Internal Audit Function Quality Research Articles

Lean Six Sigma, effectiveness, and efficiency of internal auditing

PurposeIn light of the recent changes in the internal audit (IA) landscape, the role of auditors has undergone a significant transformation. This paper aims to investigate the effects of applying Lean Six Sigma (LSS) techniques on the effectiveness and efficiency of IA.Design/methodology/approachThe study used a quantitative approach, surveying Iranian internal auditors with a sample size of 384 participants. Data analysis involved confirmatory factor analysis and structural equation modeling.FindingsThe analyses demonstrate a significant association between LSS application and IA effectiveness and efficiency. In addition, an exploratory analysis indicates that the application of LSS techniques by less experienced internal auditors had a reverse effect on IA function quality as a component of IA competency. However, IA motivation factors, including education and position, did not mediate the impact of LSS on IA effectiveness and efficiency.Research limitations/implicationsThis study was conducted with Iranian internal auditors, which may limit the generalizability of the findings to other countries. However, the primary academic implication of this research lies in its novel perspective on emphasizing the concept of continuous improvement in IA through the use of LSS techniques. By focusing on the need for internal auditors to add value to the business in new ways, this research contributes to the literature on IA quality.Practical implicationsThis study has significant implications for the effective management of IA departments. By promoting the application of LSS techniques in IA, lean auditing is enhanced, and IA can create value by improving the quality of its functions. Moreover, IA regulators can benefit from this study as it emphasizes providing guidance and training on LSS techniques to enhance IA skills.Originality/valueThis research is pioneering in applying LSS methodology to enhance the effectiveness and efficiency of internal auditing. It also considers the integration of lean thinking into current audit practices, making it unique and valuable in internal auditing research.

The Impact of Domain-Specific Internal Audit Education on Financial Reporting Quality and External Audit Efficiency

SYNOPSISWe investigate how the geographic distribution of domain-specific internal audit education impacts financial reporting quality and audit efficiency in the U.S. Using universities with Centers for Internal Auditing Excellence as proxies for robust internal audit education, we find that companies headquartered in close proximity to these programs have fewer material weaknesses in internal controls over financial reporting, fewer financial statement misstatements, and shorter audit lags, and sometimes pay lower audit fees compared with a matched sample of companies not in close proximity to these programs. These findings have implications for practitioners responsible for the staffing and quality of their internal audit functions, the Institute of Internal Auditors in its education-collaboration initiatives, and higher-learning institutions responsible for educating future audit practitioners. These findings also contribute to the academic debate on the value of internal audit and determinants of internal audit function quality.Data Availability: Data are available from sources cited in the text.

The mediation effect of audit committee quality and internal audit function quality on the firm size–financial reporting quality nexus

PurposeThis study examines the effects of firm size on financial reporting quality (FRQ) through the mediating effects of audit committee (AC) quality and internal audit function (IAF) quality.Design/methodology/approachBased on data from a questionnaire survey and archival sources of non-financial companies listed on the Dhaka Stock Exchange (DSE), the authors perform both structural equational modeling and ordinary least squares (OLS) regression to test the developed hypotheses.FindingsResults show that the firm size is positively related to IAF quality. Firm size, AC quality and IAF quality are significantly associated with abnormal accruals (FRQ). Moreover, the authors find a mediation effect of the IAF quality on the relationship between firm size and FRQ, while no mediation effect is observed for AC quality. Thus, the study advocates companies focus on AC quality and IAF quality to enhance FRQ as it has a significant impact on corporate disclosure and investor decisions.Research limitations/implicationsFirst, the study is restricted to the survey questions that cover particular areas of the AC and IAF. Second, the sample selection focuses on relatively big industries in terms of the number of firms and excludes small sectors.Practical implicationsThe findings provide significant implications for professionals and policymakers in making regulatory reforms and revising existing policies to improve governance monitoring performance and FRQ.Originality/valueTo the best of the authors’ knowledge, this is the first study to explore the mediation effect of AC quality and IAF quality on firm size–FRQ nexus in a developing country.

