The Effect of the Internal Audit Function’s Assurance Versus Advisory Focus on the External Auditor’s Reliance Decision
45 Pages Posted: 31 Mar 2018 Last revised: 21 Aug 2020
Date Written: March 26, 2018
Abstract
This study examines the extent to which external auditors (EAs) use the work of internal auditors. We explore this issue using a multi-year survey in a first instance from the chief audit executive’s (CAE) perspective and then validate our results using data from EAs. Furthermore, we introduce a new category of internal audit function (IAF) reliance indicators, namely the specific purpose(s) of the IAF. We first observe an overall positive association between the perceived EA reliance on and an assurance-related purpose of the IAF, whether the underlying focus is on internal control strength or risk management. Second, we observe an overall positive association between perceived EA reliance on and an advisory-related purpose of the IAF. However, neither a focus on the efficiency of controls nor of business processes separately influenced the reliance decision. Third, we observe similar perceptions of the intensity of EA reliance between our CAE and EA participants. This finding suggests that our perceptions from CAEs are a reliable proxy for EA intended behavior. We also find that relative to CAEs, EAs suggest they were most likely to rely on the IAF when it focused on risk management and least likely when the IAF focused on the efficiency of business processes. Lastly, we observe that either a balanced or an assurance-related purpose of the IAF, relative to an advisory-related purpose, is associated with higher perceived EA reliance. The findings of our study should be of interest to auditor practitioners, academics, and regulators.
Keywords: internal auditing, external audit, assurance, consulting, reliance
JEL Classification: M40, M42, G34, G32, M4, G3
Suggested Citation: Suggested Citation