ◽

Elisabete Vieira

Keyword(s):

Significant Influence ◽

Audit Quality ◽

Internal Audit ◽

Audit Fees ◽

External Audit ◽

Internal Auditors ◽

External Auditors ◽

The Relationship

The main purpose of this chapter is to analyze the relationship between internal and external audit and its effect on external audit fees, through a questionnaire addressed to the external auditors of Portugal and Spain. It obtained 131 answers for Portugal and 149 answers for Spain. According to the results, the competencies and characteristics of internal auditors, as well as the type of activities performed by them and the communication between internal and external auditors, have a significant influence on the decision of using the internal audit work. However, the Portuguese external auditors do not consider this influence to be so significant that it affects the number of substantive tests, the quality of external audit, and external audit fees. However, for Spanish auditors using internal audits decreases the planned hours, the number of control and substantive tests, and improves external audit quality, but does not reflect in the fees to be charged to the client.

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The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor's Reliance Decision

The Accounting Review ◽

10.2308/accr-10136 ◽

2011 ◽

Vol 86 (6) ◽

pp. 2131-2154 ◽

Cited By ~ 100

Author(s):

William F. Messier ◽

J. Kenneth Reynolds ◽

Chad A. Simon ◽

David A. Wood

Keyword(s):

Internal Audit ◽

Management Training ◽

Audit Fees ◽

Data Availability ◽

External Audit ◽

Internal Auditors ◽

External Auditors ◽

Internal Audit Function ◽

Management Positions ◽

The Many

ABSTRACT This study examines how using the internal audit function (IAF) as a management training ground (MTG) affects external audit fees and the external auditors' perceptions of the IAF. Over half of all companies that have an IAF specifically hire internal auditors with the purpose of rotating them into management positions (or cycle current employees into the IAF for a short stint before promoting them into management positions). Using archival data, we find that external auditors charge higher fees to companies that use the IAF as a MTG. Using an experiment, we provide evidence as to why fees are higher. Specifically, we find that external auditors perceive internal auditors employed in an IAF used as a MTG to be less objective but not less competent than internal auditors employed in an IAF not used as a MTG. These results have important implications for the many companies that use their IAF as a MTG. Data Availability: Contact the authors. Data provided by the Institute of Internal Auditors Research Foundation are subject to restrictions.

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The Effects of Interaction between Internal Auditor and Audit Committee on Fraud Detection in Malaysia

International Journal of Engineering & Technology ◽

10.14419/ijet.v7i4.38.27820 ◽

2018 ◽

Vol 7 (4.38) ◽

pp. 1338

Author(s):

Sunita Lylia Hamdan ◽

Nahariah Jaffar ◽

Ruzanna Ab Razak

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Audit Committee ◽

Specific Interaction ◽

Fraud Detection ◽

Internal Audit ◽

Internal Auditing ◽

Internal Auditor ◽

Internal Auditors ◽

External Auditors

This study aims to examine the effect of interaction between internal auditor and audit committee on fraud detection in Malaysia. Specific interaction is firstly; audit committee approving the appointment of chief audit executive, the evaluation of chief audit executive, the dismissal of chief audit executive, the internal audit budget and the internal audit plan or program. Secondly, audit committee’s involvement in reviewing internal auditor’s work specifically; providing input for the internal audit plan, reviewing the results of internal auditing related to financial reporting, reviewing the results of internal auditing related to internal control, reviewing the results of internal auditing related to compliance with laws and regulation, reviewing the internal audit involvement in management responses to internal audit suggestions, reviewing the difficulties or scope restrictions encountered by internal auditors and reviewing the coordination between internal auditors and external auditors. Survey questionnaires were mailed to internal auditors attached to 782 companies listed on Bursa Malaysia’s main market. The results of this study suggest that involvement of audit committee in approving chief audit executives’ matters is insignificant on internal auditors’ contribution to fraud detection. However, audit committee’s involvement in reviewing internal auditors’ work significantly influence the internal auditors’ contribution in fraud detection.

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