Internal audit standard compliance, potentially competing duties, and external auditors' reliance decision

Abstract

Abstract This article explores the impact of two previously overlooked characteristics, compliance with Institute of Internal Auditors (IIA) standards and the presence of potentially competing duties, on external auditors' perceptions of internal audit competence, objectivity, and, in turn, their willingness to rely on the internal audit function. This research finds that external auditors consider internal audit functions to be more competent and objective when they fully comply with IIA standards and that external auditors consider internal auditors to be more objective in the absence of any potentially competing duties in other areas. Overall, ratings of objectivity and competence relate to the decision to rely on the internal audit function. This study contributes by providing evidence that external auditors are more willing to rely on internal audit functions that comply with IIA standards and do not perform managerial/consulting duties, even though evidence suggests internal audit functions often do not fully comply with IIA standards and do perform managerial/consulting duties. Additionally, this study's results suggest that remedial action could reduce external audit fees and improve internal audit quality.

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