Journal of Finance and Accounting
ISSN (Print): 2333-8849 ISSN (Online): 2333-8857 Website: http://www.sciepub.com/journal/jfa Editor-in-chief: Apply for this position
Open Access
Journal Browser
Go
Journal of Finance and Accounting. 2019, 7(1), 1-5
DOI: 10.12691/jfa-7-1-1
Open AccessLiterature Review

The Role of Internal Audit in Corporate Governance and Contribution to Determine Audit Fees for External Audits

IrwanAdimas Ganda Saputra1, and Achmad Yusuf2

1Faculty of Economics and Business, University of Airlangga, Surabaya, Indonesia

2English Teacher, Senior High School, 17 Agustus 1945, Surabaya, Indonesia

Pub. Date: January 25, 2019

Cite this paper:
IrwanAdimas Ganda Saputra and Achmad Yusuf. The Role of Internal Audit in Corporate Governance and Contribution to Determine Audit Fees for External Audits. Journal of Finance and Accounting. 2019; 7(1):1-5. doi: 10.12691/jfa-7-1-1

Abstract

This study aims to determine the role of the internal audit function in good corporate governance and to know the contribution of the internal audit function to the implementation of external audit and the determination of audit fees. The method used is in-depth and critical review literature. The results of our analysis show that the role of internal audit in corporate governance is to assess the fairness of financial statements, to compliance with applicable standards and rules, and to provide creative advice for the effectiveness and operational efficiency of the company. Effectiveness and efficiency of the implementation of external audits is influenced by the availability of internal audits, knowledge and experience of internal auditors internal audit quality, level of coordination between internal auditors and external auditors, level of risk in the audit environment, external auditor work style, and inherent risk the amount of fee that must be given to the external auditor. So, it can be concluded that the internal audit function has a very important role in corporate governance. Moreover, a quality internal audit function can affect the effectiveness and efficiency of the implementation of external audits and can influence the determination of fees for external auditors.

Keywords:
audit fee external audit internal audit corporate governance

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]  Agoes, S, “Auditing (Pemeriksaan Akuntan) Oleh Kantor Akuntan Publik Jilid I”, Jakarta: Lembaga Penerbit Fakultas Ekonomi Universitas Indonesia, 2004.
 
[2]  IIA, “International Professional Practices Framework (IPPF)”, The Institute of Internal Auditors Research Foundation, Altamonte Springs, FL, 2009, Retrieved from www.iia.org.au/AboutIIA/defnofia.html, Desember 2018 [online].
 
[3]  Cohen, J. R., and Hanno, D. M, “Auditors' Consideration of Corporate Governance and Management Control Philosophy in Preplanning and Planning Judgments”, AUDITING: A Journal of Practice & Theory, 19(2), 133-146, 2000.
 
[4]  Ho, S., and Hutchinson, M, “Internal Audit Department Characteristics/Activities And Audit Fees: Some Evidence From Hong Kong Firms”, Journal of International Accounting, Auditing and Taxation, 19(2), 121-136, 2010.
 
[5]  Schneider, A, “The Nature, Impact and Facilitation of External Auditor Reliance on Internal Auditing”, Academy of Accounting and Financial Studies Journal, 13(4), 41-53, 2009.
 
[6]  Gramling, A. A., Maletta, M. J., Schneider, A., and Church, B. K, “The Role of The Internal Audit Function in Corporate Governance: A Synthesis of The Extant Internal Auditing Literature and Directions For Future Research”, Journal of Accounting Literature, 23, 194-244, 2004.
 
[7]  Munro, L., and Stewart, J, “External Auditors' Reliance on Internal Auditing: Further Evidence”, Managerial Auditing Journal, 26(6), 464-481, 2011.
 
[8]  ASX, “Corporate Governance Principles with 2010 Amendments, 2nd ed”, Australian Securities Exchange (ASX) Corporate Governance Council, Retrieved from https://www.asx.com.au/documents/asx-compliance/cgprinciplesrecommendationswit h2010amendments.pdf, 2010, Desember 2018 [online].
 
[9]  Zain, M. M., Zaman, M., and Mohamed, Z, “The Effect of Internal Audit Function Quality and Internal Audit Contribution to External Audit on Audit Fees”, International Journal of Auditing, 19(3), 134-147, 2015.
 
[10]  Grant, C. T., Park, N., and Wheeler, S. W, “Non Audit, External Audit, and Internal Audit Services in a Post-SOX World”, Internal Auditing, 24(1), 28-35, 2009.
 
[11]  Sarens, G, “Internal Auditing Research: Where are We Going?”, International Journal of Auditing, 13(1), 1-7, 2009.
 
