The Reliance of External Auditors on Internal Audit's Use of Continuous Audit. Malaescu, I. and Sutton, S. G. Journal of Information Systems, 29(1):95--114, March, 2015. 00008
The Reliance of External Auditors on Internal Audit's Use of Continuous Audit [link]Paper  doi  abstract   bibtex   
As a response to the increased demand for timely and ongoing assurance over the effectiveness of risk management and control systems, companies are moving toward a more automated control environment through the implementation of continuous audit modules. The purpose of this study is to evaluate external auditors’ reliance on internal audit’s work when advanced audit techniques are introduced by the internal auditor and the impact this reliance has on budgeted audit hours. Prior literature suggests that internal control deficiencies also have an impact on external auditor reliance and the audit budget. The reliance decision of an external auditor has important economic consequences and implications for efficiency and effectiveness of the overall audit. In recent years, the PCAOB has encouraged greater such reliance to improve audit efficiency. An experiment is conducted with 87 experienced external auditors to investigate the theorized effects. Using a 2 3 2 between-subjects factorial design, the frequency of the internal audit (traditional versus continuous audit) and prior year material weakness (absent versus present) are manipulated. Consistent with predictions, we find that auditors are willing to rely more on internal audit work in a continuous audit environment than in a traditional environment, and this effect is magnified when the prior year audit report on the effectiveness of internal controls indicates that controls are working properly. The presence of a material weakness, however, negatively impacts judgments on the budget for the valuation of a complex account. In addition, both material weakness and continuous audit have an impact on the overall audit budget, which is reduced only when the company has no prior year material weakness and a functioning continuous audit module is put in place. The results show that auditors increase budgeted hours for the engagement at a higher rate when the client uses traditional internal audit procedures.
@article{malaescu_reliance_2015,
	title = {The {Reliance} of {External} {Auditors} on {Internal} {Audit}'s {Use} of {Continuous} {Audit}},
	volume = {29},
	issn = {0888-7985, 1558-7959},
	url = {http://aaajournals.org/doi/10.2308/isys-50899},
	doi = {10.2308/isys-50899},
	abstract = {As a response to the increased demand for timely and ongoing assurance
over the effectiveness of risk management and control systems, companies are moving
toward a more automated control environment through the implementation of continuous
audit modules. The purpose of this study is to evaluate external auditors’ reliance on
internal audit’s work when advanced audit techniques are introduced by the internal
auditor and the impact this reliance has on budgeted audit hours. Prior literature
suggests that internal control deficiencies also have an impact on external auditor
reliance and the audit budget. The reliance decision of an external auditor has important
economic consequences and implications for efficiency and effectiveness of the overall
audit. In recent years, the PCAOB has encouraged greater such reliance to improve
audit efficiency. An experiment is conducted with 87 experienced external auditors to
investigate the theorized effects. Using a 2 3 2 between-subjects factorial design, the
frequency of the internal audit (traditional versus continuous audit) and prior year
material weakness (absent versus present) are manipulated. Consistent with predictions, we find that auditors are willing to rely more on internal audit work in a continuous
audit environment than in a traditional environment, and this effect is magnified when the
prior year audit report on the effectiveness of internal controls indicates that controls are
working properly. The presence of a material weakness, however, negatively impacts
judgments on the budget for the valuation of a complex account. In addition, both
material weakness and continuous audit have an impact on the overall audit budget,
which is reduced only when the company has no prior year material weakness and a
functioning continuous audit module is put in place. The results show that auditors
increase budgeted hours for the engagement at a higher rate when the client uses
traditional internal audit procedures.},
	language = {en},
	number = {1},
	urldate = {2016-10-18TZ},
	journal = {Journal of Information Systems},
	author = {Malaescu, Irina and Sutton, Steve G.},
	month = mar,
	year = {2015},
	note = {00008},
	keywords = {accounting, inf720},
	pages = {95--114}
}
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