The association between external and internal hearers has been the centre of attending of several professional criterions and researches. SAS No. 65 ( AICPA 1991 ) outlines the nature of this relationship and suggests specific ways utilizing which the external hearer can better efficiency and effectivity by doing usage of internal hearers ‘ work.
Internal hearers normally assist direction in guaranting that there is a proper internal control system in topographic point and that the operations of the company are carried out expeditiously, economically and efficaciously. External hearers, on the other manus, are interested in the truth and equity of the fiscal statements. In order to accomplish this aim, the external hearers will normally measure the internal control system of the company to guarantee that it is capable of forestalling and observing material mis-statements from happening. External auditing criterions require external hearers to find whether or non, and if so to what extent, they will trust on their clients ‘ systems of internal fiscal control in order to obtain confidence that their clients ‘ fiscal statements are dependable.
There is therefore renewed involvement on the likely part that the internal audit map of an administration may do towards cut downing fiscal statement audit costs through external hearers ‘ trust on work undertaken by the internal hearer ( Felix, Gramling, & A ; Maletta, 2001 ; Wallace, 1984 ; Elliot & A ; Korpi, 1978 ) .
Findingss gathered from empirical surveies show an increasing tendency in internal audit supplying support for external audit ( FelixA et al. , 2001 ; A HaronA et al. , 2004 ) . Advocates of higher degrees of internal audit engagement and part to the external audit argue that this engagement is favourable to both external and internal hearers. In contrast, external hearers may utilize the experience of the internal hearers to cut down the duplicate of work and, efficaciously, the cost of the external audit. Additionally, internal hearers can assist external hearers understand the house ‘s internal control system and the degree of conformance with it. Alternatively, internal hearers may profit from the expertness of external hearers in countries that the internal audit section demands. Internal hearers may besides profit from exposure to different audit techniques employed by the external hearers ( Reckers and Lee, 1997 ; A HaronA et al. , 2004 ; A Schneider, 2009 ) .
Despite the fact that client houses are interested in acquiring the maximal benefits from their internal audit investings, they are continually looking for ways to command external audit fees. For case, A FelixA et al.A ( 2001 ) A discovered that the extent to which internal audit contributes to external audit is a major variable in finding external audit fees. This suggests that client houses have fiscal inducements to promote external hearers to trust on internal hearers in the behavior of their external audit.
However, the determination of external hearers refering the grade to which they may trust on the internal audit work during an audit battle should be sustained by a full apprehension of the strength of their client ‘s internal audit map. This sort of apprehension is normally achieved during the trial of controls period in which external hearers appraise their clients ‘ internal controls to guarantee that they are capable of forestalling and observing material misstatement happening. In this respect, the issue of professional auditing criterions has tried to supply counsel for external hearers on the proper usage of the internal audit during an external audit.
In 1975, Statement on Auditing Standards ( SAS ) 9 was the first professional criterion to see to the relationship between external and internal hearers. SAS 9 required external hearers to measure the internal hearers ‘ objectiveness, competency and work public presentation before finding the extent to which they may put trust on the work of internal hearers. However, SAS 9 was condemned on the footing that it did non supply specific counsel for the completion of this rating, go forthing the grade of trust up to the judgement of the single hearers ( Reckers and Lee, 1997 ) . Therefore, SAS 65 was issued in 1991 to cast visible radiation on the working relationship that must be between the external and internal hearers, and to supply better counsel for external hearers on how to gauge and prove the internal hearer ‘s objectiveness, competency and work public presentation ( ReinsteinA et al. , 1994 ) .
It should be noted that SAS 65 licenses external hearers to trust to a great extent on the work of the internal hearers. However, the SAS does non necessitate trust on the internal hearer ‘s work. Therefore, there is no duty for external hearers to trust on internal hearers ; they may or may non trust.
Literature reappraisal
A bulk of external hearers rely on internal hearers to some extent and this trust should increase in the hereafter ( Ward and Robinson, 1980 ) . It is a by and large accepted belief that external hearers should reexamine and measure internal audit quality before make up one’s minding upon the grade of trust on internal hearers. Assorted efforts have been made through a figure of surveies so as to look into the extent of the part of internal hearers in the external audit work.
