The purpose of this paper is to explore whether internal audit's reporting relationship with the audit committee and the client's business risk environment impact external auditors' reliance on the work of internal audit.
An experiment is conducted using a 2×2 between‐subjects design where we manipulate the above two factors at strong and weak levels. Participants are 66 audit partners, managers and seniors, all experienced with clients having internal audit functions.
The results indicate that both factors affect external auditors' reliance on work already undertaken by internal audit and their use of internal auditors (IA) as assistants. The results also indicate that external auditors are more likely to use internal audit for control evaluation tasks than for substantive tests of balances. The study does not find any significant interaction effects between the two factors.
No prior studies have examined the influence of reporting relationship and client business risk on external auditors' reliance decisions in the current governance environment. Further, the paper examines the impact of these factors on reliance on work already undertaken by internal audit and on using IA as assistants, with respect to both control evaluation work and substantive testing of balances.
