The Effect of Internal Audit Function Quality and Internal Audit Contribution to External Audit on Audit Fees

14 Pages Posted: 13 Oct 2015

See all articles by Mazlina Mat Zain

Mazlina Mat Zain

Multimedia University (MMU) - Faculty of Management

Mahbub Zaman

Hull University Business School

Zul Mohamed

Universiti Tun Abdul Razak (UNIRAZAK)

Date Written: November 2015

Abstract

Corporate governance mandates and listing rules identify internal audit functions (IAF) as a central internal control mechanism. External auditors are expected to assess the quality of IAF before placing reliance on its work. We provide evidence on the effect of IAF quality and IAF contribution to external audit on audit fees. Using data from a matched survey of both external and internal auditors, we extend prior research which is based mainly on internal auditors' assessment and conducted predominantly in highly developed markets. We find a positive relationship between IAF quality and audit fees as well as a reduction in audit fees as a result of external auditors' reliance on IAF. The interaction between IAF quality and IAF contribution to external audit suggests that higher quality IAF induces greater external auditor reliance on internal auditors' work and thus result in lower external audit fees.

Keywords: Internal auditing, corporate governance, audit fees

Suggested Citation

Zain, Mazlina Mat and Zaman, Mahbub and Mohamed, Zulkifflee Mohamed, The Effect of Internal Audit Function Quality and Internal Audit Contribution to External Audit on Audit Fees (November 2015). International Journal of Auditing, Vol. 19, Issue 3, pp. 134-147, 2015. Available at SSRN: https://ssrn.com/abstract=2673250 or http://dx.doi.org/10.1111/ijau.12043

Mazlina Mat Zain

Multimedia University (MMU) - Faculty of Management ( email )

Persiaran Multimedia
Cyberjaya, Selangor Darul Ehsan
Malaysia
+603 8312 5664 (Phone)
+603 8312 5590 (Fax)

Mahbub Zaman (Contact Author)

Hull University Business School ( email )

Hull, HU6 7RX
United Kingdom

HOME PAGE: http://www.mahbubzaman.com

Zulkifflee Mohamed Mohamed

Universiti Tun Abdul Razak (UNIRAZAK) ( email )

Capital Square, Block C & D
No. 8
Jalan Munshi Abdullah, Kuala Lumpur 50100
Malaysia

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