An investigation into the nature and extent of external auditor reliance on the internal audit function of companies listed on the Irish stock exchange

Abstract

Questions exist regarding the extent to which internal auditors should participate in the external audit. While internal and external auditors occupy distinct roles, some professional bodies increasingly advocate the view that increased co-ordination between the internal and external auditors can provide total audit coverage more efficiently and effectively. However, others maintain that internal auditors should not focus on areas that are the subject of external audit interest. This study used online questionnaires and semi-structured interviews to advance research by examining the nature and extent of external auditor reliance on the internal audit function (IAF) of companies listed on the Irish Stock Exchange (ISE). The findings of this study revealed that the role of internal auditors has evolved in recent years so that they are now seen in a more positive light. External auditors now believe that internal auditors stand in a unique position to detect and prevent fraudulent activity. As a result, IAF’s are now seen as a value adding component of an organisation. Therefore, it was surprising when questionnaire findings revealed that even though there has been more co-operation between both parties in recent years, the nature of internal audit’s work which has actually been helpful to the external auditor and which they have relied upon has been limited. Internal auditors were more positive about the extent of co-operation between both parties and the reliance placed on them when certain qualities are present within the IAF. The results of the primary research also revealed that external auditors consider the objectivity, independence and the quality of the work performed by the IAF as the most important factors affecting the reliance decision. The quality of the work performed by the IAF is actually ranked as the most important factor i.e. the IAF must produce high quality work for external auditors to place reliance on them. External auditors highlighted the interrelationships between these three factors and stated that they would be unwilling to rely on the work of the IAF if any of the above aforementioned qualities were absent.