Additional Evidence on the Relationship between an Internal Audit Function and External Audit Fees in Australia

13 Pages Posted: 18 Feb 2014

See all articles by Harjinder Singh

Harjinder Singh

Curtin University - School of Accounting

David R. Woodliff

University of Western Australia

Nigar Sultana

Curtin University of Technology - Curtin Business School - Bentley Campus; Curtin University - School of Accounting

Rick Newby

The University of Western Australia - Department of Accounting and Finance

Date Written: March 2014

Abstract

Studies examining the relationship between a firm's internal audit (IA) function and its audit fees have produced mixed results with suggestions of possible model mis‐specification in these studies. Our analysis reveals that differences in significance for IA with audit fees is driven by the choice of variables proxying for firm size and other firm characteristics, suggesting that prior results are entangled with model specification issues. Specifically, when the sales variable is used as a measure of firm size, IA is insignificant (in explaining variations in audit fees) but subsequently becomes significant when assets and employees are used. To overcome the conflicting results, subsequent factor analysis supported a positive relationship between IA and audit fees. The most significant implication from this study is that previously reported relationships involving audit fees may be the outcome of the model adopted rather than the underlying relationship between the variable of interest and audit fees.

Keywords: internal audit, audit fees, model mis‐specification and corporate governance

Suggested Citation

Singh, Harjinder and Woodliff, David R. and Sultana, Nigar and Sultana, Nigar and Newby, Rick, Additional Evidence on the Relationship between an Internal Audit Function and External Audit Fees in Australia (March 2014). International Journal of Auditing, Vol. 18, Issue 1, pp. 27-39, 2014, Available at SSRN: https://ssrn.com/abstract=2397491 or http://dx.doi.org/10.1111/ijau.12009

Harjinder Singh

Curtin University - School of Accounting ( email )

Australia

David R. Woodliff

University of Western Australia ( email )

Department of Accounting & Finance
Nedlands WA 6907
AUSTRALIA

Nigar Sultana

Curtin University of Technology - Curtin Business School - Bentley Campus ( email )

GPO Box U1987
Perth WA 6845
Australia

Curtin University - School of Accounting ( email )

Australia

Rick Newby

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

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