Factors affecting the voluntary use of internal audit

Tags: Journal of Accounting and Public Policy, Managerial Auditing Journal, internal audit, Accounting Horizons, audit committee, Journal of Accounting Research 18, Contemporary Accounting Research, audit committees, internal audit services, Positive Accounting Theory, National Commission of Fraudulent Financial Reporting, A. Craswell, Attitude Measurement, Journal of Accounting and Economics, Journal of Applied Business Research, Corporate Law Economic Reform Program, audit risk, Accounting, J. Francis, external audit, Journal of Accounting Research, R. Simnett, D.R. Hermanson, external audit fee, D.V. Rama, New York, American Accounting Association, British Accounting Association, Factors Affecting, Jere Francis, Corporate Governance, University of Queensland, Queensland University of Technology, Internal Auditor, internal auditors, risk management, Blue Ribbon Committee, Accounting, Organizations and Society, Institute of Internal Auditors, internal auditing, Corporate Audit Committees, University of New South Wales, New York Stock Exchange, National Association of Securities Dealers, K. Raghunandan
Content: Working Paper No. 2004-001 Factors Affecting the Voluntary Use of Internal Audit Jenny Goodwin School of Accountancy Queensland University of Technology and Pamela Kent UQ Business School University of Queensland Acknowledgements: The authors acknowledge the helpful comments of Bruce Bennett, Peter Carey, Liz Carson, Allen Craswell, Jere Francis, Gerry Gallery, David Hay, Robert Knechel, Arnie Schneider, participants at seminars at the University of New South Wales, Unitec, Auckland and the Institute of Internal Auditors, Queensland, and at the Annual Conference of the British Accounting Association, Manchester, UK, 2003 and the Annual Meeting of the American Accounting Association, Hawaii, 2003. Funding from the University of Queensland is also gratefully acknowledged. October 2004
Factors Affecting the Voluntary Use of Internal Audit ABSTRACT The objective of this study is to explore the use of internal audit and to identify factors that lead listed companies to voluntarily use internal audit. Drawing on the Institute of Internal Auditors' definition of internal auditing, we develop hypotheses which predict that the use of internal audit is associated with factors that increase the need for risk management, strong internal controls and strong corporate governance. We test these hypotheses using data from a questionnaire survey combined with information from ANNUAL REPORTS. Our results indicate that only one third of our sample companies use internal audit. While size appears to be a dominant driver of internal audit use, we find a strong association between the level of commitment to risk management and the use/size of internal audit. We also find support for our prediction that internal audit is associated with strong corporate governance. Key Words: internal audit; internal controls; corporate governance; risk management 2
References Adams, M.B. 1994. Agency theory and the internal audit. Managerial Auditing Journal 9 (8): 8-12. Anderson D., J.R. Francis, and D.J. Stokes. 1993. Auditing, directorships and the demand for monitoring. Journal of Accounting and public policy 12: 353-375. Auditing Standards Board of the Australian accounting research Foundation. 1995. AUS 402 risk assessment. Australian Stock Exchange (ASX) Corporate Governance Council. 2003. Principles of Good Corporate Governance and Best Practice Recommendations. Sydney: ASX. Bishop, W.G., D.R. Hermanson, P.D. Lapides, and L.E. Rittenburg. 2000. The year of the audit committee. Internal Auditor 57 (2): 46-51. Bradbury, M.E. 1990. The incentives for voluntary audit committee formation. Journal of Accounting and Public Policy 9:19-36. Braiotta, L. 1999. The Audit Committee Handbook. 3rd Edition. New York: John Wiley & Sons Inc. Brody, R.G., S.P. Golen, and P.M.J. Reckers. 1998. An empirical investigation of the interface between internal and external auditors. Accounting and Business Research 28 (3): 160-171. ________ , and S.E. Kaplan. 1996. Escalation of commitment among internal auditors. Auditing: A Journal of Practice & Theory 15 (1): 1-15. ________ , and D.J. Lowe. 2000. The new role of the internal auditor: Implications for internal auditor objectivity. International Journal of Auditing 4: 169-176. Cadbury Report. 1992. Report of the Committee on the Financial Aspects of Corporate Governance. London: Gee & Co. 35