The Impact of Chief Audit Executive’s Leadership Style and Senior Management Support for Internal Audit Function on Corporate Governance Effectiveness with the Moderating Effect of Audit Committee Characteristics: Evidence from Yemen

The objective of this paper is to determine the relationship between the Chief Audit Executive's (CAE) leadership style and senior management support for the internal audit function (IAF) as determinants of IAF quality and corporate governance (CG) effectiveness in Yemeni commercial banks. This article also investigates the extent to which the characteristics of the audit committee (AC) influence the link between CAE leadership style, support senior management for IAF, and CG effectiveness. The data was acquired using questionnaires delivered to respondents in Yemeni commercial banks, of which 158 valid questionnaires were obtained for analysis. Smart PLS 3 was used to analyse the data and test the hypotheses. The PROCESS macro approach was also utilised to evaluate the influence of AC characteristics on the association between CAE leadership style, senior management support for IAF, and CG effectiveness. An affirmative substantial correlation was found between CAE leadership style and senior management support for IAF, and CG effectiveness. Furthermore, the study found that AC characteristics favourably influence the association between CAE leadership style and CG effectiveness. However, AC characteristics do not alter the association between senior management support for the IAF and CG effectiveness. The findings improve the IAF's quality of determinants to enhance CG in developing countries, such as Yemen.

The Influence of Management's Internal Audit Experience on Earnings Management*

ABSTRACTWe examine whether firms with managers that have prior internal audit experience are less likely to manage earnings. This examination is important because the internal audit function (IAF) is uniquely positioned to provide experiences that could influence future managerial behavior, including limiting the potential negative repercussions of earnings management. We find that firms with managers that have internal audit experience are associated with lower real earnings management (REM) but not accruals‐based earnings management. Effects are strongest when managers with internal audit experience have greater power or currently hold financial roles, or when there are a greater number of managers with internal audit experience. The results are robust to including firm fixed effects, using entropy‐balancing and performance‐matching approaches, using a subsample of firm‐years required to have an IAF, using a subsample of firms for which we can measure IAF quality, and measuring internal audit experience at a previous employer. These results point to an important benefit of manager internal audit experience, as research suggests that REM is common, difficult to detect, not always within the scope of financial reporting regulators, and detrimental to future performance.

The Real Effects of Internal Audit Function Quality: Evidence From Investment Strategies

This article examines the relation between internal audit function (IAF) quality and investment efficiency, a recurring value-added corporate activity critical to firm survival and profitability. We argue that an IAF, unlike other information intermediaries, is uniquely positioned to have access to firm-specific, private information—particularly related to localized, firm-specific risks. If a more competent IAF incrementally improves the information that is generated and communicated to management (while not participating directly in decision-making), we should observe more productive capital investment decisions from firms with higher quality IAFs relative to firms with lower quality IAFs. Through this enhanced information channel, we find that IAF quality is associated with investment efficiency. This result holds for both under- and overinvestment, although not in tests of all subsamples. We also document that this effect is more pronounced for firms with more complexity and for firms with greater investment opportunities. Our evidence indicates that IAF quality provides measurable and economically meaningful value to an organization.

Internal audit quality and earnings management: evidence from the UK

PurposeThis study aims to examine the association between internal audit quality and the involvement of UK companies in earnings management practices.Design/methodology/approachTo measure the internal audit quality, this study uses 115 responses for a postal questionnaire that was addressed to the heads of internal audit departments in a sample of non-financial listed companies in the UK context. The other financial and governance data for the respondent companies were collected from the Datastream and the companies’ annual reports. The present study uses the signed abnormal accruals as a proxy for earnings management and uses both logistic and ordinary least squares regression models to test the research hypothesis.FindingsThis study finds a negative relationship between the internal audit quality and the abnormal accruals, implying the prominent role of internal audit in reducing the upwards earnings management. The study also finds a significant impact of the internal audit competence on reducing the engagement of UK companies in income-increasing earnings management compared to the internal audit independence. This remarkable result suggests the companies need to focus more on enhancing the internal audit competence to reduce the opportunistic management’s behaviour.Practical implicationsThis study has important implications for the internal audit’s practice, regulation and research.Originality/valueThis is the first study that investigates the relationship between internal audit quality and earnings management in the UK context. Furthermore, it uses a comprehensive measure for the internal audit function (IAF) quality covering different aspects of IAF quality based on the global Institute of Internal Auditor standards and prior internal audit literature.