[12]  AICPA, “The Auditor’s Consideration of the IA Function in an Audit of Financial Statements”, Statement on Auditing Standard No. 65. New York: AICPA, 1997a.
 
[13]  AuASB, “ASA610 Considering the Work of Internal Auditors”, Sydney: AuASB, 2006.
 
[14]  IFAC, “International Auditing and Assurance Standards Board ISA: 610 International Standard on Auditing Using the Work of Internal Auditors”, New York: IFAC, 2009.
 
[15]  PCAOB, “An Audit of Internal Control Over Financial Reporting that is Integrated with An Audit of Financial Statements’, PCAOB Release No. 2007-005, Washington DC: PCAOB, 2007.
 
[16]  Abbott, L. J., Parker, S., and Peters, G. F, “Audit Fee Reductions from Internal Audit-Provided Assistance: The Incremental Impact of Internal Audit Characteristics”, Contemporary Accounting Research, 29(1), 94-118, 2012.
 
[17]  IAPI, “Peraturan Pengurus Nomor 2 Tahun 2016 Tentang Penentuan Imbalan Jasa Audit Laoran Keuangan”, Jakarta: IAPI, 2016.
 
[18]  Mulyadi, ”Auditing (6 ed.)”, Jakarta: Salemba Empat, 2002.
 
[19]  Pizzini, M., Lin, S., and Ziegenfuss, D. E, “The Impact of Internal Audit Function Quality and Contribution on Audit Delay”, AUDITING: A Journal of Practice & Theory, 34(1), 25-58, 2015.
 
[20]  Prawitt, D. F., Smith, J. L., and Wood, D. A, “Internal Audit Quality and Earnings Management”, The Accounting Review, 84(4), 1255-1280, 2009.
 
[21]  Braiotta, L, “The Audit Committee Handbook, 3rd ed., Wiley, New York, NY, 1999.
 
[22]  Goodwin, J, “A Comparison of Internal Audit in The Private and Public Sectors”, Managerial Auditing Journal, Vol. 19 No. 5, pp. 640-50, 2004.
 
[23]  Goodwin, J., and Yeo, T. Y, “Two Factors Affecting Internal Audit Independence and Objectivity: Evidence from Singapore”, International Journal of Auditing, Vol. 5 No. 2, pp. 107-25, 2001.
 
[24]  Moeller, R. R, “Brink's Modern Internal Auditing Eight Edition A Common Body of Knowledge”, Canada: John Wiley & Sons, Inc, 2016.
 
[25]  Davidson, R., Goodwin-Stewart, J., and Kent, P, “Internal Governance Structures and Earnings Management”, Accounting and Finance, Vol. 45 No. 2, pp. 241-67, 2005.
 
[26]  DeZoort, F. T., Hermanson, D. R., and Houston, R. W, “Audit Committee Support for Auditors: The Effects of Materiality Justification and Accounting Precision”, Journal of Accounting and Public Policy, 22(2), 175-199, 2003.
 
[27]  McMullen, D. A., and Raghunandan, K, “Enhancing Audit Committee Effectiveness”, Journal of Accountancy, Vol. 18 No. 2, pp. 79-81, 1996.
 
[28]  Zaharia, D. L., Lazar, A., and Tilea, D. M, “The Role of Internal Audit regarding the Corporate Governance and the Current Crisis”, Procedia - Social and Behavioral Sciences, 116, 4819-4823, 2014.
 
[29]  Danescu, T., Prozan, M., and Prozan, R. D, “The Valances of The Internal Audit in Relationship With The Internal Control – Corporate Governance”, Procedia Economics and Finance, 26, 960-966, 2015.
 
[30]  Dewing, I. P., and Russell, P. O, “The Individualization of Corporate Governance: The Approved Persons' Regime for UK Financial Services Firms”, Accounting, Auditing & Accountability Journal, 21(7), 978-1000, 2008.
 
[31]  Leung, P., Cooper, B. J., and Perera, L, “Accountability Structures and Management Relationships of Internal Audit: an Australian Study”, Managerial Auditing Journal, 26(9), 794-816, 2011.
 
[32]  Power, M, “The Risk Management of Everything: Rethinking the Politics of Uncertainty”, London: Demos, 2004.
 
[33]  Mihret, D. G., and Grant, B, “The Role of Internal Auditing in Corporate Governance: A Foucauldian Analysis”, Accounting, Auditing & Accountability Journal, 30(3), 699-719, 2017.
 
