Reconciling Archival and Experimental Research: Does Internal Audit Contribution Affect the External Audit Fee?

2011 ◽  
Vol 23 (2) ◽  
pp. 187-206 ◽  
Author(s):  
Douglas F. Prawitt ◽  
Nathan Y. Sharp ◽  
David A. Wood
Keyword(s):  
Internal Audit ◽  
Audit Fees ◽  
Data Availability ◽  
Potential Contribution ◽  
Archival Studies ◽  
External Audit ◽  
Data Set ◽  
Internal Auditor ◽  
Internal Auditors ◽  
Auditing Standards

ABSTRACT Consistent with guidelines from external auditing standards, experimental and survey research suggests that an internal audit function (IAF) can contribute in ways that lead to decreased external audit fees; however, research using archival methodologies generally finds either no relation or a positive relation between proxies for IAF contribution and external audit fees. In this paper, we provide new evidence using a unique and previously unavailable data set to develop archival proxies of internal audit contribution. We find that archival proxies for the contribution of internal audit based on Statement of Audited Standards (SAS) No. 65 are associated with lower unexpected external audit fees. We show that proxies used in prior archival studies are limited in their ability to capture the IAF's potential contribution to external auditing, and suggest that the lack of high-quality proxies could help explain the divergent findings of experimental and survey-based studies in relation to archival studies in this area. In addition, our results suggest that fee reductions are associated with the direct assistance of, but not with reliance on, work previously performed by the internal auditor. Overall, our results provide evidence consistent with external auditing standards and with results from prior experimental and survey studies suggesting that IAFs can indeed contribute in ways that lead to lower external audit fees. Data Availability: Contact the authors. Data provided by the Institute of Internal Auditors are subject to restrictions.

Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective

2016 ◽  
Vol 36 (2) ◽  
pp. 21-43 ◽  
Author(s):  
Lucy Huajing Chen ◽  
Hyeesoo H. (Sally) Chung ◽  
Gary F. Peters ◽  
Jinyoung P. (Jeannie) Wynn
Keyword(s):  
Financial Reporting ◽  
Internal Audit ◽  
Positive Association ◽  
Audit Fees ◽  
Data Availability ◽  
Company Performance ◽  
Potential Threat ◽  
External Audit ◽  
Internal Auditors ◽  
Survey Responses

SUMMARY This paper considers the potential impact of internal audit incentive-based compensation (IBC) linked to company performance on the external auditor's assessment of internal audit objectivity. We posit that external auditors will view IBC as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk. The increase in risk and external auditor effort should result in higher audit fees. We hypothesize that the form of incentive-based compensation, namely stock-based versus cash bonuses, moderates the association between IBC and external audit fee. Finally, we consider whether underlying financial reporting risk mitigates the external auditor's potential sensitivity to IBC. We find a positive association between external audit fees and internal audit compensation based upon company performance. The association is acute to IBC paid in stock or stock options as opposed to cash bonuses. We also find evidence consistent with the IBC associations being mitigated by the company's financial reporting risks. Data Availability: Individual survey responses are confidential. All other data are derived from publicly available sources.

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

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.

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.

External Auditor Evaluations of Outsourced Internal Auditors

2010 ◽  
Vol 29 (2) ◽  
pp. 159-173 ◽  
Author(s):  
Duane M. Brandon
Keyword(s):  
Internal Audit ◽  
Audit Fees ◽  
Accounting Firms ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
Consulting Services ◽  
Significant Area ◽  
External Auditor ◽  
Nonaudit Services

SUMMARY: In the last decade internal auditing services has been a significant area of growth for public accounting firms. Unlike the provision of external audits, the provision of outsourced internal audit services does not prohibit accounting firms from providing the client with additional services. This study investigates some implications of an outsourced internal auditor providing nonaudit services. Specifically, 89 experienced external auditors completed an experiment to investigate whether external auditors will evaluate and rely on an outsourced internal auditor’s work differently when the internal auditor also provides nonaudit services. Results indicate that evaluations of the outsourced internal auditors’ objectivity were negatively affected by the provision of nonaudit services. Further, the differences in objectivity perceptions are tempered by the use of different personnel to provide consulting services. Competence perceptions were not affected. Results also indicate that external auditor reliance on internal audit and suggested audit fees are affected. However, these results do not appear to be tempered by audit and nonaudit staffing decisions.

