Introduction
Although internal and external auditors have different roles as far as their responsibilities and authorities are concerned, but it has been advocated that the synergy between the two can effectively cover more audit areas (Felix, et al., 1998). That is to say, notwithstanding the difference in the scope and objectives of internal and external auditors, there are still commonalities in the objectives of the two functions, which provide some basis or rationale for their interdependence on each other (Al-Twaijry, et al., 2004). However, it is an area of contention as to how far this interdependence or reliance on each other’s work can be placed. Keeping in view this research problem this proposed study has the following research aim.
Aim
The aim of this proposed study is to investigate the extent to which external and internal audit are dependent on each other and how this extent of dependence is determined in the Saudi Arabian private corporate sector.
Objectives
The research aim presented above can be segregated into following research objectives:
- To review available literature and conclusions reached by researchers in the past related to the relationship between external and internal audit;
- To find out the nature of relationship between external and internal audit;
- To find out the extent to which external and internal audit are dependent on each other;
- To find out the factors, which determine the extent of dependence of external and internal audit on each other; and
- To find out the implications of external audit’s dependence on internal audit.
Questions
The research objectives can be used to formulate research questions as follows:
- What does the available literature and conclusions reached by researchers in the past tell about the relationship between external and internal audit?
- What is the nature of relationship between external and internal audit?
- To what extent external and internal audit are dependent on each other?
- What are the main factors which determine the extent of dependence of external and internal audit on each other? and
- What are the implications of external audit’s dependence on internal audit?
Methodology
While choosing the research methodology for a study, it is pertinent to establish the justification for doing so. There are two broad approaches which can be followed in the conduct of a study, namely qualitative and quantitative research (Thomas, 2003). In addition to these two approaches, a researcher may employ a mixed approach, which is a mixture of both qualitative and quantitative approach. A qualitative research approach involves the evaluation of information at hand with making use of any analytical tools, so that there are no empirical findings obtained but instead qualitative aspects of information are determined which are then used to formulate an opinion regarding the subject matter (Creswell, 2009).
On the other hand, a quantitative research approach involves the testing and analysis of quantitative information, which result in quantitative or empirical findings to support the research aim. With respect to the research aim identified earlier in this report, the researcher aims at conducting this study on the basis of a mixture of both quantitative and qualitative approach. The approach will be quantitative in a way that researcher will conduct surveys of both internal and external auditors of the selected Saudi companies, which will generate quantitative information. On the other hand, it will be qualitative also as the researcher will conduct interviews with representatives of internal and external audit functions of the selected companies, which will generate qualitative information (Johnson & Christensen, 2010; Newman, et al., 1998).
Selection of Companies
Since internal audit function is still not common in Saudi Arabian corporate sector therefore the researcher will select private companies through purposive sampling technique. This technique will involve selecting those companies only which have an internal audit function within their organizations.
Survey Questionnaires
The survey questionnaire for external and internal auditors of the selected companies will be based on following design:
The responses obtained through survey questionnaires will be analyzed statistically.
Interview of External and Internal Auditors
The researcher also aims at conducting short interviews of the internal audit department heads of the selected companies and their external auditors. The interviews will be aimed at supplementing the information obtained through the survey questionnaire and a thematic analysis of the same will be conducted to find out how far survey results match with the findings obtained through interviews.
Brief Literature Review
According to Burnaby and Klein (2000), the work of internal auditors contributes significantly in the work of external auditors. On the other hand, the study carried out by CICA (Canadian Institute of Chartered Accountants) shows that it is a common practice for external auditors to take assistance from the work of internal auditors in the country (Canadian Institute of Chartered Accountants, 1989). But at the same time, there are some studies which have concluded that there are significant differences noted among business entities with regard to the usage of each other’s work by internal and external auditors (Felix, et al., 2001; Felix, et al., 1998). Although, there are many supporters of internal and external audit coordination so as to avoid any duplicity of work and increase efficiency and effectiveness in auditing process, at the same time, some have viewed this coordination in different manner. As for instance, Gaston (2000) has expressly stated that it is not suitable for the purposes of bringing transparency in the audit process to allow internal auditors of an entity to take part in external audit matters. He stated that internal auditors shall not be allowed or permitted to “…..unduly focus on those areas of financial controls that are the subject of external audit interest” (Gaston, 2000, p. 37). Similarly, Gramling (1999) also has a similar point of view and argues that if internal audit function existing in an organization is not up the mark, that is to say, it does not fulfills the requirements of objectivity, competence and independence, then any reliance placed on its work can reduce effectiveness and efficiency of external audit process significantly.
There have been a number of studies carried out in relation to the determination of dependence of internal and external audit on each other. Morrill and Morrill (2003) investigated the relationship between internal and external audit and found that there is a significant relation between internal audit expertise and external auditor’s work. Usually, when the relationship between internal and external audit is evaluated, it ascertains the level of reliance external auditor can place on internal auditor’s work and expertise. In this regard, majority of prior research works have been carried out by researchers in the US context in which the focus has been to examine decisions for relying on the internal auditor’s work based on its evaluation carried out by external auditor (Al-Twaijry, et al., 2004). Apart from this, Asairy (1993) in his study found that internal auditors in Saudi companies claimed that the quality of their services to their respective entities was largely influenced by the work of external auditors of the companies. Maletta (1993) in his work found that there were two main characteristics noted by external auditors in the work of internal auditors before they decided to rely on it; these characteristics were objectivity and competence. Moreover, Nagy & Cenker (2002), Brown (1983), Schneider (1985), Margheim (1986) and Messier & Schneider (1988) found that competence and work performance were two main factors, which were considered by external auditors before placing reliance on the work of internal auditors.