Internal Audit Function Quality and Audit Committees’ Practices: Survey Evidence from Jordan

The current study examines the extent to which audit committees comply with the requirements of corporate governance in Jordan and describes the current status of internal audit function. In addition, the study examines empirically the relationship between the internal audit quality and the compliance of audit committees with the governance requirements. The results from 49 respondents indicate that audit committees comply with the requirement of corporate governance and no significant difference is found in such compliance due to sector. In addition, the internal audit quality attributes are met among Jordanian companies to a considerable extent. Further, the independence and objectivity dimension of internal audit quality has a positive and significant relationship with the compliance of audit committees with governance requirements. Internal audit competence and due professional care have no significant relationship with audit committees compliance. One important implication of the current study is the development of a scale to measure the compliance level of audit committees with the governance requirements that can be used by both academics and decision-makers in firms.

Outsourced internal audit function and real earnings management: The role of industry and firm expertise of external providers

As the outsourced internal audit function (IAF) and real earnings management are attracting widespread attention among firms, it is vital for stakeholders to understand how these two practices affect the quality of financial reporting. This study examines how the expertise of an external IAF provider reduces real earnings management. Using a pooled panel data regression of 928 firm‐observations, we find that the external IAF provider's firm‐specific expertise is significantly associated with lower real earnings management. Conversely, we report no such association for external IAF providers with industry expertise. These findings are robust under a battery of sensitive analyses. The results of additional analyses show that the industry and firm‐specific expertise of external IAF provider interact with each other, resulting in a significant reduction in real earnings management. We also find significant differences in the IAF quality between big4 and second‐tier audit firms in which the latter are associated with lower real earnings management and the former with higher real earnings management. Finally, we observe low real earnings management for important clients and/or those with influential CEOs if the external IAF provider has firm‐specific expertise.

FACTORS MEASURING INTERNAL AUDITING FUNCTION IN THE VIETNAM LISTED COMPANIES

This study aims to explore the research model of factors measuring quality of the Internal Audit Function impacting on earnings management at listed companies in Vietnam. By using inductive and interpolation methods from prior researchs and qualitative method through researching documents and interviewing experts related to this study, the author developed model and hypotheses of five factors measuring Internal Audit Function quality that have associated with earnings management such as internal auditing competence (COMP), internal auditing objective (INDEPT), internal auditing’s size (IAFSize), relation with independent auditing (Big4) and internal auditing quality control (QuPRO)

Can internal audit functions improve firm operational efficiency? Evidence from China

Purpose The purpose of this study is to examine the effects of internal audit function (IAF) quality on the operational efficiency of Chinese firms. Design/methodology/approach The authors use regression models with a sample of Chinese listed companies to test their research hypotheses. Findings The authors find that IAF quality is positively associated with firm operational efficiency. The result is unchanged after correcting for endogeneity via the instrumental variable method and using an alternative measure of firm operational efficiency. The authors show that IAF competence improves firm operational efficiency, but the relationship between IAF independence and firm operational efficiency is insignificant. Additionally, they find that IAF quality can only significantly improve firm operational efficiency in the presence of effective corporate governance at the firm level and strong institutions at the province level. Using path analysis, the authors find that an IAF can improve firm operational efficiency directly or indirectly by promoting firm internal control quality. Practical implications The findings of this study suggest the need for a balance between IAF competence and independence to achieve the goals of IAF. Additionally, the authors study suggests that the effectiveness of IAF is contingent on corporate governance and market-based institutions. Originality/value The study’s findings contribute to the burgeoning literature on the relationship between IAF and firm operational performance and deepen the authors’ understanding of the role of IAF in an emerging economy whose government plays a major role in promoting and enforcing internal audits. The study also empirically support the Internal Audit Governance Maturity Model proposed by the Institute of Internal Auditors.

