Reconciling Archival and Experimental Research: Does Internal Audit Contribution Affect the External Audit Fee?

37 Pages Posted: 2 Dec 2007 Last revised: 5 Feb 2015

See all articles by Douglas F. Prawitt

Douglas F. Prawitt

Brigham Young University

Nathan Y. Sharp

Texas A&M University - Department of Accounting

David A. Wood

Brigham Young University - School of Accountancy

Date Written: 2011

Abstract

Consistent with guidelines from external auditing standards, a large body of experimental and survey research suggests that an internal audit function (IAF) can contribute in ways that lead to decreased external audit fees; however, research using archival methodologies generally finds either no relation or a positive relation between proxies for IAF contribution and external audit fees. In this paper, we provide new evidence using a unique and previously unavailable data set to develop archival proxies of internal audit contribution. We find that SAS No. 65-based proxies for the contribution of internal audit are associated with lower unexpected external audit fees. We show that proxies used in prior archival studies are limited in their ability to capture the IAF’s potential contribution to external auditing, and suggest that the unavailability of high quality proxies could help explain the divergent findings of experimental and survey-based studies in relation to archival studies in this area. In addition, our results suggest that fee reductions are more strongly associated with the direct assistance of, than with reliance on work previously performed by, the internal auditor. Overall, our results provide evidence consistent with external auditing standards and with results from prior experimental and survey studies suggesting that IAFs can indeed contribute in ways that lead to lower external audit fees.

Keywords: Internal Audit Function, Internal Audit Costs, External Audit Fee, SAS No. 65, and AS 5

JEL Classification: M49, M41, G34

Suggested Citation

Prawitt, Douglas F. and Sharp, Nathan Y. and Wood, David A., Reconciling Archival and Experimental Research: Does Internal Audit Contribution Affect the External Audit Fee? (2011). Behavioral Research in Accounting, Vol. 23, No. 2, 2011, Available at SSRN: https://ssrn.com/abstract=1034208 or http://dx.doi.org/10.2139/ssrn.1034208

Douglas F. Prawitt

Brigham Young University ( email )

Provo, UT 84602
United States
801-422-2351 (Phone)

Nathan Y. Sharp

Texas A&M University - Department of Accounting ( email )

4353 TAMU
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

David A. Wood (Contact Author)

Brigham Young University - School of Accountancy ( email )

518 TNRB
Brigham Young University
Provo, UT 84602
United States
801-422-8642 (Phone)
801-422-0621 (Fax)

HOME PAGE: http://marriottschool.byu.edu/employee/employee.cfm?emp=daw44

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