External auditors’ reliance on internal audit: the impact of sourcing arrangements and consulting activities

This study examines the impact of internal audit outsourcing and involvement in consulting on external auditors’ reliance on the work of internal audit. We test whether these factors influence reliance on internal audit work already undertaken and the use of internal auditors as assistants, distinguishing between control evaluation and substantive testing. Involvement in consulting impacts reliance on work undertaken and the use of internal auditors as assistants for control evaluation. External auditors make greater use of internal auditors as assistants for substantive testing when internal audit is provided in‐house. Overall, external auditors use internal audit more for control evaluation tasks.     

External auditors' willingness to rely on the work of internal auditors: The influence of work style and barriers to cooperation

The extent to which external auditors rely on the work of internal auditors is an important judgment. Recently, the Public Company Accounting Oversight Board has recommended that external auditors “rely (more) on the work of others” to reduce the greater-than-expected costs associated with compliance with Section 404 of the Sarbanes–Oxley Act. Reliance decisions, however, are complex decision tasks that require professional judgment and may be influenced by a number of factors, both external (environmental) and internal (cognitive and affective), including the auditors' working style and pervious experiences related to barriers to external/internal auditor cooperation (e.g., previously experienced low versus high internal auditor objectivity and/or competence). We experimentally examine these influences in our research reported herein. Consistent with expectations, external auditors' work styles significantly influenced the extent of planned audit testing, internal auditor reliance judgments, and interpretation of analytical procedures results. Auditors' perceptions about internal auditors' competence and objectivity, developed over years of interaction, also influenced these judgments, and interacted with work styles. Inconsistent with expectations, auditor rank (senior versus manager) did not influence judgments.     

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.     

Factors affecting the internal audit effectiveness: A survey of the Saudi public sector

This study assesses factors influencing internal audit effectiveness (IAE) in Saudi Arabia. Data were obtained from 203 managers and 239 internal auditors from 79 Saudi Arabian public sector organizations. Multiple regression analysis examines the association between IAE and five principal factors. Results suggest that management support for IAE drives perceived effectiveness of the internal audit function from both management's and the internal auditors’ perspective. Management support is linked to hiring trained and experienced staff, providing sufficient resources, enhancing the relationship with external auditors, and having an independent internal audit department. Saudi Arabia is representative of many developed and developing environments, and its recent tradition of governance and audit is mirrored in countries worldwide. Moreover, its specific cultural traditions involving clan and tribal allegiances, and pervasive and core religious beliefs, characterize the GCC countries, the Arab World generally, and indeed, many other developing countries, irrespective of wealth. Thus, links between management support and internal audit effectiveness are likely generalizable beyond the Saudi public sector context.     

Effects of audit committee chair characteristics on auditor choice,audit fee and audit quality

We investigate whether the characteristics of audit committee (AC) chairs are associated with decisions about auditor choice, audit fees and audit quality. Using hand-collected Australian data, firms with AC chairs who have longer tenure and multiple AC memberships across several boards are found to be more likely to choose Big 4 and/or industry specialist auditors, pay higher audit fees and have lower discretionary accruals. Those AC chairs with higher business qualifications are more likely to hire a Big 4 auditor, pay higher audit fees and have lower discretionary accruals, while AC chairs with professional qualifications are more likely to hire a Big 4 and/or industry specialist auditor. In contrast, firms with AC chairs who are executive directors are less likely to hire a Big 4 auditor and have higher discretionary accruals. Our findings contribute to the literature by documenting that various characteristics of AC chairs are important for enhancement of auditor selection and audit quality.     

The civil justice system and going concern audit reports: Comments on “Auditors’ decision-making under going concern uncertainties in low litigation risk environments: Evidence from Hong Kong”

Lam and Mensah [Lam, K., Mensah, Y.M., 2006. Auditors’ decision-making under going concern uncertainties in low litigation risk environments: Evidence from Hong Kong. J. Account. Public Pol. 25 (6), this issue] provide some valuable insight on auditors’ choice of going concern audit reports in an environment where the civil justice system affords, from the standpoint of the plaintiff, fewer remedies and is more difficult to file a complaint than it is in the US. Hence, from the auditor’s standpoint, this environment can appropriately be described as a “low litigation risk environment”. In this comment, I first question whether a disclaimer of an opinion is any indication of either a quality audit or professionalism. Secondly, three alternative explanations for the empirical regularities are discussed. The Gatekeeper Story suggests auditors are simply not willing to risk reducing their reputational capital by acquiescing to clients that are not likely to survive their own financial distress. The Herding Story suggests that, when auditors are faced with uncertainties or a gap in the authoritative literature, auditors will herd together to form a common response that mimic one-another. The Value of Incumbency Story holds that as the value of incumbency declines with the client’s inability to survive, auditors will have fewer incentives to incur the incremental costs to gather sufficient competent evidential matter necessary to support an unqualified opinion.     

