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.

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.

scholarly journals Does Internal Audit Function Quality Deter Management Misconduct?

2014 ◽  
Vol 90 (2) ◽  
pp. 495-527 ◽  
Author(s):  
Matthew S. Ege
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Internal Audit ◽  
Audit Committees ◽  
Regulatory Requirements ◽  
Difference In Differences ◽  
External Auditors ◽  
Internal Audit Function ◽  
Auditor Quality ◽  
External Auditor

ABSTRACT Standard-setters believe high-quality internal audit functions (IAFs) serve as a key resource to audit committees for monitoring senior management. However, regulators do not enforce IAF quality or require disclosures relating to IAF quality, which is in stark contrast to regulatory requirements placed on boards, audit committees, and external auditors. Using proprietary data, I find that a composite measure of IAF quality is negatively associated with the likelihood of management misconduct even after controlling for board, audit committee, and external auditor quality. This result is robust to a variety of other specifications, including controlling for internal control quality and separate estimation during the pre- and post-SOX time periods. A difference-in-differences analysis indicates that misconduct firms have low IAF quality and competence during misconduct years and improve IAF quality and competence in the post-misconduct years. These findings suggest that regulators, audit committees, and other stakeholders should consider ways to improve IAF quality.

The Effects of Employer and Client Identification on Internal and External Auditors' Evaluations of Internal Control Deficiencies

2012 ◽  
Vol 31 (1) ◽  
pp. 39-56 ◽  
Author(s):  
Chad M. Stefaniak ◽  
Richard W. Houston ◽  
Robert M. Cornell
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Data Availability ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
Audit Efficiency ◽  
Public Company ◽  
External Auditor ◽  
Internal Control Deficiencies

SUMMARY The Public Company Accounting Oversight Board's (PCAOB) Auditing Standard No. 5 (AS5) encourages external auditors to rely on internal auditors to increase the efficiency of lower-risk internal control evaluations (PCAOB 2007). We use post-SOX experimental data to compare the levels and effects of employer (client) identification on the control evaluations of internal (external) auditors. First, we find that internal auditors perceive a greater level of identification with the evaluated firm than do external auditors. We also find some evidence that, ceteris paribus, internal auditors are less lenient than external auditors when evaluating internal control deficiencies (i.e., tend to support management's preferred position to a lesser extent). Further, while we support Bamber and Iyer's (2007) results by finding that higher levels of external auditor client identification are associated with more lenient control evaluations, we demonstrate an opposite effect for internal auditors—higher levels of internal auditor employer identification are associated with less lenient control evaluations. Our results are important because we are the first to capture the relative levels of identification between internal and external auditors, as well as the first to compare directly internal and external auditor leniency, both of which are important in light of AS5. That is, we provide initial evidence that external auditors' increased reliance on internal auditors' work, while increasing audit efficiency, also could improve audit quality by resulting in less lenient internal control evaluations, due, at least in part, to the effects of employer and client identification. Data Availability: Contact the first author.

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.

scholarly journals An Applied Valuation of the Association among Internal and External Auditors

2018 ◽  
pp. 122-129
Author(s):  
Dr. Alhassan Haladu ◽  
Mohammed Haliru Beri
Keyword(s):  
Public Sector ◽  
Internal Control ◽  
Primary Data ◽  
Internal Auditor ◽  
Face To Face ◽  
External Auditors ◽  
The Public ◽  
Internal Control System ◽  
External Auditor

The study examines the cooperation between internal and external auditors in discharging duties and upholding organizational objectives. The aim is to know how the internal auditor relates with the external auditor once appointed and especially during the process of carrying out his/her duties. To achieve this primary data was collected through face-to-face interview from Mike Ukueje & Co. which is the case study of this research. The result showed that both the internal auditor and external auditor work in the interest of the organization through emphasis on the internal control system even though they are guided in their duties by the articles of association (internal auditor) and CAMA 2004 (external auditor). In the private sector external auditors are welcome whole heartedly by their internal counterpart, while in the public sector they are treated with suspicion and prejudice. For this reason it is advisable to enlighten the public sector more on the responsibilities of the external auditor.

