The contingent relationship between the controller and internal audit functions in large organizations

The research literature on organizational control in large business firms does not address the inter-relationship between the controller and internal audit functions. Yet these functions are commonly used to effect control within large, diversified corporations having hierarchical management. This research uses principal-agent theory to hypothesize the need for complementary control systems for monitoring and verifying inter-manager relationships in large U.S. firms. The research findings suggest that the primary duties and responsibilities assigned to the internal audit function are related to the organization, centralization vs decentralization, of the controller function so that effective organizational control can be achieved.     

External auditors' evaluation of the internal audit function: An empirical investigation

Evaluation of the strength of the client's internal audit function by the external auditor (EA) has taken on increased significance due to stronger regulation around the evaluation of internal controls after SOX (2002). However, research examining how this evaluation occurs in practice is mixed and inconclusive. In this study, we examine empirically whether the Desai et al. (2010) theoretical model is reflective of how auditors make judgments about the strength of their client's internal audit function in practice. Specifically, we present external auditors with evidence about internal auditor work performance, competence and objectivity in a manner consistent with the structure of evidence evaluation implied by the Desai et al. (2010) model. We then compare the auditors' actual strength judgments to the strength levels predicted by the model and evaluate similarities and differences. Results indicate that no one factor dominates the strength judgment in all cases. In addition, EAs do not weigh negative evidence as heavily as does the model. When the evidence about the three factors is conflicting, external auditors have difficulty incorporating them in a consistent way into the calculation of their overall strength judgment. Finally, we find results consistent with prior research indicating auditors tend to be more sensitive to negative than positive evidence. Also, it is harder to move auditors' beliefs away from a negative position with positive evidence than to move those beliefs away from a positive position with negative evidence. Results suggest that additional training and use of a decision aid structured according to the Desai et al. (2010) model would be especially useful when evidence about internal auditors' work performance, competence and objectivity is conflicting.     

略论内部控制审核与会计报表审计的关系

2001年6月,财政部发布《内部会计控制规范》,要求各单位建立适合本单位业务特点和管理要求的内部会计控制制度,并提出,单位可以聘请中介机构或相关专业人员对本单位内部会计控制的建立健全及实施进行评价,接受委托的中介机构或相关专业人员应当对委托单位内部会计控制中的重大缺陷提出书面报告.     

Relation between external audit fees, audit committee characteristics and internal audit

This study examines whether the existence of an audit committee, audit committee characteristics and the use of internal audit are associated with higher external audit fees. Higher audit fees imply increased audit testing and higher audit quality. We find that the existence of an audit committee, more frequent committee meetings and increased use of internal audit are related to higher audit fees. The expertise of audit committee members is associated with higher audit fees when meeting frequency and independence are low. These findings are consistent with an increased demand for higher quality auditing by audit committees, and by firms that make greater use of internal audit.     

The empirical relationship between ownership characteristics and audit fees

The present study examines the empirical relationship between ownership characteristics and audit fees. The basic premise is that the level of ownership sophistication and the extent to which ownership is large and substantial impact the effectiveness of stockholder monitoring on corporate affairs including the financial reporting process. Furthermore, high managerial ownership firms may experience a decline in agency problems in financial reporting due to a decrease in managerial propensity to misreport financial results. By employing a cross-sectional least squares regression analysis for a sample of 358 New York Stock Exchange-listed firms audited by the Big Five auditors, we find evidence of a significantly positive relationship between diffused institutional stock ownership (i.e., having less than 5% individual shareholding) and audit fees, and a significantly negative relationship between institutional blockholder ownership (i.e., having 5% or more individual shareholding) and audit fees. Finally, we document that managerial stock ownership is negatively associated with audit fees. We do not, however, find evidence of any relationship between noninstitutional blockholder ownership (with at least 5% individual stock ownership) and audit fees. The study's main results hold in various specification tests including when the effects of board-related and audit committee variables are factored in the analysis. Based on the observed relationship between the ownership variables and audit fees, we suggest that the ownership characteristics of a firm as a part of its governance mechanism constitute an important determinant of audit fees.