Audited account fees call for survey for two grounds: foremost, to measure the fight of audit markets
( particularly given the little figure of international suppliers of such services ) ; and, 2nd,
to inspect issues associating to undertaking and independency ( Hay et al. 2006 ) . Much of the
research in audit fee markets has followed Simunic ( 1980 ) and investigated client and hearer
properties associated with the fluctuation of audit fees. A common maneuver has developed from the literature analyzing the determiners of audit fees, mostly based on Simunic ‘s ( 1980 ) seminal work. Typically, an appraisal theoretical account is created by regressing audit fees against a scope of steps which substitute for properties hypothesised to increase or diminish audit fees.
Past researches on the impact of internal audit on audit fees have reported:
( 1 ) a negative association accredited to external hearers ‘ trust on the internal hearers ‘ work ( Elliot & A ; Korpi 1978 ; Felix, Gramling & A ; Maletta 2001 ; Turpin 1990 ; Wallace 1984 ) ;
( 2 ) a positive association based on a house ‘s wish to bespeak a high degree of
control or monitoring environment ( Anderson & A ; Zeghal 1994 ; Carey, Craswell & A ; Simnett
2000 ; Goodwin-Stewart & A ; Kent 2006 ) ; or
( 3 ) no important association between internal audit and audit fees ( Carey et al. 2000 ; Chung & A ; Lindsay 1988 ; Gerrard, Houghton & A ; Woodliff 1994 ; Gist 1994 ; Johnson, Walker & A ; Westergaard 1995 ; Maher, Tiessen, Colson & A ; Broman 1992 ; Palmrose 1986 ; Raman & A ; Wilson 1992 ; Stein, Simunic & A ; O’Keefe 1994 ; Walker & A ; Casterella 2000 ; Willekens & A ; Achmadi 2003 ) .
Surveies of internal and external hearers were conducted by Ward ( 1979 ) and Ward and Robertson ( 1980 ) , to garner information on “ the extent to and the mode in which independent hearers already rely on the internal audit functionaˆ¦whether both groups of hearers believe this extent and mode of trust is sufficientaˆ¦and how the extent and mode of trust may alter ”
Barett and Brink ( 1980 ) A examined 150 concern administrations with both internal and external audit and so visited 20 administrations that consist of an effectual board. The consequences of the study revealed that the degree of coordination between internal and external hearers should be evaluated utilizing the extent of trust, that is “ much ” , “ moderate ” and “ small ” coordination.
One of the first surveies was performed byA Brown ( 1983 ) , whoA carried out a thorough probe of the factors that might be deemed of import by external hearers in the assessment of the dependability of the internal audit map. Approximately 101 external hearers, stand foring four auditing houses of the “ Large Eight ” houses in the USA were contacted through questionnaires. The consequences of the study showed that the hearer ‘s judgements of internal audit work were influenced by three factors, which are:
independency of the internal hearer,
satisfaction of the external hearer with the internal audit map during old audits ( known as work public presentation ) , and
competency of the internal hearer.
The first two listed above were termed as the chief factors. As for the competency factor, it was found to be the least of import factor, though important.
As per ISA 610, external hearers are required to measure four factors in make up one’s minding whether internal audit work is sufficient for the intent of their audit. In a similar vena, consequences of an experiment conducted by Arnold Schneider ( 1984 ) A stated that work public presentation was viewed as the most of import factor, followed by competency and objectivity.The consequences were obtained through an examinination of the perceptual experience of hearers towards the internal audit map, in footings of the rating of the strength of the internal audit map by hearers. Harmonizing to Statement on Auditing Standards ( SAS ) 9, an probe of three factors was conducted, including internal hearers ‘ competency, objectiveness and work public presentation. The methodological analysis adopted in this survey involved designing and administering a questionnaire to Certified Public Accountant ( CPA ) houses in the State of Ohio, found in USA.
The attempts done by internal hearers to organize with external hearers was examined by Berry ( 1984 ) , who looked at the whole state of affairs by seting himself in the places of an internal hearer. The sample chosen consisted of 14 big companies who were interviewed. Satisfactory consequences were obtained which were able to show graded standards for measuring an internal hearer ‘s competency, objectiveness and public presentation, and besides on how to originate a coordination programme.
Using informations from 1975 to 1981, Wallace ( 1984 ) A investigated the nexus between a company ‘s disbursement on internal auditing and external audit fees. Consequences of a arrested development analysis performed utilizing a sample of 31 companies used variables that are related with external audit fees, including gross from operating activities, entire assets, net gross, figure of accessory houses and the entire disbursement on the internal audit section. Finally, the decision was that there exists a notable negative relationship between disbursement on internal audit section and external audit fees paid. The consequences besides indicated that the internal audit map had changed over clip, therefore going more refined and hence increasing the likeliness of external hearers ‘ trust on internal hearers.
