Outsourcing of internal audit services in Australian firms : some preliminary evidence

Although internal auditing (IA) services have been traditionally performed in-house, organizations are increasingly outsourcing such services. Using a Transaction Cost Economics (TCE) perspective, this study examined the influence of several organizational-level variables on the decision to outsource or in-house their internal audit function. The study also identified the type of IA services that were likely to be out-sourced rather than in-housed, the extent to which incumbent external financial statement auditors participated in outsourced arrangements and the level of interaction between the internal audit provider and audit committees. The results have implications for auditor independence, corporate governance and organizational performance.

Outsourcing internal audit services : an empirical study on Queensland public-sector entities

A study of Queensland public-sector entities suggests outsourcing of internal audit services to be extensive (88%), with 51% of respondent agencies adopting co-sourcing and 37% of the agencies fully outsourcing. Results suggest that internal audit outsourcing is largely adopted for non-financial reasons such as lack of technological know-how and service quality rather than financial reasons. Deficiencies of current governance arrangements concerning internal audit outsourcing include (1) a lack of audit committee involvement in outsourcing processes, particularly in co-sourcing entities, and (2) inadequate segregation of duties whereby the same senior management is involved in key arrangements including selection, approval, negotiation and evaluation of contractual performance.

Internal audit independence and objectivity : emerging research opportunities

Purpose – The purpose of this paper is to provide a review of the recent literature on internal audit independence and objectivity and discuss opportunities for future research. The topics examined are the organizational status of internal audit, the internal auditor's dual role as a provider of assurance and consulting activities, internal audit's involvement in risk management, outsourcing and co-sourcing of internal audit activities, and the use of internal audit as a training ground for managers.
Design/methodology/approach – The approach used in this paper is a review of the literature followed by an identification of further research opportunities.
Findings – The paper summarizes the existing body of knowledge relating to internal audit independence and objectivity and identifies gaps in the literature where further research is needed.
Originality/value – The paper provides researchers with a useful summary of the literature on internal audit independence and objectivity and stimulates them to engage in further research in the area.

Internal audit involvement in enterprise risk management

Purpose – The purpose of this paper is to examine the impact of internal auditors’ involvement in enterprise risk management (ERM) on perceptions of their willingness to report a breakdown in risk procedures and whether a strong relationship with the audit committee affects such willingness to report. The study also investigates the use of ERM and the role of internal audit in ERM in Australian private and public sector entities.
Design/methodology/approach – The study uses an experimental design, manipulating the internal auditor’s involvement in ERM and the strength of the relationship between internal audit and the audit committee. Participants are 117 certified internal auditors. The study also gathers descriptive data on the use of ERM.
Findings – The study indicates that a high involvement in ERM impacts the perceptions of internal
auditors’ willingness to report a breakdown in risk procedures to the audit committee. However, a strong relationship with the audit committee does not appear to affect their perceived willingness to report. The study also finds that the majority of organisations have recently adopted ERM. Internal auditors are involved in ERM assurance activities but some also engage in activities that could compromise objectivity.
Research limitations/implications – There are internal and external validity threats associated with the experimental design.
Practical implications – The findings reinforce the need for organisations to adhere to the recommendations of the Institute of Internal Auditors and to ensure that internal auditors do not play an inappropriate role in ERM.
Originality/value – The paper contributes to our understanding of the impact of involvement in ERM on internal audit objectivity and of the current role of internal audit in ERM in Australia.

Accountability structures and management relationships of internal audit : an Australian study

