Internal Audit Sourcing Arrangement and the External Auditor's Reliance Decision

32 Pages Posted: 28 Apr 2006

See all articles by Steven M. Glover

Steven M. Glover

Brigham Young University

Douglas F. Prawitt

Brigham Young University

David A. Wood

Brigham Young University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: April 2007

Abstract

This paper examines the effects of internal audit sourcing arrangement on the external auditor's reliance decision in the presence of different levels of inherent risk and task subjectivity. We posit that external auditors will rely more on outsourced than in-house internal audit functions (IAFs) and that this difference will be more pronounced when inherent risk is high or when the work performed by internal auditors relates to a subjective task. Participants in the study were 127 external auditors from a Big 4 firm who completed an experimental case in which we manipulated internal audit sourcing, inherent risk, and task subjectivity. Results from the experiment indicate an interaction between sourcing and inherent risk such that external auditors rely more on outsourced than in-house internal auditors when the level of inherent risk is high but do not differentiate based on sourcing arrangement when inherent risk is low. While we find that reliance is lower for subjective than for objective tasks, we do not find an interaction between sourcing arrangement and the subjectivity of the work performed. We do find a marginally significant interaction between inherent risk and subjectivity of work performed: external auditors are less willing to rely on subjective work performed by internal auditors when inherent risk is high but do not differentiate based on task subjectivity when inherent risk is low. Additional analyses indicate that sourcing arrangement affects the reliance decision both directly and indirectly. The indirect effect appears to be mediated through external auditors' perceptions of internal auditor objectivity.

Keywords: Internal Audit, Outsourcing, External Auditor Reliance

JEL Classification: M49, D21, D73, M51

Suggested Citation

Glover, Steven M. and Prawitt, Douglas F. and Wood, David A., Internal Audit Sourcing Arrangement and the External Auditor's Reliance Decision (April 2007). Available at SSRN: https://ssrn.com/abstract=898800 or http://dx.doi.org/10.2139/ssrn.898800

Steven M. Glover

Brigham Young University ( email )

Provo, UT 84602
United States
801-422-6080 (Phone)
801-422-0621 (Fax)

Douglas F. Prawitt (Contact Author)

Brigham Young University ( email )

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

David A. Wood

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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