The Influence of Internal Audit on External Audit: Evidence From Portugal and Spain

The Influence of Internal Audit on External Audit: Evidence From Portugal and Spain

Ana Silva (University of Aveiro, Portugal), Helena Inácio (University of Aveiro, Portugal) and Elisabete Vieira (University of Aveiro, Portugal)
Copyright: © 2019 |Pages: 25
DOI: 10.4018/978-1-5225-7356-2.ch001
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Abstract

The main purpose of this chapter is to analyze the relationship between internal and external audit and its effect on external audit fees, through a questionnaire addressed to the external auditors of Portugal and Spain. It obtained 131 answers for Portugal and 149 answers for Spain. According to the results, the competencies and characteristics of internal auditors, as well as the type of activities performed by them and the communication between internal and external auditors, have a significant influence on the decision of using the internal audit work. However, the Portuguese external auditors do not consider this influence to be so significant that it affects the number of substantive tests, the quality of external audit, and external audit fees. However, for Spanish auditors using internal audits decreases the planned hours, the number of control and substantive tests, and improves external audit quality, but does not reflect in the fees to be charged to the client.
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Literature Review And Research Hypotheses

Activities Developed by Internal Audit

The type of activities developed by internal audit is an important issue in the decision and extension of the use of its work, since there are matters that become more important than others for the work of external auditors.

By analyzing the Hong Kong’ market, Ho and Hutchinson (2010) found that the reliance that external auditors place on the work of internal audit is related to the time that internal audit spends on activities that decrease the risk of material misstatement on financial statements and the gathering of evidence by the external auditors. The authors found that the effort spent by internal auditors on the analysis of financial statements and on matters related to external audit, system development and maintenance, fraud investigation, operational efficiency and effectiveness review including internal controls decrease the effort of external auditors during the audit and, consequently, their fees. In turn, Pestrascu and Tieanu (2014) demonstrated the benefits of internal audit’ fight against fraud, and Goodwin and Seow (2002) found that external audit preferably uses internal audit as a mechanism for detecting weaknesses in procedures for controlling and preventing fraud.

In this context, the following research hypothesis was formulated:

  • H1: The type of activities developed by internal audit influences the use of internal audit’ work by external auditors.

Key Terms in this Chapter

Substantive Tests: Audit procedures used by the auditor to obtain sufficient and substantial evidence about the transactions of the audited company and providing an opinion basis about certain facts.

Control Tests: Audit procedures used by the auditor to test the effectiveness of the control system of the audited company.

Censores Jurados de Cuentas: Responsible for the review of the financial statements of the companies and therefore, for the legal certification of account in Spain.

Corporate Governance: Is a system of practices, processes, and rules by which companies are governed and controlled, in order to protect the stakeholders’ interests.

Revisores Oficiais Contas: The responsible for the review of the financial statements of the companies and therefore, for the legal certification of account in Portugal.

Audit Fees: The price paid by a company for an external audit that will certificate its financial statements.

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