Purpose – The purpose of this study is to examine the accountability structures and the management relationships of internal audit. In particular, related issues such as the predominant internal audit objectives and the related functions, the extent to which internal audit addresses any financial reporting risks and the manner in which internal auditors in Australia perform their tasks, are identified. The study also looks at the extent of compliance with the Institute of Internal Auditors (IIA) Standards.
Design/methodology/approach – Based on a survey of the chief audit executives in Australia, the study identifies the reporting mechanisms, functions and relationships of internal audit, including the contributions made towards good corporate governance. There is, however, some misalignment between the aspirations of internal auditors and their relationships with management.
Findings – While internal audit objectives have been established with a focus on controls, risks and governance, the study has highlighted the fact that there is a lack of correlation between the tasks performed by internal auditors and the important internal audit objectives, with the exception of internal control and risks. The results also suggest that internal auditors have been providing an internal consulting and advisory role in matters concerning IT systems, strategic risks and financial issues. If internal auditors are to proactively contribute to good corporate governance, they need to define how, and in what way, this can be done. In regard to corporate governance processes, the results of the research indicate that issues surrounding internal control, risk assessment and management processes are regarded as the key factors for internal audit to contribute to good corporate governance.
Originality/value – This study complements and contributes to the existing literature in providing insights into the evolving role of the internal audit function in terms of accountabilities and relationships with management. It also provides a valuable insight into how the internal audit profession can build upon its inherent strengths and address any apparent areas of concern. This will assist both the profession and policy makers alike, in better understanding and improving the role of the internal audit process.

Internal audit attributes and external audit's reliance on internal audit : implications for audit fees

This study aims to examine two aspects of internal audit quality, namely internal audit competency and internal audit contribution to financial statement audits. Consistent with the substitution view, this study predicts a negative relationship between the competency aspects of internal audit (the tenure of the existence of internal audit in the organization, internal audit staff expertise in IT and computer skills, training hours, internal audit staff professional certifications in accounting and auditing, and internal audit staff experience in auditing) and audit fees. Second, this study tests whether the contribution of internal auditors to financial statement audit reduces audit fees. The data analysis is based on a cross-sectional regression model with observations of 73 public-listed firms in Malaysia, which include publicly available data matched with survey responses from their internal and external auditors. The results of the study suggest that the competency of internal audit, namely the tenure of the existence of internal audit in the organization, training, internal audit staff prior experience in auditing and accounting, and certifications are associated with lower audit fees. Our findings for both aspects of internal audit quality (competency and internal audit contribution) lend support to the substitution view for explaining the links between internal audit quality and audit fees.

Reliance of external auditors on internal audit work : a corporate governance perspective

The literature suggests an increasing need for interactions among board of directors, management, internal audit and external audit as the four components of corporate governance and presents internal audit as a resource for the other components. External auditing standards that originated in the Western world, which are also being applied in developing countries, recommend external auditor’s reliance on internal audit to achieve audit efficiency. Nevertheless, whether this efficiency motive explains such reliance in corporate governance settings that differ from the West has not been sufficiently explored as yet. This study examines external auditor reliance on internal audit work using questionnaire survey of 119 external auditors in Ethiopia. Mann-Whitney U test results suggest that external auditors’ reliance on internal audit work is not significantly associated with the competitiveness of external audit sub-markets in Ethiopia. Results of multiple discriminant analysis indicate internal audit work performance is the most important factor that determines the extent of external auditors’ reliance on internal audit work. Overall, findings suggest that organizations can enhance corporate governance effectiveness by strengthening internal audit and fostering internal-external auditor coordination.

Factors associated with attributes of internal audit departments : a canonical analysis

This study explores internal audit (IA) practices in selected Ethiopian organizations to identify factors associated with attributes of IA departments. Analytical questionnaire survey responses of 188 IA directors and staff from Ethiopian government ministries, state-owned enterprises and private companies were used. Canonical analysis results show that IA proficiency, scope of IA work and quality of IA planning and execution are higher in organizations where organizational policy authorizing IA is clearly defined, organizational risk exposure is high and internal audit's linkage with external audit is strong. The findings suggest that in organizations that are exposed to high risk, management tends to appreciate IA's assistance in managing risk and thus strengthens IA. Results also suggest the importance of internal and external audit linkages and IA charter (or similar organizational policy) to strengthen IA. The study provides further evidence of differences in IA attributes between public and private sector entities.

Antecedents and organisational performance implications of internal audit effectiveness: Some propositions and research agenda

Purpose – The purpose of this paper is to synthesize relevant theoretical and empirical literature to develop propositions and suggest a research agenda on the antecedents and organisational performance implications of internal audit effectiveness.

