Title

Internalaudit Sourcing Arrangements And Reliance By Externalauditors

Keywords

Cosourcing; External auditor reliance; Internal audit; Sourcing

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.

Publication Date

2-1-2011

Publication Title

Auditing

Volume

30

Issue

1

Number of Pages

149-171

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.2308/aud.2011.30.1.149

Socpus ID

80051772159 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/80051772159

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