Internal Auditing Practice in Governmetal Organizations

Topics: Auditing, Audit, Internal audit Pages: 39 (11880 words) Published: April 16, 2013

The Impact of Internal Audit Function Quality
and Contribution on Audit Delays

Mina Pizzinia
Cox School of Business
Southern Methodist University
Dallas, TX

Shu Lin
Craig School of Business
California State University, Fresno
Fresno, CA

Mark Vargus
LeBow College of Business
Drexel University
Philadelphia, PA 19104-2875

Douglas Ziegenfuss
College of Business and Public Administration
Old Dominion University
Norfolk, VA 23529

November 28, 2010

We thank the Institute of Internal Auditors for access to the Global Auditing Information Network (GAIN) database. We thank Chris Hogan, Barry Brian, and seminar participants at the University of Tennessee for their helpful comments. a Corresponding author

The Impact of Internal Audit Function Quality
and Contribution on Audit Delays


This study examines the role that the internal audit function (IAF) plays in the timeliness of financial reporting by investigating whether measures of IAF quality and the IAF’s contribution to the financial statement audit are associated with audit delay. Audit delay is the number of days between a firm’s fiscal year-end and the report date (Ashton et al. 1987). Pursuant to Section 409 of SOX, a 2002 SEC ruling shortened 10-K reporting deadlines for accelerated filers from 90 days to 60 days over a period of three years (U.S. Congress 2002; SEC 2002). At the same time, Section 404 of SOX significantly expanded internal control audit requirements and Auditing Standard No. 3 (AS 3) increased audit documentation requirements (Public Company Accounting Oversight Board [PCAOB] 2004a). Recent studies indicate that the acceleration in reporting deadlines, together with stronger attestation requirements, has compromised the reliability of accounting information by requiring auditors to do more work in less time (Bronson et al. 2010, Lambert et al. 2010). Given the potential tradeoff between the timeliness and reliability of disclosures and the opportunity for the IAF to affect the financial statement audit, it is important to investigate the IAF’s role in audit report timeliness. We conduct our tests using data from 215 firms that provided detailed responses to the Institute of Internal Auditor’s Global Auditing Information Network (GAIN) survey for 2003-2004. Results indicate that IAF quality is negatively associated with audit delay, suggesting that increases in IAF quality lower control risk, and thereby reduce external auditor effort. Analysis of individual aspects of IAF quality indicates that audit delays are decreasing in the level of IAF competence, objectivity, and fieldwork quality. We also find that audit delay is approximately three days shorter when external auditors use work performed by the IAF, suggesting that IAF contribution can improve the efficiency of the financial statement audit.

The Impact of Internal Audit Function Quality
and Contribution on Audit Delays


This study investigates whether the quality of a firm’s internal audit function (IAF) and the degree to which external auditors use work performed by the IAF to complete the financial statement audit (i.e., IAF contribution) affect audit delay. Audit delay, measured as the number of days between a firm’s fiscal year-end and the report date, generally captures the time required to complete fieldwork (Ashton et al. 1987). The auditing literature has long recognized the importance of audit delay research because audit delays affect the timeliness with which financial and audit information are publicly disclosed (Givoly and Palmon 1982). Current interest in audit delay stems from recent accelerations in reporting deadlines and the implementation of Section 404 of the Sarbannes-Oxley Act (SOX), which together require auditors to perform more work in less time (U.S. Congress 2002; Ettredge et al. 2006;...
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