A study of the interactions between internal audit function and external auditors in Italy.

Carlo Regoliosi,Davide Martino

doi:10.22495/cocv16i2art4

Abstract

This paper shows the results of a research study whose main objectives have been to understand the way and the extent of dependence and consideration which the directors of internal audit departments and the partners in external audit firms have of each other. We relied on the exploratory research methods that examine the level of operative co-operation and activity co-ordination between Internal audit functions and auditing firms through questionnaires and interviews. The findings suggest that mutual collaboration increases the reliability of controls and that, at least in part, avoids duplication of work, although there is no full agreement on the usefulness of the internal audit outcome for the external auditor activities. These findings are particularly relevant given the growing emphasis on the role of Internal Audit as an important corporate governance mechanism and on the new challenges faced by external auditors in the form of greater audit requirements. Overall, our findings have practical implications for both (i) external auditors who are evaluating the role of internal audit functions and its usefulness and (ii) CAEs who could on their turn increase the efficiency and effectiveness of internal audit functions. This article also provides a contribution to the literature examining public companies internal and external audit interrelationships as well as the literature on audit effectiveness and performance.

Highlights

Financial Reporting Quality (FRQ) and the need for a quality financial report to meet expectations of current and potential investors received particular attention especially after the financial scandals that occurred first in the United States and in different countries around the world
This paper has managed research questionnaires to examine the extent of cooperation and coordination between the Internal Audit function and external auditors in the Italian nonfinancial listed companies
Internal auditors consider the cooperation between internal and external audits to be limited, external auditors are rather more positive on the extent of cooperation in circumstances where the Internal Audit department is perceived as being professional in its work

Summary

Introduction

Financial Reporting Quality (FRQ) and the need for a quality financial report to meet expectations of current and potential investors received particular attention especially after the financial scandals that occurred first in the United States and in different countries around the world. By damaging investor confidence in corporate financial reports and raising doubts about the effectiveness of Internal Control Systems (ICS), these events highlighted the importance of integrated governance. Internal Audit is considered a fundamental function in the new developments in governance structure and an important safeguard for the effectiveness of the Internal Control System (Raiborn et al, 2017). It has become an important function that provides a pioneer role in governance quality. This increasing emphasis on the role of Internal Audit as an important corporate governance mechanism concerned aspects of financial reporting (Doyle & McVay, 2007; Abbott et al, 2016; Donelson et al, 2016). The stringent regulatory reforms in terms of financial reporting issued in the last 15 years have exacerbated the pressure on firms and their auditors to conduct financial statement audits in an adequately manner (Ettredge et al, 2006; Masli et al., 2010; Bronson et al, 2011)

Methods

Results

Conclusion