The Influence of Internal Audit on External Audit

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.

scholarly journals Internal Audit Functions: An Empirical Study of Public and Private Sectors in Nigeria

2018 ◽  
Vol 2 (1) ◽  
pp. 26-37
Author(s):  
Abdulkadir Madawaki ◽  
Aidi Ahmi ◽  
Halimah @ Nasibah Ahmad
Keyword(s):  
Public Sector ◽  
Private Sector ◽  
Internal Audit ◽  
Audit Fees ◽  
Public And Private ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
The Public ◽  
Private And Public

The study examines the similarities and differences between the private and public sectors internal audit functions in Nigeria. The features examined include the hierarchical position of the internal audit functions, outsourcing of internal audit activities, reporting relationship of the internal auditor, and the coordination between internal and external auditors. A survey of internal audit managers of both sectors was undertaken to establish their current practices. The results revealed that there are no much differences in the hierarchical positioning of the internal audit function in both sectors. A substantial difference was found in the reporting lines of internal auditors in both sectors. The results further showed that private sector outsources internal audit activities more than the public sector and a slight difference exists between the two sectors about the level of coordination between internal and external auditors. Finally, the result indicated that private sector experiences a reduction in external audit fees compares to its counterpart in the public sector.      

The Value to Management of Using the Internal Audit Function as a Management Training Ground

2018 ◽  
Vol 32 (2) ◽  
pp. 121-140 ◽  
Author(s):  
Joseph V. Carcello ◽  
Marc Eulerich ◽  
Adi Masli ◽  
David A. Wood
Keyword(s):  
Financial Reporting ◽  
Internal Audit ◽  
Management Training ◽  
Audit Fees ◽  
Senior Management ◽  
Data Availability ◽  
Negative Consequences ◽  
Internal Auditors ◽  
Internal Audit Function ◽  
Survey Results

SYNOPSIS This study examines how using the internal audit function as a management training ground (MTG) impacts managers' reliance on internal auditor recommendations. While prior research suggests that using internal audits as a MTG can adversely affect financial reporting quality, external audit fees, and internal audit efficiency, many internal audit functions use this practice. We study how this practice influences another important stakeholder—senior management. Based on survey results of 355 chief audit executives (CAEs), we find that CAEs perceive senior management to be more likely to use recommendations from MTG internal auditors than non-MTG internal auditors. To bolster the validity of these findings and provide evidence as to why this is the case, we conduct two experiments with 147 executives (47 MTurk workers) with an average of about 25 (13) years of experience. The experimental results confirm the survey results. We also find that the key reason why managers rely more on MTG than non-MTG recommendations is that MTG internal auditors are perceived to have more natural ability, which is a key driver in managers' reliance decisions. Taken together, our research provides the first empirical evidence that there are positive consequences to using the internal audit function as a MTG in contrast to the negative consequences previously reported. Data Availability: Please contact the authors.

Managers' Intentions to Share Knowledge to Internal Auditors: The Effects of Procedural Fairness and Internal Auditor Type

2019 ◽  
Vol 32 (2) ◽  
pp. 225-241
Author(s):  
Megan Seymore ◽  
Jesse C. Robertson
Keyword(s):  
Tacit Knowledge ◽  
Internal Audit ◽  
Procedural Fairness ◽  
Data Availability ◽  
Interactive Effects ◽  
Operational Effectiveness ◽  
Internal Auditor ◽  
Material Control ◽  
Internal Auditors ◽  
High Level

ABSTRACT Knowledge sharing to internal auditors by managers helps internal auditors learn about critical information and improve operational effectiveness, internal controls, and the internal audit function. We examine the interactive effects of procedural fairness at the start of an internal audit, and auditor type (in-house or outsourced) on managers' intentions to share tacit knowledge during an audit, and intentions to share subsequent knowledge of a material control weakness. Our results indicate procedural fairness is an intervention that can increase managers' intentions to share knowledge, yet it depends on internal auditor type and differs by the type of knowledge shared. A high level of procedural fairness increases intentions to share tacit knowledge to outsourced internal auditors only. However, a high level of procedural fairness increases intentions to share subsequent knowledge of a material control weakness to in-house internal auditors only. We offer contributions to the accounting literature and implications for practice. Data Availability: Data available upon request from authors.

The relationship between adherence of internal audit with standards and audit fees

2016 ◽  
Vol 14 (1) ◽  
pp. 72-85 ◽  
Author(s):  
Abdulaziz Alzeban ◽  
Nedal Sawan
Keyword(s):  
Stock Exchange ◽  
Internal Audit ◽  
Performance Standards ◽  
Audit Fees ◽  
International Standards ◽  
Annual Reports ◽  
External Audit ◽  
Content Type ◽  
Internal Auditors ◽  
The Relationship

Purpose This study aims to examine the relationship between external audit fees and the adherence of internal audit with the International Standards for the Professional Practice of Internal Auditing (ISPPIA), i.e. whether such adherence has a relation with lower or higher audit fees. Design/methodology/approach Data were gathered from the annual reports and 229 chief internal auditors (CIAs) from UK companies listed on the London Stock Exchange. Findings The result suggests that, in fact, higher external audit fee is related with adherence with both attribute and performance standards. Also, there is an association between audit fees and budget for the internal audit with longer tenure of the CIA. Originality/value Given the lack of attention to the potential impact of the ISPPIA on audit fees by previous researchers, any insight provided by the study in this regard will represent a valuable contribution to the literature in complementing what already exists and pointing the way to further research opportunities.

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.

Sign in / Sign up

Export Citation Format

Share Document