A Multistage Approach to External Auditors' Evaluation of the Internal Audit Function

2002 ◽  
Vol 21 (1) ◽  
pp. 95-121 ◽  
Author(s):  
Ganesh Krishnamoorthy
Keyword(s):  
Work Performance ◽  
Internal Audit ◽  
Bayesian Probability ◽  
Future Research ◽  
Major Conclusion ◽  
Internal Auditors ◽  
External Auditors ◽  
Internal Audit Function ◽  
Auditing Standards ◽  
Inference Theory

External auditors are continually facing intense pressure to be more efficient in conducting audits without compromising quality and effectiveness. Optimal utilization of internal audit work can improve both the efficiency and the effectiveness of external audits and can enhance the value of internal auditors to the client organization. The objective of this study is to understand how the three factors (objectivity, work performance, and competence of the internal auditors) identified by auditing standards and by prior research interact in determining the strength of the internal audit function. Most prior studies have attempted to understand external auditors' rank ordering of the importance of the three factors, without an explicit attempt to model the interactions among the factors. The results from these studies are mixed and inconclusive. Hence, prior studies have not produced a consensus about how external auditors seem to weight and combine these factors in order to make assessments relating to the strength of the internal audit function. This study employs analytical methods based on Bayesian probability to model external auditors' evaluation of the internal audit function. Specifically, models based on multistage (cascaded) inference theory are developed and analyzed using numerical sensitivity analysis. The modeling contribution is significant in the sense that it is the only study that provides a theoretical model for the decision process. Results reveal that the importance of the three factors varies with the type of evidence (convergent or conflicting) observed and is contingent on the interrelationships among the three factors. A major conclusion of this study is that in the Bayesian context, it is futile to attempt a ranking of the factors since no single factor will dominate under all conditions. The study also provides avenues for future research and for improving the guidance provided by professional auditing standards that relate to the evaluation of internal audit work.

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.

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.

Understanding the internal audit function in a digitalised business environment

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nathanaël Betti ◽  
Gerrit Sarens
Keyword(s):  
Data Analytics ◽  
New Technologies ◽  
Internal Audit ◽  
Business Environment ◽  
Future Research ◽  
The European Union ◽  
Content Type ◽  
Internal Auditors ◽  
Internal Audit Function ◽  
The Impact

Purpose This paper aims to gain an in-depth understanding of how the internal audit function evolves in an increasingly digitalised business environment. Design/methodology/approach This paper is based on 29 semi-structured interviews with members of management committees and internal auditors based in Belgium. Findings The analysis reveals that a digitalised business environment affects the internal audit function in three respects. First, it impacts its scope. The agility of the internal audit planning and the required digital knowledge are expected to increase and information technology (IT) risks gain importance, especially cybersecurity threats. Second, the demand for consulting activities performed by internal auditors is higher and third, digitalisation modifies the working practices of internal auditors in their day-to-day tasks. New technologies such as data analytics tools are being implemented progressively in internal audit departments and digital skills are considered a critical asset. Research limitations/implications This research was conducted in the European Union and gathers opinions of members of management committees and internal auditors. Future research could focus on other internal auditing stakeholders in other legal contexts. Practical implications The internal audit function needs to integrate IT and data analytics skills. In addition, the internal audit function should develop consulting activities to help organisations deal with the digitalisation of the business environment. Originality/value The impact of digitalisation on the internal audit function and its effect on internal audit practices is an underexplored area.

Internal Auditing in India and China: Some Empirical Evidence and Issues for Research

2018 ◽  
Vol 34 (4) ◽  
pp. 511-523 ◽  
Author(s):  
R. Narayanaswamy ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Empirical Evidence ◽  
Emerging Economies ◽  
Internal Audit ◽  
The United States ◽  
Future Research ◽  
Internal Auditing ◽  
Internal Auditors ◽  
Internal Audit Function ◽  
India And China

Internal auditing is an important element in the corporate governance framework. Yet, research related to internal auditing, particularly in emerging economies like India and China, is sparse. We use data from responses provided by chief audit executives to provide empirical evidence about the extent of support for internal auditing and the determinants of such support in India and China, and compare the data with those from the United States. We find that such support is negatively related to pressure on internal auditors to suppress or alter their findings. We also provide descriptive evidence about the work and staffing of the internal audit function. We discuss the role of internal auditing in India and identify some possible avenues for future research.

scholarly journals An Examination Of Underreporting Of Time And Premature Signoffs By Internal Auditors

2010 ◽  
Vol 14 (4) ◽  
Author(s):  
Qianhua (Q) Ling ◽  
Michael D. Akers
Keyword(s):  
Internal Audit ◽  
Internal Controls ◽  
Professional Skepticism ◽  
Internal Auditors ◽  
External Auditors ◽  
Considerable Research ◽  
Internal Audit Function ◽  
Sarbanes Oxley ◽  
Audit Team ◽  
The Impact

The passage of the Sarbanes-Oxley Act of 2002 (SOX) heightened the importance of internal controls and accordingly, a key control - the internal audit function.  Consequently, management and external auditors have both increased their reliance on internal auditors’ work.  While there has been considerable research regarding the impact of the underreporting of time and premature sign-offs on the external audit, there has only been one study that has examined the impact of these two items on the internal auditors’ work.  Such research is dated (1994) and prior to the passage of SOX.  We surveyed members of the Institute of Internal Auditors (IIA) in the Midwest to examine their behavior and perceptions regarding these two items.  The respondents in our study believe the underreporting of time is unethical and is supported by their reporting of all time worked, even if such time exceeded the budget.  Our findings also show that the respondents feel premature sign-offs are unethical and result primarily from lack of professional skepticism and inadequate training.  Increasing training in audit areas and improving communications within the audit team are possible solutions to reduce premature sign-offs.  Premature sign-offs are more likely to occur in operational audits and to a lesser degree in financial audits and compliance audits. 