The impact of litigation risk on the strategic timing of management earnings forecasts

This paper examines whether managers strategically time their earnings forecasts (MEFs) as litigation risk increases. We find as litigation risk increases, the propensity to release a delayed forecast until after the market is closed (AMC) or a Friday decreases but not proportionally more for bad news than for good news. How costly this behaviour is to investors is questionable as share price returns do not reveal any under‐reaction to strategically timed bad news MEF released AMC. We also find evidence consistent with managers timing their MEFs during a natural no‐trading period to better disseminate information.     

The impact of the Social Security Fund on auditor litigation risk

In this study, we examine the effect of the Social Security Fund on auditor litigation risk. Using audit fees as a proxy for auditor perceptions of litigation risk, we find that the Social Security Fund significantly reduces auditor litigation risk. Furthermore, we show that the Social Security Fund influences auditor litigation risk through reducing both the audit risk and the business risk of public companies. In addition, the impact of the Social Security Fund for reducing auditor litigation risk is more obvious in the group of firms with low levels of internal governance, which indicates that the Social Security Fund plays an important governance role as a high-quality institutional investor. In summary, we verify that the Social Security Fund, when acting as an institutional investor, plays an important role in corporate governance, and that it helps to reduce auditor litigation risk. Our results provide empirical support for expanding the governance role of the Social Security Fund as an institutional investor in China’s A-share market.     

Internal audit,alternative internal audit structures and the level of misappropriation of assets fraud

In recent years, the importance of good corporate governance has received significant public and regulatory attention. A crucial part of an entity's corporate governance is its internal audit function. At the same time, there has been significant public concern about the level of fraud within organizations. The purpose of this study is to assess whether organizations with an internal audit function are more likely to detect and self‐report fraud than those without. In this study, we use a unique self‐reported measure of misappropriation of assets fraud for the first time. The fraud data are from the 2004 KPMG Fraud Survey, which reported fraud from 491 organizations in the private and public sector across Australia and New Zealand. The internal audit data are from a separate mail survey sent to the respondents of the KPMG Fraud Survey. We find that organizations with an internal audit function are more likely than those without such a function to detect and self‐report fraud. Furthermore, organizations that rely solely on outsourcing for their internal audit function are less likely to detect and self‐report fraud than those that undertake at least part of their internal audit function themselves. These findings suggest that internal audit adds value through improving the control and monitoring environment within organizations to detect and self‐report fraud. These results also suggest that keeping the internal audit function within the organization is more effective than completely outsourcing that function.     

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.     

Effect of international working experience of individual auditors on audit quality: Evidence from China

This paper investigates the effects of auditors with international working experience on audit quality in emerging markets. Such auditors are associated with better audit quality, a pattern that is further supported by an examination based on a propensity score matching sample that controls for endogeneity. Chief financial officers with international experience are more conservative in the client company of their auditors who have international working experience. Further, reviewer partners with international working experience provide better audit quality in terms of low accruals, less below‐the‐line items, and less audit reporting aggressiveness, while engagement partners with international working experience require high audit fees. Moreover, financial reports signed by auditors with international working experience significantly increase analyst forecast accuracy and decrease analyst forecast dispersion. Our results are robust to different specifications and alternative measures. Overall, this paper highlights the importance of human capital and provides direct evidence on how auditors with international working experience use their knowledge and audit skills in emerging markets.     

Determinants and implications of long audit reporting lags: evidence from China

Audit reporting lag is the single most important determinant influencing the timeliness of the release of financial statements. In this study, we first explore the determinants of audit reporting lags in China where the audit market for listed firms is dominated by non-Big 4 auditors. We then examine the implications of long audit reporting lags in subsequent years. We find that selected measures of audit risk and complexity, and auditor expertise are all associated with the length of audit reporting lags in China. Firms with long audit reporting lags are more likely to have the receipt of non-standard opinions in subsequent periods. There is also evidence that firms with extremely long audit reporting lags tend to have more restatements in the subsequent year. As prior research has not specifically investigated the consequences of long audit reporting lags in subsequent years, this study makes an important contribution to the literature in this area.     

How does the executive pay gap influence audit fees? The roles of R&D investment and institutional ownership

Using a sample of US firms from 2003–2014, this study examines how the executive pay gap affects audit fees for firms with different levels of R&D investment and institutional ownership. Consistent with managerial power theory, we find that the executive pay gap is positively associated with audit fees, and that the positive association is attenuated by intense R&D investment and higher institutional ownership. We also find that the executive pay gap more strongly affects audit fees after the passage of the 2010 Dodd–Frank Act and the PCAOB's 2012 call to identify the audit risk related to executive incentive compensation. Additional analyses show that the moderating effects of R&D investment and institutional ownership on the pay gap–audit fees association are not conditional on auditor tenure, but the moderating effect of institutional ownership is stronger for firms hiring specialist auditors. Collectively, our findings suggest that auditors consider the business context, such as innovation initiative and external monitoring, when assessing audit risk related to the executive pay gap.     

