Internal Audit Quality in Saudi Arabia: A Categorical Regression Analysis

The turn of the millennium witnessed financially earth shaking events such as the sudden bankruptcy of Enron in 2001 and the collapse of Arthur Anderson in 2002 followed by the global financial crisis which reached its climax in 2008. These events raised concerns about the credibility of auditing as a means of judging the financial positions of business companies. Consequently the interest of academicians, practitioners and policy makers rose considerably in issues related to audit quality. Researchers, particularly in developed countries and also in LDCs set out to investigate the nature and determinants of audit quality. While research on external audit quality received the bulk of attention, internal audit quality apparently remains under- researched. The present study thus represents an endeavour to fill this gap by investigating internal audit quality for the case of Saudi listed companies on the basis of the perceptions of external auditors affiliated with Saudi audit companies. Using categorical regression analysis, findings indicate that a model that measures internal audit quality as†capacity of the IAU to ensure meeting companys strategic goal and objectives "yields statistically significant results both for the model itself and for the predictor variables coefficients. The predictor variables of the regression included "the extent to which staff members skills cover pertinent disciplines", "percentage of IAU budget to company budget", "getting audited agreement to audit findings", "how many internal auditors available per 1000 employees", "extent to which IAF covers various audit aspects". The foregoing suggests that "capacity of IAU to ensure meeting companys strategic goal and objectives" is a viable measure for internal audit quality. Consequently, the above predictor variables are important determinants of internal audit quality. Two of these predictor variables pertain to the competence and adequacy of the IAU staff members and a third important factor pertains to the audit procedures followed within the organization. Organizations, academicians and practitioners might find these results useful. Further research may travel up the same road; i.e investigate further IAU staff characteristics, audit procedures and processes within the organization and their influence on internal audit quality.