Compliance with Continuing Professional Development (IES7) of Internal Auditor and Quality of Internal Audit Function

This paper aims to highlight the importance of compliance with continuing professional development (CPD) of internal auditors and its relationship to the quality of internal audit. The study utilised a Partial Least Squares Structural Equation Modelling (PLS-SEM), which emphasise on the analyses of regression and variance by distributing a questionnaire to the study sample of internal auditors in four countries (Jordan, Lebanon, Qatar and Kuwait), and the number of samples valid for statistical analysis reached 104. The paper has reached positive results regarding the importance of CPD in improving the quality of the internal audit, focused on the continuous follow-up to changes related to income and sales tax law, international financial reporting standards (IFRS), International Accounting Standards (IAS), and International Auditing Standards (IAS). Besides, modern Computer and Technological Applications in Internal audit practices and audit ethics. The results also indicated that CPD represents in professional skills is the development of skills to detect and combat theft and fraud, critical thinking skills of analyzed data. Original/Value, the CPD is the impulse by which internal auditors continue to learn new technical knowledge and skills that support them in professional work, to make them more qualified and developed in terms of knowledge and the skills needed within the labour markets.

Factors that influence the perceived use of the internal audit function's work by executive management and audit committee

The internal audit function (IAF) is an important component of high-quality corporate governance. We study how the head of internal audit perceives the executive management team and the audit committee to rely on the IAF's work. It is not obvious from prior work or professional anecdotes whether the IAF satisfies the needs of both groups. If multiple factors influence the IAF's work, chief audit executives (CAEs) may find themselves in a situation with competing demands, which could then compromise quality for all stakeholders. Based on a unique dataset from CAEs, two logistic regression models identify factors that influence the degree to which IAF's results are perceived as being used by both executive management and the audit committee. The results show the existence of various factors that are relevant either to both groups (e.g., strategic project reports and IAF quality) or to only one (e.g., only audit committees are interested in risk management reports while only executive management teams are interested in internal control reports), depending on whether the IAF focuses on assurance or consulting work.

The Influence Of Internal Audit Function Quality, Audit Committee Effectiveness On The Audit Report Lag:, Empirical Evidence From Jordan

The Influence Of Internal Audit Function Quality, Audit Committee Effectiveness On The Audit Report Lag:, Empirical Evidence From Jordan

CEO INVOLVEMENT IN SELECTING CAE, INTERNAL AUDIT COMPETENCY AND INDEPENDENCE, AND FINANCIAL REPORTING QUALITY

The purpose of this study is to explore the argument that Chief Executive Officer (CEO) involvement in the appointment of the Chief Auditing Executive (CAE) is detrimental to efforts to achieve good financial reporting quality (FRQ). The study is original in that to date, this precise link has not been investigated. Data are obtained via survey and annual reports relating to 307 UK companies listed on the London Stock Exchange, and the working capital and discretionary accruals are used as proxies for financial reporting quality. The findings support the contention that the benefits to FRQ of an independent and competent internal audit function are not realized when there is CEO involvement in the appointment of the CAE, since management is able to override IA controls. Indeed, high FRQ is only evident when the CEO is not involved in the appointment. The results are found to be robust after using two different methods of estimation, and carry the implication regulators concerned with FRQ and quality of internal audit function that the CEO should not be party to the appointment of the CAE since this will depress FRQ.

The impact of internal audit attributes on the effectiveness of internal control over operations and compliance

The internal audit function (IAF) assists management in improving internal controls over operations, reporting, and compliance. While many studies examine the association between the IAF and the internal control over financial reporting (ICFR), little is known about internal control over operations and compliance. Using a unique dataset from Taiwan, this paper examines the association between IAF quality and internal control deficiencies in operations and compliance. The results suggest that a larger internal audit team can enhance internal audit performance for both operations and compliance, whereas internal auditor competence is positively associated with the effectiveness of internal control over compliance, but not operations. This study contributes to the literature by shedding light on the determinants of the achievement of operations and compliance objectives. It also provides important implications for stakeholders and practitioners, as a company’s control over operations and compliance may mutually influence its ICFR and ultimately its business success.