The dynamic relationship between the dollar and US prices: An intensive empirical investigation

The empirical, bivariate relationships between the dollar and US prices during the recent floating rate period are analyzed using time series methodology. Results indicate a long distributed lag from the dollar to the CPI, but no relationship in the opposite direction, and that a permanent 10 per cent decline in the dollar was ultimately followed by a CPI rise of 4.85 per cent. Similar results are obtained for various components of the CPI, including services, while substantially smaller price responses are reported in other studies that typically employ shorter lag structures in the context of structural econometric models.     

The (mis)fit between the profile of internal auditors and internal audit activities

This study investigates whether there is a fit between the profile of internal auditors and the activities of the internal audit department (IAD). It also seeks to discover which type of internal auditors fit which type of internal audit (IA) activities. This is commonly referred to as the person-job (P-J) fit. Furthermore, this study investigates whether this (mis)fit is associated with the outsourcing/co-sourcing of IA activities and turnover within the IAD. Bringing strategic human resource management (SHRM) into IA can be considered as the key contribution of this paper. The results of this study are based on a questionnaire completed by 280 members of the Institute of Internal Auditors in Belgium. The results show that there is a fit between some characteristics of internal auditors working in an IAD and the activities of the IAD. The results also show that certain internal auditor characteristics fit with certain types of IA activities. However, the degree of fit varies. Furthermore, it was found that IADs that co-source/outsource were significantly more associated with a misfit between the profile of the internal auditors and the activities of the IAD, whereas a misfit was not significantly associated with a high turnover of internal auditors.     

The changing relationship between audit firm size and going concern reporting

As a result of gradual shifts in the market for audit services, we expect financially stressed public companies to be increasingly audited by regional firms, who, in turn, will be increasingly likely to issue going concern reports to their financially stressed public companies. Our expectations challenge the view that larger audit firms, in order to avoid exposure to litigation, report more conservatively. To address these issues, we examine the 22 years between 1989 and 2010, which we classify into four ERAs (e.g., 1989–1994, 1995–2001, 2002–2005, and 2006–2010). We initially document that over time, financially stressed public companies are shifting to regional audit firms, partly due to the actions of larger audit firms shedding these clients, which represent ex-ante conservatism. In contrast, audit firm reporting represents ex-post conservatism. We next show that over time, for their financially stressed public clients, regional audit firms are increasingly more likely to issue going concern reports, and BigN audit firms are increasingly less likely to issue going concern reports. We also show that in more recent ERAs, regional audit firms have been more likely than BigN and national audit firms to issue a going concern report to their financially stressed pubic clients. Overall, our evidence suggests that more recently, larger audit firms, relative to regional audit firms, acted more proactively to lessen their litigation risks through increasing centralization of client selection and acceptance processes. However, our evidence suggests that more recently, to lessen their litigation risks, regional audit firms, relative to BigN and national audit firms, acted more conservatively by issuing more going concern reports to their financially stressed public clients.     

The interplay of external punishment and internal rewards: An exploratory study of insurance fraud

Economic theories related to ethical consumer behaviour have for the most part examined the role of external incentives and deterrents, and relatively less focus has been given to the role of internal incentives. This study explores the independent and joint effects of internal rewards and external punishment mechanisms on the likelihood of consumers exhibiting unethical behaviour in insurance fraud (IF) contexts. By utilizing a data set consisting of survey data on over 43?000 consumers across 26 European countries, this study examines the interaction of internal moral values and external deterrents, affecting unethical consumer behaviour. Ordinal regression analysis and binary logistic regression were used to assess the role of internal rewards and external punishment mechanisms in the occurrence of IF. Attitudinal differences towards IF and perceptions of the probability of being caught were used to classify customers and to predict the incidence of IF. Demographic variables were also found to be correlated with IF. Perceptions of ineffectiveness of fraud investigation and detection systems by fraudulent customers significantly influences their likelihood to commit IF.     

