External and internal auditors’ perceptions on compliance with internal audit standards and practices: Spirit versus letters?

Mohamed Hegazy,Marwa Farghaly

doi:10.22495/cocv18i3art3

Abstract

This paper investigates differences between the external auditors’ (EA) and the internal auditors’ (IA) perceptions of the degree of usage and compliance with the Institute of Internal Auditors (IIA) International Standards for the Professional Practices of Internal Auditing (Standards) by internal audit departments. The research uses survey-based questionnaires sent to IAs and EAs of the listed firms registered in an emerging market and included interviews with individuals involved in the internal auditing function (IAF) and EAs. The survey analyzes issues relating to IAF compliance with IIA standards summarized in the Common Body of Knowledge Database (CBOK). Social identity and stakeholders’ theories are used to explain the development of the research hypotheses in relation to IAF. The research indicates that the rates of conformance for the selected individual standards vary significantly among respondents. The findings provide evidence that there are low levels of interactions between IAs and EAs in emerging markets. This study is considered among the first that surveys the status of the use of the professional IIA standards in listed firms in an emerging economy. It also investigates the importance of ensuring that the “spirit” of the IIA standards is adhered to rather than the mere compliance with their “letters”. The paper emphasizes the gap still existing in practice between IAs and EAs in relation to their interactions, communication, and cooperation to enhance the quality of the IAF activities and related financial reporting. The research study relied on a sample of companies to investigate the level of compliance with IIAs standards and selected a limited number of the IIA standards for usage and compliance assessments.

Highlights

The internal audit profession is regarded by management as an important governance mechanism affecting the quality of financial reporting as well as the firm’s performance
The results revealed that there was consensus between the internal auditors (IAs) about compliance with the free of interference standard, external auditors (EAs) indicated that internal audit function (IAF) suffered from a lot of difficulties when performing their assurance duties
While IAs admitted that they are still involved in the dayto-day activities of some departments and there is no periodic rotation of the IAs on the audit tasks, EAs did not see such significant involvement

Summary

Introduction

The internal audit profession is regarded by management as an important governance mechanism affecting the quality of financial reporting as well as the firm’s performance. The external auditing standards recognized the importance of a high-quality internal audit in reducing the overall control and detection risks contingent on the independence and competence of the internal auditors (IAs) (Bame-Aldred, Brandon, Messier, Rittenberg, & Stefaniak, 2013; IAASB, 2016; Vuko, Cular, & Slapnicar, 2018). The PCAOB recommended that large and complex firms which do not have an effective IAF should be regarded as having a significant deficiency in their internal controls and corporate governance mechanisms. Bame-Aldred et al (2013) found that the environment in which EAs must make a reliance decision on IAF is complex involving several factors (such as regulations, corporate governance, IAs competence, and objectivity) that must be considered simultaneously. Carcello et al (2018) found that IAs add value to an organization by reducing perceived risks and improving the performance of the audited units compared to non-audited units

Methods

Results

Conclusion