The effect of internal audit function quality and internal audit contribution to external audit on audit fees

Mat Zain, Mazlina; Zaman, Mahbub; Mohamed, Zulkifflee

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.

Citation

Mat Zain, M., Zaman, M., & Mohamed, Z. (2015). The effect of internal audit function quality and internal audit contribution to external audit on audit fees. International Journal of Auditing, 19(3), 134-147. https://doi.org/10.1111/ijau.12043

• Journal Article Type: Article
• Online Publication Date: Jun 14, 2015
• Publication Date: 2015-11
• Deposit Date: May 16, 2019
• Journal: International Journal of Auditing
• Print ISSN: 1090-6738
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 19
• Issue: 3
• Pages: 134-147
• DOI: https://doi.org/10.1111/ijau.12043
• Keywords: Internal auditing; Corporate governance; Audit fees
• Public URL: https://hull-repository.worktribe.com/output/1790879
• Publisher URL: https://onlinelibrary.wiley.com/doi/full/10.1111/ijau.12043