An Understanding of the Differences between Internal and External Auditors in Obtaining Information about Internal Control Weaknesses

2016 ◽  
Vol 28 (3) ◽  
pp. 83-99 ◽  
Author(s):  
Ian Burt
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Relevant Information ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
Organizational Silence ◽  
Internal Control Weaknesses ◽  
External Auditor

ABSTRACT The Institute of Internal Auditors (IIA) argues that internal auditors often have a strong “employee” identity within their organization. While external auditors are concerned that this employee identity might negatively impact internal auditors' objectivity, the IIA argues this identity can actually be beneficial as employees may be more willing to share sensitive and audit-relevant information with the internal auditor than they would with the external auditor. Through an experiment relying on the social identity and organizational silence literatures, I test the prediction that non-audit employees will identify more highly with the internal than the external auditor and they will thus, be willing to share more information about internal control weaknesses with the internal than the external auditor. The results from a moderated mediation analysis support this prediction and also show the effect is stronger as the severity of the internal control weakness increases. Overall, this research informs external auditors and regulators about conditions under which the internal auditor may have an advantage over the external auditor in obtaining information that could help improve audit quality. It also informs managers about an important role played by their internal auditors that may result in increased quality of the internal control system while also potentially lowering audit fees.

scholarly journals The Effect of Corporate Governance in Palestine on the Efficiency of Internal Audit: Empirical Evidence

2016 ◽  
Vol 8 (5) ◽  
pp. 124 ◽  
Author(s):  
Suhaib Tawfiq Jarrar
Keyword(s):  
Corporate Governance ◽  
Internal Control ◽  
Audit Committee ◽  
Audit Quality ◽  
Internal Audit ◽  
Public Companies ◽  
Internal Auditor ◽  
The Right ◽  
The Impact

This paper comes to examine the impact of corporate governance in Palestine on the efficiency of internal audit from the reality of the listed corporations in the Palestine Exchange; [PEX]. The population of this paper consists of all the 25 listed Palestinian companies in the Palestine Exchange that have internal auditor. It also includes another 5 companies that rely on the internal audit by external companies. Hence, the number of the reviewed companies by this study is 30 companies (Palestine Exchange Market). Thereupon, 30 questionaires were distributed and retrived. However, this manuscript states a summary of the most important results. These results are explained as is shown in the following: (1) the findings of the study state that there is an effect of applying the variables of corporate governance altogether on the quality of the internal audit of the listed public companies in the Palestine Exchange. These rules are (disclosure and transparency, accountability, responsibility, justice, and independency). (2) The results of the study indicate that there is a significant effect of applying the corporate governance variables individually on the quality of the internal audit of the listed public companies in the Palestine Exchange. Thus, the effect of these variables appears contrasted respectively as the following: disclosure and transparency, justice and accountability, independency and responsibility. (3) The corporate governance represents combining the right practices and procedures which operate within the standards and rules that governed by the obligatory standards. These standards aim at ensuring that there aren’t any contradictions between the strategic goals of the company and the fuctional procedures of the administration in achieving these goals. (4) The internal audit adds value to the company through the functions that enhance its performance within corporate governance. This includes providing information to all levels of the management, evaluating the system of the internal control and the risk management, in addition to sticking the company with the principles of corporate governance. The findings of the study come up with the following recommendations: (1) the study assures the importance of applying the corporate governance principles because of their clear effect on the internal audit quality. It also recommends working efficiently on the professional development of the auditors and improving their performance through training programs, as well, encouraging them to keep up with the latest developments in the field of the auditing and other related fields. (2) It strongly recommends working on enhancing and activating the role of the board of directors and the audit committee; as well as granting them the independency. Hence, they will be able to carry out the tasks assigned to them. Consequently, they will avoid the effects that the company may be exposed to as a result of the internal weakness of the practical aspects of the principles of corporate governance; in addition to the negative impacts of this issue on the quality of the internal audit.

scholarly journals Outsourcing of internal audit and independence of auditors

2008 ◽  
Vol 4 (2) ◽  
pp. 40-49
Author(s):  
Arumugam Seetharaman ◽  
M. Krishna Moorthy ◽  
A.S. Saravanan
Keyword(s):  
Internal Audit ◽  
Audit Process ◽  
Front Seat ◽  
External Auditors ◽  
Internal Audit Function ◽  
External Auditor ◽  
The Impact

Internal audit which is an integral part of any organization has long been overlooked. In fact, most organizations look at internal audit as a routine function in an organization. However, in the recent years, internal audit has taken a front seat for many organizations. Others are also looking at various options such as outsourcing of the internal audit function of their organizations. However, where outsourcing is concerned, one important issue arises, which is the independence of the external auditor to perform the internal audit function. This paper takes a look at the various aspects of the internal audit process as well as the impact and independence of external auditors who perform internal audit.

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.

Internal Audit Assistance and External Audit Timeliness

2012 ◽  
Vol 31 (4) ◽  
pp. 3-20 ◽  
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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