A Summary of Research on External Auditor Reliance on the Internal Audit Function

Auditing: A Journal of Practice & Theory, Forthcoming

Northeastern U. D’Amore-McKim School of Business Research Paper No. 2013-11

57 Pages Posted: 5 Apr 2012 Last revised: 13 Jun 2013

See all articles by Charles Bame-Aldred

Charles Bame-Aldred

Washington State University; Northeastern University - Accounting Group

Duane M. Brandon

Auburn University

William F. Messier, Jr.

NHH Norwegian School of Economics

Larry Rittenberg

University of Wisconsin - Madison - Department of Accounting and Information Systems

Chad M. Stefaniak

University of South Carolina

Date Written: April 1, 2012

Abstract

PCAOB Auditing Standard No. 5 (AS5) allows external auditors (EAs) to rely on the internal audit function (IAF) when the internal audit activities meet certain criteria and the EAs would find efficiencies in relying on their work (PCAOB 2007). This paper reviews the extant literature on the EAs’ reliance on IAF, identifies gaps in the literature, and proposes a series of research questions aimed at closing these gaps. We focus our review on research pertaining to how environmental factors and IAF-specific factors influence initial EAs reliance decisions, the nature and extent of EAs reliance on IAF, and the observable outcomes as a result of EAs’ reliance decisions. Our review finds that the environment in which EAs must make a reliance decision is complex – involving several factors that must be considered simultaneously. Moreover, an evolving set of auditing standards introduces several necessary intermediary judgments that the EAs must process before, and during, reliance on the IAF. In addition, our review indicates that we continue to know very little about how, and to what extent, EAs are currently evaluating IAFs’ quality factors. Similarly, while we find that the nature and extent of EAs reliance on IAF is influenced by account risk, inherent risk, and IAF sourcing, how the EAs chooses task environments (e.g., revenue recognition versus payroll) and the types of tests to be relied upon within these task environments is not completely understood. Finally, we find that there is a paucity of research concerning the effects of EAs’ reliance on IAF in terms of external audit quality.

Keywords: External Audit, Internal Audit, Reliance

Suggested Citation

Bame-Aldred, Charles and Brandon, Duane M. and Messier Jr, William F. and Rittenberg, Larry and Stefaniak, Chad M., A Summary of Research on External Auditor Reliance on the Internal Audit Function (April 1, 2012). Auditing: A Journal of Practice & Theory, Forthcoming, Northeastern U. D’Amore-McKim School of Business Research Paper No. 2013-11, Available at SSRN: https://ssrn.com/abstract=2035087 or http://dx.doi.org/10.2139/ssrn.2035087

Charles Bame-Aldred

Washington State University ( email )

College of Business & Economics
Pullman, WA 99164-4729
United States
509-335-2421 (Phone)
509-335-4075 (Fax)

HOME PAGE: www.cbe.wsu.edu/~cbamealdred

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Duane M. Brandon

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

William F. Messier Jr

NHH Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
678-386-8634 (Phone)

Larry Rittenberg

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Chad M. Stefaniak (Contact Author)

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

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