Caplan, D.H., and M. Kirschenheiter. 2000. Outsourcing and audit risk for internal audit services. Contemporary Accounting Research 17 (3): 387-428. Carcello, J.V., D.R. Hermanson, and T.L. Neal. 2002. Disclosures in audit committee charters and reports. Accounting Horizons 16(4): 291-304. Carey, P., A. Craswell, and R. Simnett. 2000a. The association between the external audit fee and external auditors' reliance on the work of internal audit, Paper presented at AAANZ Conference, Hamilton Island, Australia, July. _________ , R. Simnett, and G. Tanewski. 2000b. Voluntary demand for internal and external auditing by family businesses. Auditing: A Journal of Practice & Theory 19 (Supplement): 37-51. Chambers, A.D. 1981. Internal Auditing: Theory and Practice. London:Pitman. Chow, C.W. 1982. The demand for external auditing: Size, debt and ownership influences. The Accounting Review 57(2): 272-291. Church, B.K., and A. Schneider. 1991. Maintaining objectivity despite conflicting duties. Internal Auditing 7 (2): 11-17. ________ , and _________ . 1992. Internal auditor involvement in internal control system design: Is objectivity impaired? Journal of Applied Business Research 8 (4): 15-24. CLERP 9 (Corporate Law economic reform Program, Chapter 9). 2002. Corporate Disclosure: Strengthening the financial reporting Framework. Canberra: Commonwealth of Australia. Colbert, J.L. 2002. New and expanded internal audit standards, The CPA Journal 72 (5): 34-38 36
Collier, P. 1993. Factors affecting the formation of audit committees in major UK listed companies. Accounting and Business Research 23 (19A): 421-430. ________ , and A. Gregory, 1999. Audit committee activity and agency costs. Journal of Accounting and Public Policy 18: 311-332. Committee on Corporate Governance. 2001. The Code of Corporate Governance Singapore. COSO Report (Committee of Sponsoring Organizations of the Treadway Commission). 1992. Internal Control - Integrated Framework. New York: AICPA. Craswell, A., J. Francis, and S. Taylor. 1995. Auditor brand name reputations and industry specializations. Journal of Accounting and Economics 20: 297-322. Dielman, T.E. 1991. Applied Regression Analysis for Business and Economics. Boston: PWS-Kent Publishing Company. Ettredge M., D. Simon, D. Smith, and M Stone. 1994. Why do companies purchase timely quarterly reviews? Journal of Accounting and Economics. 18: 131-155. Fama, E.F. 1980. Agency problems and the theory of the firm. Journal of Political Economy April: 288-307. Felix, W.L. Jr., A.A. Gramling, and M.J. Maletta. 2001. The contribution of internal audit as a determinant of external audit fees and factors influencing this contribution. Journal of Accounting Research 39 (3): 513-534. Francis, J.R., and D.J. Stokes. 1986. Audit prices, product differentiation and scale economies: Further evidence from the Australian market. Journal of Accounting Research 24(2): 383-393. 37
Goodwin J. 2003. The relationship between the audit committee and the internal audit function: Evidence from Australia and New Zealand. International Journal of Auditing Forthcoming. ________ , and P. Kent. 2003. The relation between audit fees, internal audit and the audit committee. Working Paper, University of Queensland/Queensland University of Technology, Brisbane, Australia. ________ , and T.Y. Yeo. 2001. Two factors affecting internal audit independence and objectivity: evidence from Singapore. International Journal of Auditing 5(2): 107125. Gul, F.A., and J.S.L. Tsui. 1998. A test of the free cash flow and debt monitoring hypotheses: Evidence from audit pricing. Journal of Accounting and Economics 24: 219-237. Hay, D., and W. R. Knechel. 2001. Evidence on the associations among elements of control and external assurance. Working paper, University of Florida, Gainesville, FL. Institute of Internal Auditors (IIA). 1999. Definition of Internal Auditing, Altamonte Springs, Florida: The Institute of Internal Auditors. International Federation of Accountants. 1994. International Statement on Auditing ISA 400 Risk Assessments and Internal Control. International Federation of Accountants. Jensen, M.C., and W.H. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics October: 305360. 38