Effect of audit report disclosure on auditor litigation risk

Internationally, the escalating number of cases levelled against auditors and the costs of defending such actions has led to the auditing profession calling for measures to reduce their liability burden. Relatively few measures have been taken by the auditing profession by way of adapting the disclosure contained in the audit report to mitigate their litigation risk. This study examines whether the issuance of an audit opinion with a going concern related ‘emphasis of matter’ paragraph or work practices disclosure has any effect on potential litigants' likelihood of pursuing litigation against the auditor. An analysis of 69 responses from advanced law students and 18 practitioners working in corporate liquidation demonstrate that a modified (but not qualified) audit report effectively acts as a ‘red flag’ and reduces potential litigants' propensity to initiate litigation. However, work practices disclosure did not significantly alter potential litigants' inclination to recommend litigation. Despite this finding, respondents (particularly liquidators) indicated that work practices disclosure was an important factor in their litigation decision. These results suggest that further investigation into how to effectively disclose the work done on audit and assurance engagements is needed. This has implications for standard setters and the auditing profession, especially considering recent changes in the disclosure contained in audit and assurance reports.     

The potential impact of COSO internal control integrated framework revision on internal audit structured SOX work programs

The purpose of this research is to report the extent internal auditors employ structured work programs in SOX compliance programs and the extent external auditors are involved in development of internal audit work programs. Given the link between the internal audit framework established by the Committee of Sponsoring Organizations of the Treadway Commission and the development of SOX work papers, we also summarize and explain the May 2013 changes to the COSO Internal Audit Integrated Framework. We further posit the potential effects of these changes on extant structured SOX work papers.     

商业银行内部风险管理体系及其职责

风险管理是商业银行的一项重要管理工作,从内部体系看,风险防控的三道防线是由经营部门、风险管理部门、内控合规部门和内审部门分别承担的,它们在风险防控上存在着交集,需要各司其职、明确分工,以提高风险管理效率。此外,各部门间的相互制约应当适度,风险管理部门的设置要计成本、讲效率。     

Decision aid reliance: Modeling the effects of decision aid reliability and pressures to perform on reliance behavior

We investigate the effects of decision aid reliability and pressure to perform on decision aid reliance. A total of 403 students took part in a four (pressures to perform: one through four) by five (decision aid reliability: 50%, 60%, 70%, 80% and 90%) between-participants experiment. We test two competing models of decision aid reliance behavior: pressure-induced rationality and pressure arousal theory. Additionally, we introduce a general model of reliance on a decision aid. We find that pressure arousal theory predominantly explains decision aid reliance behavior at all but the highest level of decision aid reliability tested in this study (90%). Our results indicate that there are reliance peaks across the reliability levels as more pressure to perform is applied, and that continually increasing pressures can eventually lead to decreased, rather than increased, reliance.     

The effect of external audits of internal control over financial reporting on financial reporting for clients of Big 4, Second-tier,and small audit firms

The external audit of internal control over financial reporting (ICFR) is a very expensive and contentious aspect of the Sarbanes–Oxley Act (SOX). Larger public firms were first required to file a management report on and have an external audit of ICFR in 2004. Smaller public firms were first required to file a management report on ICFR in 2007 but are exempt from the audit requirement. Whereas most related prior research investigates the combined effect of management and auditor reports on financial reporting, this study examines the distinct effect of auditor reports on reporting quality. For companies audited by small auditors, we find evidence that financial reporting quality improves with an auditor report on ICFR. We find no evidence that auditor ICFR reports improve reporting quality for clients of Big 4 or Second-tier audit firms. Our study adds to the debate on the applicability of SOX Section 404 to smaller firms.     

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.     

The vanishing searches and audit fees: Evidence from Google's withdrawal from China

I investigate the impact of the disruption of free information access via search engines on audit fees using a quasi-natural experiment provided by Google's withdrawal from China. Employing a difference-in-differences design, I document an increase in audit fees for firms with overseas business relative to firms without overseas business after Google's withdrawal. The results are robust to matched samples, placebo tests, alternative specifications, excluding alternative explanations and different event windows. This trend in audit fees suggests that Google's withdrawal hampers firms' foreign information streams and increases audit risk and audit effort. Consistent with this argument, after Google's withdrawal, firms with overseas business conduct more earnings management, pay more abnormal audit fees and experience longer audit report lags. Furthermore, the increase in audit fees is greater for firms with poor information environments, more retail investors or non-Big 4 auditors. My findings suggest a potential auditing cost of restricting the free flow of public foreign information about firms.