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An Analytical Model for External Auditor Evaluation of the Internal Audit Function Using Belief Functions

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  • VIKRAM DESAI
  • ROBIN W. ROBERTS
  • RAJENDRA SRIVASTAVA

Abstract

The purpose of this paper is to advance research in internal audit (IA) evaluation by developing an IA assessment model that considers interrelationships among specific factors used by external auditors to evaluate the strength of the IA function. The model is based on three factors identified by auditing standards and by prior academic research: Competence, Work Performance, and Objectivity. We develop an analytical expression of the model using the belief function framework in order to overcome limitations of prior research. Our results reveal that modeling the “And†relationship is essential for assessing the strength of the IA function. As far as interrelationships are concerned, the analysis shows that, when the three factors have a strong or a perfect relationship, the strength of the IA function remains high even if there is positive or negative evidence about one of the factors. This result holds as long as there are high levels of belief about the other two factors. Further, we demonstrate how the quality of corporate governance affects the evaluation of the IA function and how a cost–benefit analysis can be applied to this framework to help determine the amount of external audit work needed to comply with standards. Our analysis reveals that the extent of external audit work to be carried out by the external auditor depends on the strength of the IA function and the amount of litigation and regulatory costs likely to be faced by the external auditor.

Suggested Citation

  • Vikram Desai & Robin W. Roberts & Rajendra Srivastava, 2010. "An Analytical Model for External Auditor Evaluation of the Internal Audit Function Using Belief Functions," Contemporary Accounting Research, John Wiley & Sons, vol. 27(2), pages 346-346, June.
    • Handle: RePEc:wly:coacre:v:27:y:2010:i:2:p:346-346
    DOI: 10.1111/j.1911-3846.2010.01023_4.x
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    Cited by:

    1. Adi Masli & Matthew G. Sherwood & Rajendra P. Srivastava, 2018. "Attributes and Structure of an Effective Board of Directors: A Theoretical Investigation," Abacus, Accounting Foundation, University of Sydney, vol. 54(4), pages 485-523, December.
    2. Fawzi A. Al Sawalqa & Atala Qtish, 2021. "Internal Audit Function Quality and Audit Committees' Practices: Survey Evidence from Jordan," Business and Economic Research, Macrothink Institute, vol. 11(2), pages 20-43, June.
    3. Martin, Kasey & Sanders, Elaine & Scalan, Genevieve, 2014. "The potential impact of COSO internal control integrated framework revision on internal audit structured SOX work programs," Research in Accounting Regulation, Elsevier, vol. 26(1), pages 110-117.
    4. Christina Vadasi & Michalis Bekiaris & Andreas Andrikopoulos, 2021. "Internal Audit Function Quality and Corporate Governance: The Case of Greece," Multinational Finance Journal, Multinational Finance Journal, vol. 25(1-2), pages 1-61, March - J.
    5. 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.
    6. Isabel Z. Wang & Neil Fargher, 2017. "The effects of tone at the top and coordination with external auditors on internal auditors’ fraud risk assessments," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(4), pages 1177-1202, December.
    7. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    8. Hani Shaiti & Yahya Al-Matari, 2020. "Internal Audit Function Characteristics and the Quality of Internal Control Systems: Moderating the Effect of Enterprise Resource Planning System Maturity," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(9), pages 1012-1027, September.
    9. Mélanie Roussy & Alexandre Perron, 2018. "New Perspectives in Internal Audit Research: A Structured Literature Review," Accounting Perspectives, John Wiley & Sons, vol. 17(3), pages 345-385, September.
    10. Desai, Renu & Desai, Vikram & Libby, Theresa & Srivastava, Rajendra P., 2017. "External auditors' evaluation of the internal audit function: An empirical investigation," International Journal of Accounting Information Systems, Elsevier, vol. 24(C), pages 1-14.

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