The reliance of Maltese external auditors on the internal audit function : a study

Abstract

In Malta, internal audit functions are still considered to be a relatively modern concept. However, due to the recent growth in public expectations and increasing corporate governance rules, local organisations are increasing their investment in internal audit functions. Hence, this study seeks to establish the extent of external auditors' reliance on internal auditors' work during the performance of the external audit since certain parts of internal auditing work may be useful for external audit procedures. Reliance on internal auditors' work provides external auditors with the opportunity to reduce the extent and modify the nature and timing of external audit procedures. The main objectives of this dissertation were to ascertain the attributes that lead external auditors to rely on internal auditors' work and to determine the extent of such reliance. In order to achieve these objectives personal interviews were carried out with thirteen audit managers from the major auditing firms in Malta. Additionally, personal interviews were held with fourteen chief audit executives to analyse their perception in relation to external auditors' reliance on internal auditors' work. This study concluded that the extent of reliance on internal auditors' work is minimal. Internal auditors' work is mainly utilised to corroborate and not substitute external audit procedures. In fact, the nature of external audit procedures remains largely unchanged. Internal Auditors' work is used to reduce the sample size of external audit testing and to provide external auditors with a higher level of assurance by confirming the conclusions obtained through external audit testing. Furthermore, the lack of communication between external and internal auditors can only lead the latter to assume that there is a certain degree of reliance on internal auditors' work. The limited degree of reliance arises due to various deficiencies both in the internal audit function structure and in internal auditors' work. This study includes a number of recommendations for organisations attributing to increase the degree of external auditors' reliance on internal auditors' work. Implementing these suggestions requires investment. However, the main benefit of such investment is the peace of mind of knowing that one's internal audit is up to standard in the work it is performing.