Kaplan, S., and P.M.J. Reckers. 1995. Auditors' reporting decisions for accounting estimates: The effect of assessments of the risk of fraudulent financial reporting. Managerial Auditing Journal 10 (5): 27-36. Kent, P. 1999. Do small firms pay more interest? Evidence from a sample of Australian firms. Accounting Research Journal 12 (2): 138-150. Klein, A. 2002. Economic determinants of audit committee independence. The Accounting Review 77(2): 435-452. Kwan, W.K. 1999. Risk management ­ needed: an integrated approach. Australian CPA 69 (5): 20-21. Lampe, J.C., and S.G. Sutton. 1994. Evaluating the work of internal audit: A comparison of standards and empirical evidence. Accounting and Business Research 24 (96): 335348. Leithhead, B.S. 1999. Managing change and size risks. Internal Auditor 56 (6): 6869. Lennox, C.S. 1999. Audit quality and auditor size: An evaluation of reputation and deep pockets hypotheses. Journal of Business Finance and Accounting 26(7/8): 779-805. Lindow, P.E., and J.D. Race. 2002. Beyond traditional audit techniques. Journal of Accountancy 194 (1): 28-33. McNamee, D., and G. Selim. 1999. The next step in risk management. Internal Auditor 56 (3): 35-38. Menon, K., and J.D. Williams. 1994. The use of audit committees for monitoring. Journal of Accounting and Public Policy 13 (2): 121-139. New York Stock Exchange (NYSE) Corporate Accountability and Listing Standards Committee. 2002. http://www.nyse.com. 39
New York Stock Exchange (NYSE) and National Association of Securities Dealers (NASD). 1999. Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. New York: New York Stock Exchange and National Association of Securities Dealers. Oppenheim, A.N. 1966. Questionnaire Design and Attitude Measurement. New York: Heinmann Books. Raghunandan, K., W.J. Read, and D.V. Rama. 2001. Audit committee composition, "gray directors," and interaction with internal auditing. Accounting Horizons 15 (2): 105118. Rezaee, Z. 1995. What the COSO Report means for internal auditors. Managerial Auditing Journal 10 (6): 5-9. San Miguel J.G., and V. Govindarajan. 1984. The contingent relationship between the controller and internal audit functions in large organizations. Accounting, Organizations and Society 9(2): 179-188. Scarbrough, D.P., D.V. Rama, and K. Raghunandan. 1998. Audit committee composition and interaction with internal auditing: Canadian evidence. Accounting Horizons 12(1):51-62. Sherer, M., and D. Kent. 1983. Auditing and Accountability. London: Pitman. Simunic, D.A. 1980. The pricing of audit services; Theory and evidence. Journal of Accounting Research 18(1): 161-190. Stein, M.T., D.A. Simunic, and T.B. O'Keefe. 1994. Industry differences in the pricing of audit services. Auditing: A Journal of Practice & Theory 13 (Supplement): 128-142. 40
Steinmetz, R.S., and M. Arthus. 2001. Risk management: A multitool for better business. ABA Bank Compliance 22(1): 3-7. Treadway, J.C. 1987. Report of the National Commission of Fraudulent Financial Reporting. Washington, DC. Turner, E. 1999. Keeping audit committees effective. CA Magazine 132(9): 40-42. Verschoor, C.C. 1992. Internal auditing interactions with the audit committee. Internal Auditing 7(4): 20-23. Walker, P.L., W.G. Shenkir, and T.L. Barton. 2003. ERM in practice. Internal Auditor 60(4): 51-55. Wallace, W.A. and R.W. Kreutzfeldt. 1991. Distinctive characteristics of entities with an internal audit department and the association of the quality of such departments with errors. Contemporary Accounting Research 7(2): 485-512. Watts, R.L. 1988. Discussion of financial reporting standards, agency costs, and shareholder intervention. Journal of Accounting Literature 7:125-132. ________ , and J.L. Zimmerman. 1986. Positive Accounting Theory. Englewoods Cliffs, NJ: Prentice-Hall. Widener, S.K., and F.H. Selto. 1999. Management control systems and boundaries of the firm: Why do firms outsource internal auditing activities? Journal of Management Accounting Research 11: 45-73. Wilkinson, L. 1989. Systat: The System for Statistics. Evanston, IL: SYSTAT.

File: factors-affecting-the-voluntary-use-of-internal-audit.pdf
Published: Wed Oct 5 10:38:00 2011
Pages: 9
File size: 1.13 Mb

OCB Mode, 22 pages, 0.14 Mb
Copyright © 2018 doc.uments.com