[34]  Gramling, A. A., and Myers, P. M, “Internal Auditors’ Assessment of Fraud Warning Signs: Implications for External Auditors”, The CPA Journal, Vol. 73 No. 6, pp. 20-4, 2003.
 
[35]  Green, S, “Fighting Financial Reporting Fraud”, Internal Auditor, Vol. 60 No. 6, pp. 58-65, 2003.
 
[36]  Clark, M., Gibbs, T. E., and Schroeder, R. B, “Evaluating Internal Audit Departments Under SAS No. 9. Criteria for Judging Competence, Objectivity, and Performance”, The Woman CPA, 8-11, 1980.
 
[37]  IFAC, “International Standard on Auditing ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, 315(September)”, 2012.
 
[38]  Brody, R. G,m “External Auditors’ Willingness to Rely on The Work of Internal Auditors: The Influence of Work Style and Barriers to Cooperation”, Advances in Accounting, 28(1), 11-21, 2012.
 
[39]  Paino, H., Razali, F. M., and Jabar, F. A, “The Influence of External Auditor’s Working Style, Communication Barriers and Enterprise Risk Management Toward Reliance on Internal Auditor’s Work”, Procedia Economics and Finance, 28, 151-155, 2015.
 
[40]  Felix, W. L., Gramling, A. A., and Maletta, M. J, “The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing This Contribution”, Journal of Accounting Research, 39(3), 513-534, 2001.
 
[41]  AICPA, “Statements on Auditing Standards”, New York: AICPA, 1997b.
 
[42]  IIA, “Standards for the Professional Practice of Internal Auditing”, Altamonte Springs, FL: IIA, 1995.
 
[43]  Felix, W. L., Gramling, A. A., and Maletta, M. J, “Coordinating Total Audit Coverage: The Relationship Between Internal And External Auditors”, Institute of Internal Auditors Research Foundation, 1998.
 
[44]  IAASB, “International Standard on Auditing ISA 610 (Revised 2013), Using the Work of Internal Auditors and Related Conforming Amendments, 610(March)”, IFAC, 2013.
 
[45]  Maletta, M. J, “An Examination of Auditors’ Decisions to Use Internal Auditors as Assistants: The Effect of Inherent Risk”, Contemporary Accounting Research, 9(2), 508-525, 1993.
 
[46]  Maletta, M. J., and Kida, T, “The Effect of Risk Factors on Auditors’ Configural Information Processing”, The Accounting Review, 68(3), 681-691, 1993.
 
[47]  Libby, R., Artman, J. T., and Willingham, J. J, “Process Susceptibility, Control Risk, and Audit Planning”, The Accounting Review, 60(2), 212-230, 1985.
 
[48]  Glover, S. M., Prawitt, D. F., and Wood, D. A, “Internal Audit Sourcing Arrangement and the External Auditor's Reliance Decision”, Contemporary Accounting Research, 25(1), 193-213, 2008.
 
[49]  Goodwin‐Stewart, J., and Kent, P, “Relation Between External Audit Fees, Audit Committee Characteristics and Internal Audit”, Accounting and Finance, 46(3), 387-404, 2006.
 
[50]  Singh, H., and Newby, R, “Internal Audit and Audit Fees: Further Evidence”, Managerial Auditing Journal, 25(4), 309-327, 2010.
 
[51]  Prawitt, D. F., Wood, D., and Sharp, N. Y, “Reconciling Archival and Experimental Research: Does Internal Audit Contribution Affect the External Audit Fee?”, Behavioral Research in Accounting, 23(2), 187-206, 2010.
 
[52]  Axén, L, “Exploring the Association Between the Content of Internal Audit Disclosures and External Audit Fees: Evidence from Sweden”, International Journal of Auditing, 22(2), 285-297, 2018.
 
[53]  Beekes, W., and Brown, P, “Do Better-Governed Australian Firms Make More Informative Disclosures?”, Journal of Business Finance and Accounting, 33(3-4), 422-450., 33(3-4), 422-450, 2006.
 
[54]  Singh, H., Woodliff, D., Sultana, N., and Newby, R, “Additional Evidence on the Relationship between an Internal Audit Function and External Audit Fees in Australia”, International Journal of Auditing, 18(1), 27-39, 2014.
 
[55]  Fogg, S. L, “A Time Series Analysis of the Effects of Internal Audit Activities on External Audit Fees”, Journal of Accountancy (pre-1986), 159(1), 121, 1985.
 
[56]  Turpen, R. A, “Differential Pricing on Auditors Initial Engagements-Further Evidence”, Auditing-A Journal of Practice & Theory, 9(2), 60-76, 1990.