Exploring the association between the content of internal audit disclosures and external audit fees: Evidence from Sweden

Abstract

The aim of this study is to explore the content of internal audit (IA) disclosures in annual reports and explain the relationship between IA disclosures and external audit fees. A content analysis of the IA disclosures made it possible to generate inductive categories that were used as a basis for statistical analysis. The findings show a large variation in disclosure practices, and only a small portion of all disclosures contain firm‐specific information related to IA. Evidence is provided that the use of an IA function (IAF) is associated with higher external audit fees. However, companies that disclose firm‐specific information related to IA pay lower audit fees than those not providing this disclosure. Overall, the results of this study indicate that firm‐specific IA disclosures most likely represent actual investments in IA and can be used as a proxy for IAF quality.

The Effect of The Existence of Internal Audit Function and Internal Audit Disclosure

“…If the internal auditors comply with these standards, the external audit fee will also increase. As well as research Laura Sierra, Garcia., Et. al., (2018) which states that the internal audit function has a positive effect on the costs of external auditors.…”

“…The results of this study are supported by research by Sourour Hazami-Ammar (2019) which confirms that increased internal audit working hours have a significant positive effect on external audit costs. As well as research Laura Sierra, Garcia., Et. al., (2018) emphasized that the internal audit function has a positive effect on the costs of the external auditor.…”

The Role of Internal Audit in Corporate Governance and Contribution to Determine Audit Fees for External Audits

“…Other research showed that there is a relationship between internal audit disclosures in financial statements and external audit costs [52]. Companies that disclose information related to internal audits specifically and informatively indicate that there is an increase in the quality of corporate governance [53], and with strong corporate governance, it is shown a higher quality of internal audit functions and are prepared to pay for higher quality external audits [52,54]. Increases in risk management, internal control processes and high internal audit function quality can reduce the time and effort of external auditors in carrying out their duties, and thus the audit fees incurred will be lower [20,52].…”

“…Other research showed that there is a relationship between internal audit disclosures in financial statements and external audit costs [52]. Companies that disclose information related to internal audits specifically and informatively indicate that there is an increase in the quality of corporate governance [53], and with strong corporate governance, it is shown a higher quality of internal audit functions and are prepared to pay for higher quality external audits [52,54].…”

“…Companies that disclose information related to internal audits specifically and informatively indicate that there is an increase in the quality of corporate governance [53], and with strong corporate governance, it is shown a higher quality of internal audit functions and are prepared to pay for higher quality external audits [52,54]. Increases in risk management, internal control processes and high internal audit function quality can reduce the time and effort of external auditors in carrying out their duties, and thus the audit fees incurred will be lower [20,52]. The results of the research conducted by Felix et al [40], Fogg [55] and Turpen [56] showed that there is a negative relationship between internal audit and audit fees for external audits caused by the involvement of internal audits in strengthening company control which results in lower risk assessments.…”