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    Reconciling Archival and Experimental Research: Does...
    research summary posted February 16, 2015 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations 
    Reconciling Archival and Experimental Research: Does Internal Audit Contribution Affect the External Audit Fee?
    Practical Implications:

     The results of this study are useful to managers, boards of directors, and audit committees to benchmark their own organizations and determine areas in which they may be able to realize cost savings.  Standard setters for external auditors could consider these results in terms of whether external auditors are appropriately relying on specified characteristics of the IAF when making their reliance decisions.  Client companies and their auditors might both find it worthwhile to examine whether external auditors could make better use of financial work performed by internal auditors on which the external auditors might later rely.  Finally researchers may wish to consider the results of this study when examining the external auditor’s reliance decision or when performing other audit fee analyses, especially considering whether proxies used in this study would be appropriate control variables or experimental variables of interest with respect to the contribution of internal auditing.

    For more information on this study, please contact David A. Wood.


    Prawitt, D. F., N. Y. Sharp, and D. A. Wood. 2011. Reconciling archival and experimental research:  Does internal audit contribution affect the external audit fee. Behavioral Research in Accounting 23 (2): 187-206

    Internal audit function, internal audit costs, internal audit quality, external audit fee, SAS No. 65, AS 5
    Purpose of the Study:

    Experimental and survey research consistently have found evidence of a negative relation between measures of internal audit contribution and external audit fees. By contrast, past archival research typically has documented either no relation or a positive relation.  While it has provided important insights, prior archival research examining the relation between internal auditing and external audit fees has been limited by the unavailability of detailed data about internal audit functions (IAF).  With newly available archival data, this paper examines the internal audit contribution/external audit fee relation using direct measures of the amount of time internal auditors work directly assisting external auditors, and the amount of time internal auditors spend performing tasks upon which the external auditor is likely to rely.

    Understanding the association between the contribution of internal auditing and external audit fees is important because this is an economically important relationship.  External auditing standards allow the external auditor to either use internal auditors as assistants or to rely on work previously performed by the IAF.  This paper also addresses which of the two methods of reliance results in a greater reduction in the external audit fee.

    The conflict mentioned earlier between the results of previous research using surveys and experiments versus those found in archival studies have led a number of researchers to call for additional work in the area.  This paper also suggests an explanation for the divergent findings in the experimental and archival studies in this area.

    Design/Method/ Approach:

    The data set examined in the research is from the IIA’s GAIN database relating to fiscal years 2000 to 2005.  The authors restricted their analysis to these years because of availability of IIA data (they have no data after 2005) and because of availability of external audit fees (audit fee data were not made public before 2000).  

    • The authors find that external audit fees are negatively associated with internal audit contribution.
    • The authors find that the amount of time internal auditors spend performing tasks of a financial nature is not associated with lower external audit fees, but that the time spent working under direct supervision of the external auditor is associated with lower external audit fees.
    • The authors find that proxies used in past archival studies are positively associated with measures of the host companies’ size and complexity, and are negatively associated or are not associated with this study’s relatively direct measures of the contribution of the IAF to the external audit. In other words, proxies used in past archival studies likely did not do a good job of capturing IAF contribution, which explains their contradictory results.
    Auditing Procedures - Nature - Timing and Extent, Engagement Management
    Audit Fees & Fee Negotiations, Reliance on Internal Auditors