The internal audit control function and its implication for risk assessment by the external a case of quoted companies

Abstract

This study sets out principally to identify the effects of internal audit departments on the risk assessments process by external auditors and to establish the empirical association between the strength of internal audit departments and extent of reliance on internal controls by external auditors. As a prelude, the relative importance of other risk indicators besides internal controls were also addressed. A structured questionnaire addressed to audit managers of both quoted companies and audit firms was used to collect the data necessary for the study. A subset of the questionnaire was used to construct a set of variables for the purpose of establishing the empirical associations. To analyze the data, both descriptive and non-parametric statistics were used. The analysis found out that. though, in relative terms, internal audit departments of firms in financial investment sector was rated strongest, there was no significant differences in the strength of internal audit departments across industries implying that auditors should rely equally on the systems emanating from this departments if internal controls are sensitive to strength of internal audit departments. However, except in two cases, there was no evidence that there was any significant difference in the extent to which external auditors relied on the internal controls of firms across sectors. Further, no empirical association was located between the strength of internal audit departments and extent of reliance on internal controls by external auditors.