A critical analysis of the independence of the internal audit function: evidence from Australia

Abstract

PurposeThis study aims to critically analyse the independence of the internal audit function through its relationship with management and the audit committee.Design/methodology/approachResults are based on a critical comparison of responses from questionnaires sent out to Australian chief audit executives (CAEs) versus existing literature and best practice guidelines.FindingsWith respect to the internal audit function's relationship with management, threats identified include: using the internal audit function as a stepping stone to other positions; having the chief executive officer (CEO) or chief finance officer (CFO) approve the internal audit function's budget and provide input for the internal audit plan; and considering the internal auditor to be a “partner”, especially when combined with other indirect threats. With respect to the relationship with the audit committee, significant threats identified include CAEs not reporting functionally to the audit committee; the audit committee not having sole responsibility for appointing, dismissing and evaluating the CAE; and not having all audit committee members or at least one member qualified in accounting.Originality/valueThis study introduces independence threat scores, thereby generating analysis of the internal audit function's independence taking into account a combination of threats.

Internal audit function: a comparison between private and public sector in Nigeria

“…The table further shows that 81.5 percent of the public sector respondents indicated that IAF report to CEO while 18.5 percent shows that besides the CEO they also report to the CEO and CFO. In a similar study [22] indicated that 38 percent of the IAF report functionally to the AC, 47 percent shows that besides the AC they also report functionally to CEO and CFO whereas 32 percent of the respondents report administratively to CEO.…”

“…Whereas 22 respondents (81 percent) from the public sector indicated that on average internal auditors stays for more than 8 years in the IAF. A comparison with [22] study indicated that 47 percent of the respondents indicate that on average internal auditors in Australia stay for 2 and 4 years in the IAF. A similar study of [12] indicated that 37 percent (20 respondents) indicated that in IAF such a movement to other units was unlikely for internal auditors in Singapore.…”

“…[22] that of who reported that both private and public sector entities IAF in Australia were placed at corporate level.…”

“…While environmental audit, comprise of 7.32 percent of private sector outsourcing and 0 percent of that in the public sector. In a related study, [22] indicates that information technology and system rank as the most commonly outsourced service with 45 percent of all public sector outsourcing and 50 percent of private sector outsourcing whereas performance audit comprise of 7 percent of public sector outsourcing and 8 percent of that in private sector outsourcing in Australia and New Zealand.…”

“…There were 41 responses from the private sector organizations representing 60.29 percent and 27 responses from public sector representing 39.17 percent. The questionnaire was structure following previous studies with little modification [13], [20]- [22] each question was designed to incorporate responses expressed in multiple choices that enabled the respondents to express their opinion.…”