Design/methodology/approach – The paper employs institutional theory and Karl Marx's theory of the “circuit of industrial capital” to synthesize relevant internal audit literature to develop theoretically justifiable propositions and highlight an operational research agenda.

Findings – Propositions and a research agenda are provided on potential antecedents of internal audit effectiveness and its possible association with company performance measured as rate of return on capital employed. Also, key variables are identified and operationalisation issues discussed.

Originality/value – As the extant literature does not provide a canon of internal audit effectiveness, the paper's originality is its argument that a positive association between compliance with standards for the professional practice of internal auditors and organisational goal achievement could serve as an approach to assess internal audit effectiveness. Furthermore, the use of the two theories in combination provides additional insights into identifying the antecedents of internal audit effectiveness and its measurement.

Value-added role of internal audit : an Ethiopian case study

Purpose – The purpose of this paper is to draw inferences – from the results of an Ethiopian public sector corporation (for-profit) case study – on how the attributes of a value-adding internal audit department would vary among organisations.

Design/methodology/approach – The case study strategy is employed. The internal audit function of a public sector corporation was examined using an analytical framework derived from the literature. Research evidence was gathered distributing questionnaires to managers and internal auditors, conducting a semi-structured interview with the internal audit department manager, and reviewing documents.

Findings – The results highlight that traditional/compliance audit is dominant in the organisation studied as contrasted with value-added auditing. The paper concludes that goals and strategies pursued and the level of risk faced by organisations to which internal audit provides service, appear to shape the attributes of a value-adding internal audit department. The study also demonstrates that the quality of strategic planning for, and marketing of, internal audit would influence the extent to which an appropriate value-added profile is attained in a particular context.

Research limitations/implications – Since a single unit of analysis is examined, universal generalisability of the findings cannot be claimed. Also, the research design assumed that the unit of analysis investigated falls within the scope of internal audit departments considered in the literature that served as a basis to develop the analytical framework and data collection instruments.

Originality/value – The paper is expected to inspire conclusive follow-on research on the role of internal audit in Ethiopia, or other countries with similar settings.

Internal audit effectiveness : an Ethiopian public sector case study

Purpose – The purpose of the study is to identify factors impacting the effectiveness of internal audit services.

Design/methodology/approach – Based upon a case study of a large public sector higher educational institution in Ethiopia, the paper examines how internal audit quality, management support, organizational setting, auditee attributes, and the interplay among these factors, influence internal audit effectiveness.

Findings – The findings of the study highlight that internal audit effectiveness is strongly influenced by internal audit quality and management support, whereas organizational setting and auditee attributes do not have a strong impact on audit effectiveness.

Research limitation/implications – As in all case studies, the generalisability of the conclusions is limited.

Originality/value – Internal audit services have apparently hitherto been the subject of limited examination. However, this study, in arguably the most thorough treatment so far, highlights the areas requiring improvement.

The perceived scope of internal audit function in libyan public enterprises

Purpose - The aim of this exploratory study is to examine the perceptions of stakeholders regarding the scope of internal audit (IA) work in Libyan state-owned enterprises. Design/methodology/approach - Data were gathered through semi-structured interviews with chief executive officers, IA directors, administrative affairs managers, financial affairs managers and external auditors, which were supplemented with a review of relevant documentary evidence. Findings - The results of the study show that the scope of IA in Libyan organizations may not be sufficiently wide ranging to be considered as a value-adding service. The scope of the IA function may need to be expanded to cover a broader range of organizational functions if internal auditors are to offer value-adding services to their stakeholders. Practical implications - The IA profession has received scant attention in the literature, especially in the context of developing countries such as Libya. Therefore, such settings offer the potential to enhance the understanding of IA practices. As a study on a developing economy, it enhances understanding of the IA profession’s global configuration beyond the predominantly market-driven, industrialized Western economies. Originality/value - In contrast to most previous studies, this study covers a broad range of IA stakeholders’ views on the role of internal auditors. This coverage enabled an in-depth investigation of the factors affecting IA scope and understanding of stakeholder perceptions on the IA function.