Internal Audit Attributes and External Audit's Reliance on Internal Audit: Implications for Audit Fees

Abstract

This study aims to examine two aspects of internal audit quality, namely internal audit competency and internal audit contribution to financial statement audits. Consistent with the substitution view, this study predicts a negative relationship between the competency aspects of internal audit (the tenure of the existence of internal audit in the organization, internal audit staff expertise in IT and computer skills, training hours, internal audit staff professional certifications in accounting and auditing, and internal audit staff experience in auditing) and audit fees. Second, this study tests whether the contribution of internal auditors to financial statement audit reduces audit fees. The data analysis is based on a cross‐sectional regression model with observations of 73 public‐listed firms in Malaysia, which include publicly available data matched with survey responses from their internal and external auditors. The results of the study suggest that the competency of internal audit, namely the tenure of the existence of internal audit in the organization, training, internal audit staff prior experience in auditing and accounting, and certifications are associated with lower audit fees. Our findings for both aspects of internal audit quality (competency and internal audit contribution) lend support to the substitution view for explaining the links between internal audit quality and audit fees.

Internal audit function characteristics and external auditors' co‐sourcing in different institutional contexts

“…To be efficient, more autonomous IAFs should, then, either increase co‐sourcing or, alternatively, increase employees' expertise. The results also indicate a negative association between IAF expertise, and in particular IAF internal expertise, and co‐sourcing fees, which is in line with more experienced IAFs being more competent (Mohamed et al, ) and, thus, needing less external support.…”

“…With regard to the tenure of an IAF, Carey et al () found that most of the companies that decided to outsource internal audit activities did not have an in‐house internal department before that decision. Also, Mohamed, Zain, Subramaniam, and Yusoff () found that an increasing IAF tenure leads to more mature and competent IAFs. This result might be interpreted as more experienced IAFs not needing as much support as inexperienced IAFs.…”

“…Although we expect focus, expertise, and autonomy of IAFs to have an influence on the level of co-sourcing for internal audit activities, the associations we defined in our hypotheses may suffer changes depending on whether the IAF is voluntary or mandatory for specific organizations in a given institutional context. Though there is a wide range of empirical literature about the substitution or complementary effect between internal and external audit activities (Carey et al, 2000;Elliott & Korpi, 1978;Felix, Gramling, & Maletta, 2001;Hay, Knechel, & Ling, 2008;Hay, Knechel, & Wong, 2006;Ho & Hutchinson, 2010;Mohamed et al, 2012;Prawitt, Sharp, & Wood, 2011;Stein, Simunic, & O'Keefe, 1994), there are no studies, to our knowledge, examining the relationship between IAF characteristics and co-sourcing, depending on whether the IAF is voluntary or mandatory.…”

Some evidence on the impact of internal audit on external audit fees

“…Many studies show that the contribution of the IAF reduces external audit fees. This relationship has already been examined in American (Felix et al, 2001) and Malaysian contexts (Mat Zain et al, 2015;Mohamed et al, 2012). Then, it is interesting to study this relationship in France for several reasons.…”

“…Like Pizzini et al (Pizzini, Lin, & Ziegenfuss, 2015), Prawitt et al (2011) andMessier Jr. et al (2011); we use the responses of 2,160 internal auditors to a global survey carried out by the IIA's Global Audit Information Network (GAIN). 1 Unlike Mohamed, Mat Zain, Subramaniam, and Wan Yusoff (2012), assessment of the IAF's contribution to financial reporting quality is based on objective questions such as number of hours worked by IA for external audit or the money spent on the IAF by the organization. In this research, we study the direct effect of the quality of IA and its contribution to the audit of financial statements in the French context.…”