Internal Audit Sourcing Arrangements and Reliance by External Auditors

    Authors

    N. K. Desai; G. J. Gerard;A. Tripathy

    Comments

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    Abbreviated Journal Title

    Audit.-J. Pract. Theory

    Keywords

    cosourcing; external auditor reliance; internal audit; sourcing; NONAUDIT SERVICES; INDEPENDENCE; FEES; Business, Finance

    Abstract

    A company's internal audit (IA) function can be maintained in-house, outsourced to an IA service provider, or cosourced (a combination of the in-house and outsourced IA functions). This study explores the effect of these sourcing arrangements on the external auditor's assessed quality and reliance on the IA function. We predict that external auditors consider the cosourced and outsourced IA functions to be equal in terms of assessed quality and reliance. Furthermore, we predict that the external auditors' assessments of objectivity and competence will be greater for cosourced and outsourced IA functions compared to in-house IA functions; therefore, external auditors will have greater reliance on the cosourced and outsourced IA functions. Finally, we predict that when the IA service provider also provides additional tax services to the client, external auditor reliance is significantly decreased compared to when the service provider does not provide tax services. One hundred and eight CPAs participated in this study and were randomly assigned to one of five treatment conditions: in-house, cosource, outsource, cosource with tax services, and outsource with tax services. The results support our predictions and indicate that external auditors place more reliance on cosourced and outsourced IA functions compared to in-house IA functions. Furthermore, external auditors' reliance on cosourced and outsourced IA functions decreases when tax services are also provided by the IA service provider.

    Journal Title

    Auditing-a Journal of Practice & Theory

    Volume

    30

    Issue/Number

    1

    Publication Date

    1-1-2011

    Document Type

    Article

    Language

    English

    First Page

    149

    Last Page

    171

    WOS Identifier

    WOS:000287774700007

    ISSN

    0278-0380

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