Another relevant survey conducted by Schneider ( 1985 ) led to the decision that competency and work public presentation were reagarded as holding equal importance in the rating of the strength of internal audit. Findingss besides provided clear grounds that external hearers place heavy trust on internal audit so as to diminish their external audit work.
Messier and Schneider ( 1988 ) adopted the Analytical Hierarchy Process to measure the comparative importance of the properties that are deemed of import by external hearers in measuring the internal audit map. Findingss stated that hearers consider competency as the most of import facet, after that objectiveness and work public presentation.
Using a sample of 25 expenses from an existent international airdrome company, and with an aim to measure the sensing rate of internal and external hearers in the testing of controls, Wagonner and Rickette ( 1989 ) conducted an experimental survey. The internal hearers were found to hold an overall sensing rate of 63.2 per cent, while the external hearers ‘ rate was 59 per cent, which was considered to be statistically undistinguished. Consequently, these consequences were used by external hearers to document, trial and measure a client ‘s control system to back up the usage of internal hearers to prove controls.
In a survey by Tiessen and Colson ( 1990 ) , it was found that internal hearers ‘ specific work performed accounted for most of the discrepancy in the external hearers ‘ appraisal of the grade of trust they could put on the internal audit section.
Using a sample of Australian external hearers, Edge and Farley ( 1991 ) assessed the factors that are used to measure a client ‘s internal audit map. Consequences led to the decision that proficient competency was the most dominant factor as deemed by the hearers, followed by work public presentation. Prior audit work was considered to be the 3rd most deciding factor and objectiveness ( organisational position ) the least of import of the factors.
Research surveies by Maletta ( 1993 ) and Maletta & A ; Kida ( 1993 ) carried out probes on the factors considered by external hearers ‘ before make up one’s minding to use internal hearers as helpers. The factors included built-in hazard, strength of internal control and quality of internal audit. Internal control strength extremely determines trust on internal audit when work is already done by internal hearers, while internal control strength has no consequence on the determination to trust when internal hearers function as direct helpers to external hearers. The consequences indicated that when a company ‘s internal control strength is regarded as being hapless, external hearers should forbear from trusting on the work performed by internal hearers, but may alternatively use internal hearers as direct helpers.
SteinA et al.A ( 1994 ) A conducted an examintation as to the consequence of internal audit part, among other variables, on audit fees paid to external hearers. The consequences were non as per outlooks and it was found that this variable was non a important determiner of external audit fees.
In Australia, A GerrardA et al.A ( 1994 ) A addressed the issue refering the impact of the internal audit map on external audit fees. The sample from which informations were collected from consisted of 300 publically listed companies in Australia during the 1980s. The method used to pattern audit fees involved a additive arrested development. Consequences revealed that the size, complexness of audited companies and industry differences are major variables in finding divergence in audit fees. Furthermore, it was found that no important relationship existed between internal audit map and audit fees.
A survey was carried out by Haron ( 1996 ) as to how internal and external hearers evaluate the quality of a paysheet internal control system. Findingss reported that there was no major difference between the two parties ‘ rating, thereby reasoning that the work or opinion of internal hearers can be relied upon by external hearers.
The impact of the part of internal hearers on the external audit work in regard of audit fees and the factors that influence this part was analysed by FelixA et al.A ( 2001 ) . With a position to accomplish the aims of the survey, two questionnaires were designed, with the first being sent to audited companies and the other to external hearers. The consequences indicated that the part of internal audit in external audit work significantly determines audit fees. It was found that the higher the coordination of external audit with internal audit, the lower are audit fees, therefore saying a negative relationship. The findings further revealed that audit fees were more or less 18 per centum lower when external hearers placed trust on internal audit.
The degree of coordination between internal hearers and external hearers in Saudi Arabia was examined by Al-TwaijryA et al.A ( 2004 ) .A Through the usage of questionnaires and interviews, it was found that external hearers are dissatisfied with the current internal auditing pattern since they believed that many companies lacked professionalism. On the other manus, the degree of cooperation between internal and external hearers was regarded as limited by internal hearers. The consequences besides revealed that the extent to which external hearers place trust on the work of internal hearers varies with the quality of internal audit. It was agreed that external hearers considered objectiveness, competency and work experience of internal hearers as cardinal factors which influence their determination to trust.
