The effect of inherent risk, knowledge spillover, and litigation risk on external auditors' reliance on client's internal audit functions.

摘要

The potentially significant role that an entity's internal audit function (IAF) can play in external auditors' work has long been recognized by both the American Institute of Certified Public Accountants (AICPA) and the Institute of Internal Auditors (IIA) [SAS No. 9 (AICPA, 1975); SAS No. 65 (AICPA, 1991); Standard 550 (IIA, 1995)]. Public auditors, who are facing intense pressure to be more cost-efficient, rely on IAF mainly to reduce the cost of performing necessary audit work. The purpose of this dissertation is to investigate the effect of inherent risk, knowledge spillover, and litigation risk on external auditors' reliance on audit clients' IAF.; An analytical model is first developed to describe the theoretical relationship between external auditors' reliance and inherent risk as well as knowledge-spillover-related cost savings. The general analytically theme posits that external auditors engage in a cost-benefit analysis and select the optimal level of reliance on IAF. Optimally occurs when the marginal benefit and marginal cost of the reliance are equal. In addition, an empirical examination is performed to examine whether external auditors' reliance on IAF is affected by inherent risk, knowledge spillover, and litigation risk, the test variables of interest in this study.; The research's findings indicate that external auditors' reliance on IAF is significantly and positively related to the audit client's financial condition, an indicator of potential litigation risk. This finding is consistent with prior research which indicates that external auditors may view their clients' financial health as the primary determinant of litigation risk, and do consider an assessment of the audit client's financial condition in the planning of their audit procedures [i.e., Pratt and Stice (1994)]. The results of this study fail to provide support for the existence of a relationship between the reliance on IAF and inherent risk or knowledge spillover. This implies that external auditors' reliance on IAF is not significantly related to simultaneously providing both audit and NAS to the same audit client, an issue currently being debated by accounting regulatory policy makers.