Al-Twaijry et al. (2004) conducted a study in Saudi Arabian corporate sector’s context to explore the relationship between internal and external audit and to investigate the factors which are influential in promoting the relationship. The researchers used survey questionnaires to obtain responses from internal and external auditors of selected corporate entities and also conducted interviews with them to supplement information obtained through surveys. Following this methodology, the researcher concluded that external auditors in the Saudi Arabian corporate sector are reluctant to rely on the activities and work of internal auditor and in this respect they signified serious concerns regarding their independence, scope and other attributes. These findings were also justified by responses obtained from internal auditors, who rated the cooperation and coordination level between them and external auditors as low (Al-Twaijry, et al., 2004). Further studies which are relevant to the research topic include those by Lowe, et al. (1999), Dezoort, et al. (2001), Jamal (2011), William & Schneider (2010) and Kumar & Sharma (2001).
Resources Needed
In order to conduct this proposed study, the researcher will require information / data from both primary and secondary sources. As far as secondary information is concerned, the researcher will take into consideration published material related to the subject matter, which is available through online sources, journals, books, and other sources of second hand information. On the other hand, with regard to gathering primary information as required by the chosen methodology, the researcher will conduct surveys and interviews of internal and external auditors of companies chosen for the proposed study.
First of all the researcher will need to select companies, which will be private companies only, operating in Saudi Arabia. However, it is pertinent to select only those companies which have internal audit departments. These companies will be selected on a random basis from the list of companies obtained from Saudi Arabian stock exchange.
For conducting surveys, the researcher will need to communicate with the management of selected business entities and audit firms in Saudi Arabia and will have to approach relevant staff in the organization for obtaining assistance in the conduct of survey.
In a similar manner, the researcher will have to obtain express consent from related authorities to interview selected individuals. Moreover, for interview purpose, the researcher will have to approach interviewees himself and meet them in person.
Project Schedule
Below is a description of schedule to be followed by the researcher which includes dates of completion for each step involved in the preparation of proposed study.
List of References
Al-Twaijry, A A M, Brierley, J A & Gwilliam, D R 2004, An examination of the relationship between internal and external audit in the Saudi Arabian corporate sector, Managerial Auditing Journal, 19(7), pp 929-944.
Brown, P R 1983, Independent auditor judgement in the evaluation of the internal audit function, Journal of Accounting Research, 21(2), pp 444-455.
Canadian Institute of Chartered Accountants 1989, The Independent Auditor’s Consideration of the Work of Internal Auditors: An Audit Technique Study, Toronto: sn
Creswell, J W, 2009, Research Design: Qualitative, Quantitative, and Mixed Methods Approaches, Sage Publication, New York.
Dezoort, F T, Houston, R W & Peters, M F 2001, The Impact of Internal Auditor Compensation and Role on External Auditors’ Planning Judgments and Decisions, Contemporary Accounting Research, 18(2), p. 257–281.
Felix, W L, Gramling, A A & Maletta, M J 2001, The contribution of internal audit as a determinant of external audit fees and factors influencing this contribution, Journal of Accounting Research, 39(3), p. 513-534.
Felix, W L, Gramling, A & Maletta, M 1998, Co-ordinating Total Audit Coverage: The Relationship Between Internal and External Auditors, Institute of Internal Auditors, Altamonte Spring.
Gaston, S J 2000, Getting Value for Your Internal Audit Dollar, Canadian Institute of Chartered Accountants, Toronto.
Jamal, S F 2011, The Impact of the Function of the Internal Auditor on the Scope of Work of the External Auditor: A Field Study on the Saudi Environment, King Saud’s University, Riyadh.
Johnson, B & Christensen, L 2010, Educational Research: Quantitative, Qualitative, and Mixed Approaches, SAGE Publications Incorporation, Thousand Oaks.
Kumar, A & Sharma, R 2001, AuditingTheory And Practice, Atlantic Publishers & Dist., New Delhi.
Lowe, J D, Geiger, M A & Pany, K 1999, The Effects of Internal Audit Outsourcing on Perceived External Auditor Independence. AUDITING, A Journal of Practice & Theory: Supplement , 18(1), p. 7-26.
Margheim, L L 1986, Further evidence on external auditors’ reliance on internal auditors, Journal of Accounting Research, 24(1), p. 194-205.
Messier, W J & Schneider, A 1988, A hierarchical approach to the external auditor’s evaluation of the internal auditing function, Contemporary Accounting Research, 4(2), p. 337-353.
Nagy, A L & Cenker, W J 2002, An assessment of the newly defined internal audit function, Managerial Auditing Journal, 17(3), p. 130-137
Newman, I., Ridenour, Carolyn S & Benz, I 1998, Qualitative-Quantitative Research Methodology: Exploring the Interactive Continuum, Southern Illinois University, Illionis.
Schneider, A 1984, Modelling external auditors’ evaluations of internal auditing, Journal of Accounting Research, 22(2), p. 657-678.
Thomas, R M 2003, Blending qualitative and quantitative research methods in theses and dissertations, Corwin, Thousand Oaks.
William, M F & Schneider, A 2010, A hierarchical approach to the external auditor’s evaluation of the internal auditing function, Contemporary Accounting Research, 4(2), p. 337–353.