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Experimental evidence on external auditor reliance on the internal audit

Author

Listed:
  • Reiner Quick

    (Darmstadt University of Technology)

  • Philipp Henrizi

    (Lucerne University of Applied Sciences and Arts)

Abstract

With the revised version of ISA 610 (revised 2013), external auditors now face both requirements and guidance addressing their responsibilities when relying on the internal audit function (IAF). The reliance decision of an external auditor has important economic consequences and implications for the efficiency and effectiveness of the annual audit. Using an experimental design, we explore how German external auditors’ reliance decisions regarding the IAF are affected by varying levels of environmental factors, like client business risk, effectiveness of the internal control system, and quality of the corporate governance. Furthermore, the experiences of external auditors in collaborating with an IAF are taken into consideration. The results indicate main effects for each factor and a two-way interaction between the effectiveness of the internal control system and the quality of corporate governance. Specifically, a strong internal control system can compensate for weaknesses in corporate governance with respect to the confidence of external auditors in the IAF. Also, the type of audit procedure influences the willingness of auditors to rely on the IAF, and the inherent risk of the examined transaction strengthens the negative impact of client business risk on the reliance decision. Moreover, past experiences of external auditors with an IAF have a significant impact on their reliance decision. Overall, the findings suggest that organizations can foster internal–external auditor coordination by enhancing corporate governance effectiveness and strengthening the internal control system.

Suggested Citation

  • Reiner Quick & Philipp Henrizi, 2019. "Experimental evidence on external auditor reliance on the internal audit," Review of Managerial Science, Springer, vol. 13(5), pages 1143-1176, November.
    • Handle: RePEc:spr:rvmgts:v:13:y:2019:i:5:d:10.1007_s11846-018-0285-0
    DOI: 10.1007/s11846-018-0285-0
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    References listed on IDEAS

    as
    1. Reiner Quick & Niklas Schenk & Florian Schmidt & Thilo Towara, 2018. "The impact of corporate governance on auditor choice: evidence from Germany," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(2), pages 251-283, June.
    2. William L. Felix, Jr. & Audrey A. Gramling & Mario j. Maletta, 2001. "The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing This Contribution," Journal of Accounting Research, Wiley Blackwell, vol. 39(3), pages 513-534, December.
    3. Lawrence J. Abbott & Susan Parker & Gary F. Peters, 2012. "Audit Fee Reductions from Internal Audit†Provided Assistance: The Incremental Impact of Internal Audit Characteristics," Contemporary Accounting Research, John Wiley & Sons, vol. 29(1), pages 94-118, March.
    4. Quick, Reiner & Schmidt, F. & Towara, T. & Schenk, N., 2018. "The Impact of Corporate Governance on Auditor Choice: Evidence from Germany, in: Journal of Management and Governance," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 110655, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    5. Brown, Pr, 1983. "Independent Auditor Judgment In The Evaluation Of Internal Audit Functions," Journal of Accounting Research, Wiley Blackwell, vol. 21(2), pages 444-455.
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    7. Steven M. Glover & Douglas F. Prawitt & David A. Wood, 2008. "Internal Audit Sourcing Arrangement and the External Auditor's Reliance Decision," Contemporary Accounting Research, John Wiley & Sons, vol. 25(1), pages 193-213, March.
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    More about this item

    Keywords

    Audit judgment; Audit planning; External audit; Internal audit; Reliance on the IAF;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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