Exploring the association between the content of internal audit disclosures and external audit fees: Evidence from Sweden

The aim of this study is to explore the content of internal audit (IA) disclosures in annual reports and explain the relationship between IA disclosures and external audit fees. A content analysis of the IA disclosures made it possible to generate inductive categories that were used as a basis for statistical analysis. The findings show a large variation in disclosure practices, and only a small portion of all disclosures contain firm‐specific information related to IA. Evidence is provided that the use of an IA function (IAF) is associated with higher external audit fees. However, companies that disclose firm‐specific information related to IA pay lower audit fees than those not providing this disclosure. Overall, the results of this study indicate that firm‐specific IA disclosures most likely represent actual investments in IA and can be used as a proxy for IAF quality.

Factors That Influence the Use of the Internal Audit Function by Executive Management and Audit Committee

The internal audit function (IAF) is an important component of high quality corporate governance. We study how two important groups in the corporate governance mosaic—the executive management team and the audit committee—rely on IAF's work. It is not obvious if the IAF satisfies the needs of both groups. Especially if multiple factors influence IAF's work, Chief Audit Executives (CAEs) may find themselves in a Serving Two Masters-situation which could compromise quality for all stakeholders. Based on a unique dataset from CAEs, two logistic regression models identify factors that influence the degree IAF's results are used by both the executive management and the audit committee. The results show the existence of various factors, which are relevant for either both (e.g. strategic project reports and IAF quality), or only one of the respective players (e.g., audit committees are interested in risk management reports while executive management teams are interested in internal control reports), depending on whether the IAF focuses on assurance or consulting.

Factors associated with security/cybersecurity audit by internal audit function

PurposeThe purpose of the study is to explore the factors associated with the extent of security/cybersecurity audit by the internal audit function (IAF) of the firm. Specifically, the authors focused on whether IAF/CAE (certified audit executive [CAE]) characteristics, board involvement related to governance, role of the audit committee (or equivalent) and the chief risk officer (CRO) and IAF tasked with enterprise risk management (ERM) are associated with the extent to which the firm engages in security/cybersecurity audit.Design/methodology/approachFor analysis, the paper uses responses of 970 CAEs as compiled in the Common Body of Knowledge database (CBOK, 2015) developed by the Institute of Internal Auditors Research Foundation (IIARF).FindingsThe results of the study suggest that the extent of security/cybersecurity audit by IAF is significantly and positively associated with IAF competence related to governance, risk and control. Board support regarding governance is also significant and positive. However, the Audit Committee (AC) or equivalent and the CRO role are not significant across the regions studied. Comprehensive risk assessment done by IAF and IAF quality have a significant and positive effect on security/cybersecurity audit. Unexpectedly, CAEs with security certification and IAFs tasked with ERM do not have a significant effect on security/cybersecurity audit; however, other certifications such as CISA or CPA have a marginal or mixed effect on the extent of security/cybersecurity audit.Originality/valueThis study is the first to describe IAF involvement in security/cybersecurity audit. It provides insights into the specific IAF/CAE characteristics and corporate governance characteristics that can lead IAF to contribute significantly to security/cybersecurity audit. The findings add to the results of prior studies on the IAF involvement in different IT-related aspects such as IT audit and XBRL implementation and on the role of the board and the audit committee (or its equivalent) in ERM and the detection and correction of security breaches.

An international study of internal audit function quality

We investigate organisational and environmental factors that influence firms’ incentives to develop high-quality internal audit functions (IAFs) by using a unique international sample formed by matching proprietary data from a global internal auditor survey with public data obtained from Worldscope. Concerning organisational factors, we find that a positive relationship exists between IAF quality and firm complexity and confirm that complex firms have a higher demand for monitoring and advising and, therefore, a greater need for formal controls. In addition, IAF quality is positively related to board monitoring and audit committee diligence but negatively associated with CEO power, which suggests that IAF quality is influenced by other key players in corporate governance. Regarding environmental factors, we document that IAF quality is positively associated with industry competition, which implies that a firm’s incentive for a high-quality IAF is enhanced when confronted with greater environmental uncertainty. Furthermore, IAF quality has a significantly positive relationship with our self-constructed index of IAF requirements included in national corporate governance codes, which indicates that strong home-country corporate governance codes play a role in fostering IAF development.