An international study of internal audit function quality

We investigate organisational and environmental factors that influence firms’ incentives to develop high-quality internal audit functions (IAFs) by using a unique international sample formed by matching proprietary data from a global internal auditor survey with public data obtained from Worldscope. Concerning organisational factors, we find that a positive relationship exists between IAF quality and firm complexity and confirm that complex firms have a higher demand for monitoring and advising and, therefore, a greater need for formal controls. In addition, IAF quality is positively related to board monitoring and audit committee diligence but negatively associated with CEO power, which suggests that IAF quality is influenced by other key players in corporate governance. Regarding environmental factors, we document that IAF quality is positively associated with industry competition, which implies that a firm’s incentive for a high-quality IAF is enhanced when confronted with greater environmental uncertainty. Furthermore, IAF quality has a significantly positive relationship with our self-constructed index of IAF requirements included in national corporate governance codes, which indicates that strong home-country corporate governance codes play a role in fostering IAF development.     

Endogenous market statistics and security pricing:: An empirical investigation

This study examines empirically the degree to which the history of daytime and overnight price changes and order flow affects estimates of traders' beliefs about future security price changes. Estimates indicate that forecasts of the permanent component of price changes occurring after the open of trading are significantly related to past price changes and order flow; but the same is not generally true for price changes occurring after the close. These results are consistent with models of technical analysis, and models in which the process of trading facilitates price discovery. The evidence also suggests that private information is an important determinant of price movements.     

The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation

This article examines the dynamic relationship between two key US money market interest rates––the federal funds rate (FF) and the 3-month Treasury bill rate. Using daily data over the period from 1974 to 1999, we find a long-run relationship between these two rates that is remarkably stable across monetary policy regimes of interest rate and monetary aggregate targeting. Employing a nonlinear asymmetric vector equilibrium correction model, which is novel in this context, we find that most of the adjustment toward the long-run equilibrium occurs through the FF. In turn, there is strong evidence for the existence of significant asymmetries and nonlinearities in interest rate dynamics that have implications for the conventional view of interest rate behavior.     

An exploratory investigation of the firm size effect

We investigate the firm size effect for the period 1958 to 1977 in the framework of a multi-factor pricing model. The risk-adjusted difference in returns between the top five percent and the bottom five percent of the NYSE firms is about one to two percent a year, a drop from about twelve percent per year before risk adjustment. The variable most responsible for the adjustment is the sensitivity of asset returns to the changing risk premium, measured by the return difference between low-grade bonds and long-term government bonds.     

A graphical approach to teaching the relationship between the evaluation of internal accounting controls and substantive audit testing

This note reviews auditing theory and professional standards describing the relationship between internal accounting control systems and substantive audit testing. It presents three graphical models that may be used to illustrate to students the basic theoretical relationships and to clarify some points in the professional literature that may be confusing to students and practitioners. We have found these graphical models to be a useful teaching tool. They permit students to extend beyond mere verbalizations to a visualization of the theoretical concepts involved. The final model enhances the students ability to analyze and learn major concepts.     

我国内部审计的独立性问题

内部审计的独立性是审计理论和实务必须认识和解决的问题。受托经济责任需要内部审计拥有独立性．但当前的管理体制、机构和人员设置状况，法律环境、人员素质和工作质量等制约了内部审计的独立性。在国家对内部审计管理体制进行改革的形势下，笔者提出了强化内部审计独立性的措施建议。     

An information security control assessment methodology for organizations' financial information

