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    The Impact of Internal Audit Function Quality and...
    research summary posted July 24, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 11.0 Audit Quality and Quality Control 
    The Impact of Internal Audit Function Quality and Contribution on Audit Delay.
    Practical Implications:

    This research should be of interest to regulators who are concerned with the timeliness of financial reports, practitioners who are responsible for preparing and auditing financial statements, and standard setters who provide auditing guidance. In particular, the findings indicate that firms’ decisions regarding the structure of the IAF and their role in the financial statement audit can significantly affect audit completion times. Reducing audit delay from current levels back to pre- SOX 404 levels could potentially reverse the decline in the reliability of earnings announcements. The results are useful to external auditors in determining whether and how IAF work can be incorporated into the financial statement audit. This study also provides support for recent PCAOB guidance contending that external auditors can improve audit efficiency by making more extensive use of work performed by others.


     Pizzini, M., Lin, S., & Ziegenfuss, D. E. 2015. The Impact of Internal Audit Function Quality and Contribution on Audit Delay. Auditing: A Journal Of Practice & Theory 34 (1): 25-58.

    audit delay, audit report timeliness, internal audit contribution, internal audit quality
    Purpose of the Study:

    This study investigates the internal audit function’s (IAF’s) role in the financial statement audit by examining whether measures of IAF quality and the IAF’s contribution to the financial statement audit affect audit delay. Audit delay, measured as the number of days between a firm’s fiscal year-end and the audit report date, generally captures the time required to complete fieldwork. Current interest in audit delay stems from recent accelerations in reporting deadlines and the implementation of Section 404 of the Sarbanes-Oxley Act (SOX), which together require preparers and external auditors to do more work in less time. Given the increased attestation requirements created by SOX, it is important to investigate ways in which the IAF can influence audit delay. In this study, the authors argue that the IAF can significantly affect audit completion times by helping management establish and maintain a strong system of internal control over financial reporting (ICFR) and by assisting the external auditor in the financial statement audit. The authors investigate whether IAF quality and the IAF’s contribution to financial statement audits affect audit delay in a sample of 292 firm-year observations drawn from the pre-SOX 404 period. 

    Design/Method/ Approach:

    The authors use firm-level data collected by the IIA through their 2003 and 2004 GAIN surveys. They then collect firm financial data from Compustat and audit fee and restatement data from Audit Analytics. The resulting sample contains 293 firm-year observations from 216 firms with fiscal years ending on or after December 31, 2000 and prior to November 15, 2004.

    • A one standard deviation increase in the comprehensive quality measure corresponds to audit delay reductions of 3.1 to 3.9 days, which are primarily driven by the competence of the internal audit staff and the quality of their fieldwork.
    • Objectivity and investment in the IAF are also associated with reductions in audit delay, but significance levels vary with time period and model specification.
    • Audit delay is significantly shorter (4.1 to 6.6 days) when the IAF contributes to the financial statement audit by independently performing relevant work, but not when the IAF works under the direction of the external auditor.
    • The mean delay is 41.9 days, and earnings are announced an average of 9.8 days prior to the audit report date.
    • High-quality IAFs are more likely to assist the external auditor by independently performing relevant work, while low-quality IAFs are more likely to be used as direct assistants.
    • The authors expect the impact of IAF quality and contribution would be even larger in the current period. The more rigorous attestation requirements of SOX 404 expanded the IAF’s potential to contribute to the financial reporting process and, therefore, should increase the impact of IAF quality and contribution on audit delay.
    Audit Quality & Quality Control, Auditing Procedures - Nature - Timing and Extent, Standard Setting
    Impact of 404, Reliance on Internal Auditors