INTERNAL AUDITING AND DETERMINANTS OF EXTERNAL AUDIT FEE
ABSTRACT
This study examined the relationship between internal auditing and external audit fees in Nigeria.
This study made use of secondary data obtained from annual reports of publicly quoted companies in the Nigeria stock exchange. The regression method (OLS) and the correlation techniques were used to test the research hypothesis.
This study revealed a positive relationship between client size and audit fee. The study also revealed a positive relationship between client risk, profitability, complexity and audit fee. Debt ratio was also found to have a negative relationship with audit fee. The study recommends that firms should reduce their risk level as well as maintain a sound internal audit department.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Statement of Research Problem
1.3 Objectives of the Study
1.4 Significance of the Study
1.5 Scope of the Study
1.6 Statement of Research Hypotheses
1.7 Limitation of the Study
Reference
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
2.2 Theoretical Relationship between Internal Auditing and External Auditing Fees
2.3 Empirical Relationship between Internal Auditing and External Audit Fees
References
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction
3.2 Research Design
3.3 Data Source
3.4 Population
3.5 The Sample and Sampling Technique
3.6 Data Analysis
3.7 Regression Analysis
3.8 Multiple Regression Analysis
3.9 Model Specification
References 45
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction
4.2 Presentation and Analysis of Results
4.3 Interpretation of Results
4.4 Test of Hypothesis
CHAPTER FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION
5.0 Introduction
5.1 Summary of Findings
5.3 Recommendations
5.4 Conclusion
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The internal audit function has become well-recognized as one of the key governance mechanisms and that role has evolved over time. Despite its earlier role as company’s watchdog’ for the organization, the nature of internal audit processes today has expanded and typically encompasses consulting role, including risk management, control assurance and compliance work.
This is reflected by the new definition of internal auditing by the institute of internal auditors (IIA, 2011) that defined it as “an independent, objective assurance and consulting activity designed to add value and improve on organization’s operation. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management control and governance process.
More recently, given the new set of rules imposed to the public listed companies under Bursa listing requirement (2009), it is likely that internal audit function will continue to increase in its importance. For instance, the new Bursa listing requirements has mandated the establishment of the internal audit function and also requiring the internal audit to report directly to the audit committee. These requirements reemphasized on the importance of the internal audit function in supporting the organization to comply with these requirements as well as the role that the internal auditor could play in terms of enhancing the quality of the internal audit and the involvement in the preparation of the financial statement audit. Consequently, this new phenomena has attracted a significant interest and attention of academic researchers and practitioners alike. In particular, an emerging stream of research that focus on the contribution of internal audit to external audit work, internal audit attributes and its implication for audit fees. While the roles of external and internal audit are distinct, there are many opportunities for coordination and cooperation between these two functions that may yield synergistic outcomes such as higher quality audits and economic benefits. Professional auditing standards acknowledge the potential contribution that an internal audit function can provide to the external audit. This contribution can be made by internal auditors either working as assistant under the direct supervision of external auditors or independently perform various audits and reviews throughout the audit year work which the external auditors may rely upon (Maletta, 2001).
Reviews over the years suggest that extensive research has been undertaken to identify the determinants of external audit fees. While the roles of external and internal audit are distinct, there are many opportunities for coordination and cooperation between these two functions that they yield synergistic outcomes such as higher quality audits and economic benefits, professional auditing standards acknowledge the potential contribution that an internal audit function can provide to the external audit. This contribution can be made by internal auditors either working as assistants under the direct supervision of external auditors or independently perform various audits and reviews throughout the audit year work which the external auditors may rely upon (Maletta, 2001)
Reviews over the years suggest that extensive research has been undertaken to identify the determinants of external audit fees, but yet, there is scent and mixed evidence on the effects of internal audit quality especially on the aspect of internal audit competency, contribution of internal audit to external audit, and their impact on audit fees. A basic assumption of auditing is that a better internal audit function will induce greater reliance by external auditors on such a function, particularly through a reduction in the substantive work by external auditors, resulting in lower audit fees. (Felix et al 2006). Simunic contended that audit checks may substitute internal controls for external auditing if there is monopoly pricing, or substitute external auditing for internal control when knowledge spillovers reduce the cost of external auditing.
Felix et al (2006) reported a significant and negative association between external auditors reliance on internal audit and audit fees, this study will provide additional evidence on this.
1.2 STATEMENT OF RESEARCH PROBLEM
In outlining various approaches to internal auditing and external audit fees, a number of problems will be discussed. There has been largely inconclusive findings and this has resulted in several calls for additional research to better understand the relation between internal and external audit fees. Further analysis suggests that clients can affect the extent of internal auditing by meeting in internal audit quality and depending on the level of inherent risk, by either managing internal audit, availability or facilitating greater coordination between internal and external auditors. There are several factors that influence internal auditing and external audit fees. In the light of these, the following research question will be asked.
1. What is the relationship between firm size and external and it fees?
2. What is the relationship between client risk and external audit fees?
3. What is the relationship between profitability and external audit fees?
1.3 OBJECTIVES OF THE STUDY
1. To ascertain the relationship between firm size and external audit fees.
2. To find out the relationship between client risk and external audit fees.
3. To examine the relationship between profitability and external audit fees.
1.4 SIGNIFICANCE OF THE STUDY
This research work on its conclusion together with whatever solution or findings will provide answers to some pertinent questions as regards internal auditing and external audit fees.
This research work will be relevant to some specific group of persons. This includes shareholders, board of directors, and also prospecting students of accounting who would love to research in this area and build upon this study. This research will explore different areas of auditing and attempt to give solution or make suggestions as to how the internal audit function and fees paid to external auditors can be enhanced.
1.5 SCOPE OF THE STUDY
This study examines the relationship between internal auditing and external audit fees. The time frame for this study is from (2005 – 2010). Geographically, this study will be limited to Nigeria. The sector for this study will be manufacturing sector.
1.6 STATEMENT OF RESEARCH HYPOTHESES
The following hypotheses are tested in the course of carrying out this research.
1. There is a relationship between firm size and external audit fees.
2. There is a relationship between client risk and external audit fees.
3. There is a relationship between profitability and external audit fee.
1.7 LIMITATION OF THE STUDY
Problems encountered in this study were the use of secondary data in the research problems that arose as a result of secondary data use are, no assurance and reliability.
REFERENCES
Brody, R.G. et al (2008). An empirical investigation of the
interface between internal and external auditors, Accounting and business, vol. 28, pp 160-172.
Elliot, R.K. and Korpi, A.R. (2007). Factors affecting audit fees. Cost-Benefit Analysis of Auditing Research study. No. 3, by Melvin shakun: AICPA.
Felix, W.L. et al (2006). The contribution of internal audit as a determinant of external audit fees and factors influencing this contribution. Journal of accounting research.
Goodwin – Steward, J. and Kent, P. (2006). The relationship between external audit fees, audit committee characteristics and internal audit. Accounting and finance, vol. 46, pp. 387-404.
Oladipupo, A.O (2005). Auditing and investigation: Theory and practice, Mindex Publishers.
Wood, D.A. (2007). Does internal auditing affect the external audit fees? Journal of Accounting Research.