Another study undertaken by Haron et Al ( 2004 ) laid accent on the fact that external hearers frequently place trust on their clients ‘ internal hearers because making so leads to be nest eggs to the client. The survey was carried out to find which of the standards ( objectiveness, competency and internal audit quality ) considered by external hearers largely affects their determination to trust on internal hearers. Consequences were clear plenty to bespeak that work performed and competency are the two most important determiners which affect trust on internal hearers. Haron et Al. besides listed the consequences of the most of import researches undertaken sing the cardinal standards act uponing external hearers ‘ trust on internal hearers:
Table 1
In a survey conducted by FelixA et al.A ( 2005 ) , it was found that when major non-audit services are provided, client force per unit area well increases the extent of external hearer trust. On the contrary, when important non-audit services are non provided to a client, the quality of internal audit and the degree of coordination between internal and external hearers have a positive consequence on external hearers ‘ determination to put trust.
Group association theory, adopted by Gramling and Vandervelde ( 2006 ) , revealed that external hearers might be subjective in measuring the quality of internal audit when another public accounting house performs the service. Based on an experiment conducted with both internal and external hearers, no difference was found in either party ‘s judgement of competency and work public presentation. Nevertheless, the external hearer respondents considered internal audit objectiveness to be higher when the supplier was another accounting house, which was different from the internal hearer respondents, harmonizing to whom objectiveness was higher when internal audit was provided within the house.
It was put frontward by Hay, Knechel & A ; Wong ( 2006 ) that the pick of variable may drive the significance or insignificance of internal audit as an explanatory variable for divergences in audit fees. However, there are other likely grounds for the assorted consequences reported by Hay et Al. ( 2006 ) . For case, harmonizing to SAS 65 and 78 in the United States of America ( USA ) , external hearers are required to trust on an internal hearer ‘s work, wherever possible. In contrast, scrutinizing criterions in some other parts of the universe ( such as Australia and Canada ) do non let this. For that ground, a inauspicious association in USA markets and a positive association in other markets could originate owing to contradictory institutional models.
Goodwin-Stewart and Kent ( 2006 ) A reported through their findings that the being of an internal audit map in a house is extremely and positively associated with external audit fees. Consequences pointed out that this positive association has strengthened since 2000. “ This observation suggests that houses that engage in greater internal monitoring through the usage of internal audit besides demand higher choice external auditing ” ( Goodwin-Stewart and Kent, 2006, p. 388 ) .
In a more recent survey, GloverA et al.A ( 2008 ) A analysed how sourcing agreements influence external hearers ‘ determination to trust on the internal audit. Harmonizing to a survey effected on 127 external hearers, consequences showed that the likeliness of external hearers to trust on in-house or outsourced internal hearers ‘ work is equal when inherent hazard is low. Similarly, external hearers are more prone to trust on the work of outsourced instead than in-house internal hearers when built-in hazard is high. In add-on to what has been said, it was found that when built-in hazard is high, external hearers place more trust on work done by internal hearers for undertakings which are nonsubjective, instead than subjective undertakings, but non when built-in hazard is low.
Finally, A Munro and Stewart ( 2009 ) A carried out a study to cognize how internal audit sourcing agreement and internal audit ‘s confer withing affect external hearers ‘ trust on internal hearers ‘ work. Consequences led to the decision that external hearers are less likely to utilize internal hearers ‘ work for substantial testing of history balances than for the appraisal of internal fiscal control. It is to be noted that an exclusion was identified ; that is external hearers employ internal hearers largely as helpers for substantial testing when internal audit is provided in-house.
To sum up, earlier surveies have made usage of a explanatory and experimental attack with no proper theoretical account to steer the research hypotheses. As revealed in Table 1 above, the findings from these surveies have been varied and indecisive. While one survey ( Abdel-khalik et al. 1983 ) identifies objectiveness as the most of import factor, others ( Brown 1983 ; Schneider 1984, 1985a, 1985b ; Margheim 1986 ) term work public presentation as the most important. On the contrary, latest surveies ( Margheim 1986 ; Messier and Schneider 1988 ; Edge and Farley 1991 ; Maletta 1993 ) place that external hearers believe competency to be the most important factor in the appraisal of the internal audit map. Hence, though a notable sum of old research has been carried out, yet there are no clear decisions refering how external hearers truly measure and unite these factors so as to measure the strength of the internal audit map and therefore how much trust to put on internal hearers.
