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Various attempts have been made through a number of studies so as to investigate the extent of the contribution of internal auditors in the external audit work.
Surveys of internal and external auditors were conducted by Ward (1979) and Ward and Robertson (1980), to gather information on "the extent to and the manner in which independent auditors already rely on the internal audit functionâ€¦whether both groups of auditors believe this extent and manner of reliance is sufficientâ€¦and how the extent and manner of reliance may change"
Barett and Brink (1980)Â examined 150 business organisations with both internal and external audit and then visited 20 organisations that consist of an effective board. The results of the survey revealed that the level of coordination between internal and external auditors should be evaluated using the extent of reliance, that is "much", "moderate" and "little" coordination.
One of the first studies was performed byÂ Brown (1983), whoÂ carried out a thorough investigation of the factors that might be deemed important by external auditors in the appraisal of the reliability of the internal audit function. Approximately 101 external auditors, representing four auditing firms of the "Big Eight" firms in the USA were contacted through questionnaires. The results of the survey showed that the auditor's judgments of internal audit work were influenced by three factors, which are:
independence of the internal auditor,
satisfaction of the external auditor with the internal audit function during previous audits (known as work performance), and
competence of the internal auditor.
The first two listed above were termed as the main factors. As for the competence factor, it was found to be the least important factor, though significant.
As per ISA 610, external auditors are required to assess four factors in deciding whether internal audit work is sufficient for the purpose of their audit. In a similar vein, results of an experiment conducted by Arnold Schneider (1984)Â stated that work performance was viewed as the most important factor, followed by competence and objectivity.The results were obtained through an examinination of the perception of auditors towards the internal audit function, in terms of the evaluation of the strength of the internal audit function by auditors. According to Statement on Auditing Standards (SAS) 9, an investigation of three factors was conducted, including internal auditors' competence, objectivity and work performance. The methodology adopted in this study involved designing and distributing a questionnaire to Certified Public Accountant (CPA) firms in the State of Ohio, found in USA.
Using data from 1975 to 1981, Wallace (1984)Â investigated the link between a company's spending on internal auditing and external audit fees. Results of a regression analysis performed using a sample of 31 companies used variables that are related with external audit fees, including revenue from operating activities, total assets, net revenue, number of ancillary firms and the total spending on the internal audit department. Finally, the conclusion was that there exists a noteworthy negative relationship between spending on internal audit department and external audit fees paid. The results also indicated that the internal audit function had changed over time, thus becoming more refined and therefore increasing the likelihood of external auditors' reliance on internal auditors.
Another relevant study conducted by Schneider (1985) led to the conclusion that competence and work performance were reagarded as having equal importance in the evaluation of the strength of internal audit. Findings also provided clear evidence that external auditors place heavy reliance on internal audit so as to decrease their external audit work.
Research studies by Maletta (1993) and Maletta & Kida (1993) carried out investigations on the factors considered by external auditors' before deciding to employ internal auditors as assistants. The factors included inherent risk, strength of internal control and quality of internal audit. Internal control strength highly determines reliance on internal audit when work is already done by internal auditors, while internal control strength has no effect on the decision to rely when internal auditors function as direct assistants to external auditors. The results indicated that when a company's internal control strength is regarded as being poor, external auditors should refrain from relying on the work performed by internal auditors, but may instead employ internal auditors as direct assistants.
SteinÂ et al.Â (1994)Â conducted an examintation as to the effect of internal audit contribution, among other variables, on audit fees paid to external auditors. The results were not as per expectations and it was found that this variable was not a significant determinant of external audit fees.
In Australia,Â GerrardÂ et al.Â (1994)Â addressed the issue concerning the impact of the internal audit function on external audit fees. The sample from which data were collected from consisted of 300 publicly listed companies in Australia during the 1980s. The method used to model audit fees involved a linear regression. Results revealed that the size, complexity of audited companies and industry differences are major variables in determining deviation in audit fees. Moreover, it was found that no significant relationship existed between internal audit function and audit fees.
A study was carried out by Haron (1996) as to how internal and external auditors evaluate the quality of a payroll internal control system. Findings reported that there was no major difference between the two parties' evaluation, thereby concluding that the work or judgement of internal auditors can be relied upon by external auditors.
