Internal Audit Sourcing Arrangements and Reliance by External Auditors

Abstract

SUMMARY: A company’s internal audit (IA) function can be maintained in-house, outsourced to an IA service provider, or cosourced (a combination of the in-house and outsourced IA functions). This study explores the effect of these sourcing arrangements on the external auditor’s assessed quality and reliance on the IA function. We predict that external auditors consider the cosourced and outsourced IA functions to be equal in terms of assessed quality and reliance. Furthermore, we predict that the external auditors’ assessments of objectivity and competence will be greater for cosourced and outsourced IA functions compared to in-house IA functions; therefore, external auditors will have greater reliance on the cosourced and outsourced IA functions. Finally, we predict that when the IA service provider also provides additional tax services to the client, external auditor reliance is significantly decreased compared to when the service provider does not provide tax services. One hundred and eight CPAs participated in this study and were randomly assigned to one of five treatment conditions: in-house, cosource, outsource, cosource with tax services, and outsource with tax services. The results support our predictions and indicate that external auditors place more reliance on cosourced and outsourced IA functions compared to in-house IA functions. Furthermore, external auditors’ reliance on cosourced and outsourced IA functions decreases when tax services are also provided by the IA service provider.

Financial Instruments Disclosure Practices: Evidence from Malaysian Listed Firms

“…an auditing or accounting firm) tends to comply more with MFRS 7 as compared to firms that have their own in-house internal audit functions. This is consistent with prior studies (see Desai et al 2011;Abdolmohammadi 2013) but contradicts with the revised MCCG (2012) recommendations. The revised MCCG (2012) states that companies should establish an internal audit function as one of the mechanisms to recognise and manage the risk.…”

“…As normally, firms would outsource their internal audit functions to a professional service provider, who can provide specialised resources, and thus be able to strengthen the internal control of the firms. Similarly, a study by Desai, Gerard and Tripathy (2011) found that external auditors assess the quality of outsourced IAF to be higher than the quality of an in-house IAF and thus are more willing to rely (to a greater extent) on outsourced IAF than in-house IAF. Accordingly, the study predicts that firms that outsource their internal audit functions are more likely to comply with MFRS requirements, given firms would outsource their internal audit functions to a professional service provider (i.e.…”

“…The greater the independence level of the internal audit functions, the greater the likelihood that the internal auditors can exercise their professional skepticism and remain objective (Christopher et al 2009;Kueppers & Sullivan 2013). Moreover, firms would outsource their internal audit functions to a professional service provider, who can provide specialised resources, such as an auditing or accounting firm (Desai et al 2011;Abdolmohammadi 2013). Thus, they should have the relevant qualification and appropriate experience that enable them to provide assurance to their clients that the internal controls are operating effectively.…”

Comment apprécier la compétence d’un auditeur interne ? L’opinion des membres du comité d’audit

“…La satisfaction des auditeurs externes au regard des travaux antérieurs de la fonction d'audit interne s'est ajoutée à la liste des indicateurs de la compétence des auditeurs internes, ce qui reflète le dynamisme de la relation entre les auditeurs externes et internes (Brown et Karan, 1986). Les résultats obtenus par Desai, Gerard et Tripathy (2011) ont montré que les auditeurs externes considèrent que, dans l'ensemble, la compétence de l'audit interne est jugée plus grande si cette fonction fait appel à des consultants externes pour réaliser les travaux en partie ou en totalité, car ces derniers sont considérés comme des experts. Cependant, l'étude menée par Munro et Stewart (2010) indique le contraire.…”

Internal and External Audit Attributes, Audit Committee Characteristics, Ownership Concentration and Earnings Quality: Evidence from Malaysia

“…Outsourced internal audit refers to internal audit services that are undertaken by independent accounting firms (Carcello, Hermanson & Raghunandan, 2005;Desai, Gerard & Tripathy, 2011). According to Bursa Malaysia, listed companies are required to disclose whether their internal audit function is performed in-house or is outsourced.…”