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MAJ 19,5

A comparison of internal audit in the private and public sectors Jenny Goodwin
School of Accountancy, Queensland University of Technology, Brisbane, Australia Keywords Internal auditing, Public sector organizations, Private sector organizations Abstract This paper explores similarities and differences between public sector internal auditing and its counterpart in the private sector. Features examined include organizational status, outsourcing, using internal audit as a “tour of duty” function, activities and relationships with the external auditor. The study is based on a survey of chief internal auditors in organizations in Australia and New Zealand. Results suggest that there are differences in status between internal audit in the two sectors, with public sector internal auditors less likely to report to the chief financial officer. While a similar amount of work is outsourced, public sector organizations are more likely than those in the private sector to outsource to the external auditor. There is little difference between internal audit activities and interactions with external audit in the two sectors. However, private sector internal audit is perceived to lead to a greater reduction in audit fees compared to that in the public sector.

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The objective of this paper is to compare features of the internal audit function between organizations in the private sector and those in the public sector. Aspects examined include organizational status, using internal audit as a “tour of duty” function, outsourcing, internal audit activities including involvement in risk management, and interactions with external auditors. The data were collected by a questionnaire survey sent to chief internal auditors who were members of the Institute of Internal Auditors (IIA) in Australia and New Zealand. The study extends that reported in Goodwin (2003) which focused on the relationship between internal audit and the audit committee. The study is motivated by the increasing emphasis on the role of internal audit as a corporate governance mechanism in both sectors. It has been argued that there are important differences between public sector internal auditing and its private sector counterpart in terms of the orientation of the framework in which it operates and the scope of its activities (Carhill and Kincaid, 1989; Coupland, 1993). However, public sector reforms have lessened the differences between the two sectors, particularly with regard to governance (Barrett, 2002a, b). An interesting research question, therefore, is the current extent to which internal audit in the public sector differs from that in the private sector with regard to its status, scope and activities. The results of the study suggest that there are differences in status between internal audit functions in the two sectors but that internal audit activities and interactions Managerial Auditing Journal Vol. 19 No. 5, 2004 pp. 640-650 q Emerald Group Publishing Limited 0268-6902 DOI 10.1108/02686900410537766

The author thanks K. Raghunandan for his help in the development of the survey instrument for this study. The assistance of the Institute of Internal Auditors – Australia and the members who completed the survey is also gratefully acknowledged. The paper has benefited from the helpful comments of participants in a seminar hosted by the Institute of Internal Auditors – Queensland Branch.

with external auditors are similar. Reliance on the work of internal audit by the external auditor is perceived to lead to a greater reduction in audit fees in the private sector compared to the public sector. The paper is structured as follows. The next section provides the background and research questions. This is followed in the third section by a...
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