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

2015 ◽  
Vol 30 (1) ◽  
pp. 143-156 ◽  
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.

Attributes of the internal audit function and effectiveness of internal audit services: evidence from local government authorities in Tanzania

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Athuman Kalokola Mahyoro ◽  
Pendo Shukrani Kasoga
Keyword(s):  
Local Government ◽  
Audit Quality ◽  
Internal Audit ◽  
Principal Component ◽  
Positive Influence ◽  
Audit Committees ◽  
Future Research ◽  
Content Type ◽  
Internal Auditors ◽  
Internal Audit Function

Purpose The purpose of this study is to examine how the level of attributes of the internal audit function relates to the effectiveness of internal audit services in local government authorities (LGAs) in Tanzania. Design/methodology/approach Data have been collected through a survey whereby 510 respondents from LGAs in Tanzania through their Heads of Internal Audit Functions, Internal Auditors and Chairpersons of Audit Committees respond to the questionnaire. The data were subjected to principal component analysis and exploratory factor analysis to reduce the set of items and to provide continuous scores for use in multiple regression analyses. Findings The findings reveal that audit quality; organization setting and auditee attributes have a significant positive influence on the effectiveness of internal audit services in LGAs in Tanzania. Research limitations/implications The study covered only LGAs in Tanzania. Future research in this field should address the gaps identified in the study. Practical implications This paper highlights areas that need management attention on the improvement of the effectiveness of internal audit units. Originality/value This paper contributes to the literature of both internal auditing and management studies by linking the level of attributes of internal audit function which are audit quality, organization setting, auditee attributes and effectiveness of internal audit services in Tanzania.

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

2011 ◽  
Vol 86 (6) ◽  
pp. 2131-2154 ◽  
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.

Interaction between internal and external auditors – insights from a developing country

2019 ◽  
Vol 27 (6) ◽  
pp. 840-861
Author(s):  
Grace Mubako ◽  
Susan Charowedza Muzorewa
Keyword(s):  
Developing Country ◽  
Online Survey ◽  
Internal Audit ◽  
Future Research ◽  
Content Type ◽  
Internal Auditors ◽  
External Auditors ◽  
The Relationship ◽  
E Mail ◽  
African Setting

Purpose The purpose of this study is to examine the nature and extent of interaction and the relationship between internal auditors (IAs) and external auditors (EAs) from the perspective of the IAs in a developing country, Zimbabwe. Design/methodology/approach This study was carried out by soliciting the opinions of chief audit executives (CAEs) in Zimbabwe through an online survey that was distributed via e-mail. Findings The study finds that the interaction between the IAs and EAs is limited and that EAs may not be making full use of the internal audit function (IAF). Findings also suggest that the relationship between the auditors is, in some instances, strained and that the actions of management do not always facilitate the fostering of a good, productive relationship between the auditors. Originality/value Results of this study contribute to the understanding of the nature and extent of interaction between the IAF and EAs in an African setting. The study also solicits qualitative data about the relationship between IAs and EAs where previous research has largely focused on objective measures, failing to take into account factors such as attitudes and biases, which can affect this relationship. Finally, the results of this study bring to light important, previously under-explored issues, which provide opportunities for future research.

Internal auditors’ perceptions of the function’s ability to investigate fraud

2019 ◽  
Vol 20 (2) ◽  
pp. 134-153 ◽  
Author(s):  
Sourour Hazami-Ammar
Keyword(s):  
Internal Audit ◽  
Future Research ◽  
Financial Fraud ◽  
Internal Auditing ◽  
Content Type ◽  
Organizational Variables ◽  
Internal Auditors ◽  
Fraud Risk ◽  
Internal Audit Function ◽  
Practical Implications

Purpose The purpose of this paper is to examine the relation between internal audit function (IAF) characteristics and organizational variables and IAF’s self-investigation about fraud and irregularities (SIFI) in the French context. Design/methodology/approach This paper uses the responses of 96 chief audit executives (CAEs) to a global survey of the internal auditing profession carried out by the Institute of Internal Auditors Research Foundation (IIARF) in 2010. A logistic regression model is used to determine factors influencing IAF’s SIFI. Findings The authors’ findings reveal that IAF’s SIFI is positively correlated to independence and objectivity, the number of activities performed by the function, adoption of a systematic approach to evaluate the effectiveness of risk management and the size of the company. Research limitations/implications This study examines the factors associated only to IAF’s investigation rather than assessment of the risk of fraud. It remains for future research to analyze determinants those related to internal auditors’ approaches when they evaluate the risk of fraud. Practical implications The findings have implications for CAEs who wish to improve the IAF’s ability to investigate fraud. Originality/value Even if the IIA has stipulated since 2009 that internal auditors must have knowledge to evaluate the risk of fraud, no disclosure requirement exists, in France, for IAF or its charter. The areas of research related to internal audit behavior in relation to fraud concern fraud risk investigation of financial fraud and management/employee misconduct.

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