In an era where dependence of information systems is significantly high, the threat of incidents related to information security that could jeopardize financial information held by organizations is serious. Alarming facts within the literature point to inadequacies in information security practices, particularly the evaluation of information security controls in organizations. Research efforts have resulted in various methodologies developed to deal with the information security controls assessment problem. A closer look at these traditional methodologies highlights various weaknesses that prevent an effective information security controls assessment in organizations. This paper develops a methodology that addresses such weaknesses when evaluating information security controls in organizations' financial systems. The methodology uses the fuzzy set theory which allows for a more accurate assessment of imprecise criteria than traditional methodologies. It is argued that using the fuzzy set theory to evaluate information security controls in organizations addresses existing weaknesses identified in the literature and leads to a more precise assessment. This, in turn, results in a more effective selection of information security controls and enhanced information security in organizations. The main contribution of this research is the development of a fuzzy set theory-based assessment methodology that provides for a thorough evaluation of information security controls in organizations. Overall, the methodology presented herein proved to be a feasible technique for evaluating information security controls in organizations' financial systems.     

The association between audit committee effectiveness and audit risk

Audit committees (ACs) are expected to play a key role in improving financial statement integrity and as a consequence reduce audit risk. Companies reporting conformity with regulations can have an AC that appears effective but is not actually effective in substance. We surveyed audit partners and managers to identify their indicators of actual AC effectiveness (auditor‐chosen list). We hypothesize a negative association between AC effectiveness and audit risk, only when an auditor‐chosen list, rather than extent of conformity with regulations, is used to measure effectiveness. Results support our expectations.     

On estimating the expected return on the market: An exploratory investigation

The expected market return is a number frequently required for the solution of many investment and corporate finance problems, but by comparison with other financial variables, there has been little research on estimating this expected return. Current practice for estimating the expected market return adds the historical average realized excess market returns to the current observed interest rate. While this model explicitly reflects the dependence of the market return on the interest rate, it fails to account for the effect of changes in the level of market risk. Three models of equilibrium expected market returns which reflect this dependence are analyzed in this paper. Estimation procedures which incorporate the prior restriction that equilibrium expected excess returns on the market must be positive are derived and applied to return data for the period 1926–1978. The principal conclusions from this exploratory investigation are: (1) in estimating models of the expected market return, the non-negativity restriction of the expected excess return should be explicity included as part of the specification: (2) estimators which use realized returns should be adjusted for heteroscedasticity.     

An analysis of attributes that impact information technology audit quality: A study of IT and financial audit practitioners

The importance of information technology (IT) auditing has grown with increased reliance on IT for business operations and new regulations regarding the assurance of IT for these operations. Prior work on IT and financial auditing has suggested several general frameworks that may affect IT audit quality; however, the prior work has not provided measurable constructs nor has it considered whether these proposed constructs are the same or different. Building on prior work that has proposed frameworks of IT audit quality, we identify and evaluate potential constructs suggested by these frameworks as well as financial auditing literature. We develop a survey tool and ask IT and financial accounting practitioners to assess the impact of these items on IT audit quality. A factor analysis is used to refine the set of IT audit quality factors identified, and we are able to provide insight into the prioritized impact of each factor on IT audit quality. In comparison to prior research, we find that additional factors are significant for IT audit quality and that the relative importance of the factors for IT audit quality differs for IT versus financial auditors.     

How audit effort affects audit quality: An audit process and audit output perspective

Using a unique dataset of audit days in China from 2006 to 2011, this paper examines the relationship between audit effort and audit quality from the perspective of audit process and audit output. The results show that audit effort significantly increases the probability of audit adjustments, which inhibits positive earnings management and improves the quality of audited financial statements. We also find that audit effort does not have a significant effect on the issuance of modified audit opinions overall, but that a modified audit opinion is more likely to be issued in the absence of an audit adjustment. Furthermore, we find that the impact of audit effort on audit quality is attenuated when clients are more complex and when audit firms are larger. Collectively, our evidence suggests that audit effort plays an important role in improving audit quality by influencing audit process and audit output. Our study extends the literature on the impact of audit effort on audit quality in emerging markets, and the conclusions have important implications for the improvement of China’s audit market efficiency.