The impact of the contribution of internal auditors on the external audit work in respect of audit fees and the factors that influence this contribution was analysed by FelixÂ et al.Â (2001). With a view to achieve the objectives of the study, two questionnaires were designed, with the first being sent to audited companies and the other to external auditors. The results indicated that the contribution of internal audit in external audit work significantly determines audit fees. It was found that the higher the coordination of external audit with internal audit, the lower are audit fees, thus stating a negative relationship. The findings further revealed that audit fees were more or less 18 percent lower when external auditors placed reliance on internal audit.
The level of coordination between internal auditors and external auditors in Saudi Arabia was examined by Al-TwaijryÂ et al.Â (2004).Â Through the use of questionnaires and interviews, it was found that external auditors are dissatisfied with the current internal auditing practice since they believed that many companies lacked professionalism. On the other hand, the level of cooperation between internal and external auditors was regarded as limited by internal auditors. The results also revealed that the extent to which external auditors place reliance on the work of internal auditors varies with the quality of internal audit. It was agreed that external auditors considered objectivity, competence and work experience of internal auditors as key factors which influence their decision to rely.
Another survey undertaken by Haron et al (2004) laid emphasis on the fact that external auditors often place reliance on their clients' internal auditors because doing so leads to cost savings to the client. The study was carried out to determine which of the criteria (objectivity, competence and internal audit quality) considered by external auditors mostly affects their decision to rely on internal auditors. Results were clear enough to indicate that work performed and competence are the two most significant determinants which affect reliance on internal auditors. Haron et al. also listed the results of the most important researches undertaken regarding the key criteria influencing external auditors' reliance on internal auditors:
In a study conducted by FelixÂ et al.Â (2005), it was found that when major non-audit services are provided, client pressure considerably increases the extent of external auditor reliance. On the contrary, when significant non-audit services are not provided to a client, the quality of internal audit and the level of coordination between internal and external auditors have a positive effect on external auditors' decision to place reliance.
Group affiliation theory, adopted by Gramling and Vandervelde (2006), revealed that external auditors might be subjective in evaluating the quality of internal audit when another public accounting firm performs the service. Based on an experiment conducted with both internal and external auditors, no difference was found in either party's judgment of competence and work performance. Nevertheless, the external auditor respondents considered internal audit objectivity to be higher when the provider was another accounting firm, which was different from the internal auditor respondents, according to whom objectivity was higher when internal audit was provided within the firm.
Goodwin-Stewart and Kent (2006)Â reported through their findings that the existence of an internal audit function in a firm is highly and positively associated with external audit fees. Results pointed out that this positive association has strengthened since 2000. "This observation suggests that firms that engage in greater internal monitoring through the use of internal audit also demand higher quality external auditing" (Goodwin-Stewart and Kent, 2006, p. 388).
In a more recent study, GloverÂ et al.Â (2008)Â analysed how sourcing arrangements influence external auditors' decision to rely on the internal audit. According to a study effected on 127 external auditors, results showed that the likelihood of external auditors to rely on in-house or outsourced internal auditors' work is equal when inherent risk is low. Similarly, external auditors are more prone to rely on the work of outsourced rather than in-house internal auditors when inherent risk is high. In addition to what has been said, it was found that when inherent risk is high, external auditors place more reliance on work done by internal auditors for tasks which are objective, rather than subjective tasks, but not when inherent risk is low.
Finally,Â Munro and Stewart (2009)Â carried out a survey to know how internal audit sourcing arrangement and internal audit's consulting affect external auditors' reliance on internal auditors' work. Results led to the conclusion that external auditors are less likely to use internal auditors' work for substantive testing of account balances than for the assessment of internal financial control. It is to be noted that an exception was identified; that is external auditors employ internal auditors mostly as assistants for substantive testing when internal audit is provided in-house.
To sum up, earlier studies have made use of a explanatory and experimental approach with no proper model to guide the research hypotheses. As revealed in Table 1 above, the findings from these studies have been varied and indecisive. While one study (Abdel-khalik et al. 1983) identifies objectivity as the most important factor, others (Brown 1983; Schneider 1984, 1985a, 1985b; Margheim 1986) term work performance as the most significant. On the contrary, latest studies (Margheim 1986; Messier and Schneider 1988; Edge and Farley 1991; Maletta 1993) identify that external auditors believe competence to be the most significant factor in the assessment of the internal audit function. Hence, though a noteworthy amount of previous research has been carried out, yet there are no clear conclusions concerning how external auditors really evaluate and combine these factors so as to appraise the strength of the internal audit function and therefore how much reliance to place on internal auditors.