Blackwell Publishing Ltd.Oxford, UK and Malden, USAIJAUInternational Journal of Auditing1090-67382006 Blackwell Publishing Ltd.

2006101118Original ArticlesInternal Auditors’ Contribution to Financial Statement AuditsM. M. Zain et al.

International Journal of Auditing

Int. J. Audit. 10: 1–18 (2006)

Internal Auditors’ Assessment of their

Contribution to Financial Statement
Audits: The Relation with Audit
Committee and Internal Audit
Function Characteristics
Mazlina Mat Zain,1 Nava Subramaniam2 and
Jenny Stewart2
1
Multimedia University, Malaysia
2
Griffith University, Australia

This paper examines the relation between audit committee

characteristics, internal audit function characteristics and
internal auditors’ assessment of their contribution to financial
statement audits. Using survey data from chief internal
auditors of 76 Malaysian publicly-listed firms, we provide
evidence of a positive relationship between internal auditors’
assessment of their contribution to financial statement audits
and three audit committee characteristics: the proportion of
independent audit committee members, their knowledge and
experience of accounting and auditing, and the extent of audit
committee review of internal audit programmes, budget and
coordination proposals. Further, a positive relationship is
found between internal auditors’ evaluation of their
contribution to the financial statement audit and internal audit
function characteristics including size, prior experience of
staff in auditing, time availability and the closeness of the
function’s relationship with the external auditor. The results
indicate that more effective audit committees and well-
resourced internal audit units tend to be positively associated
with the internal auditors’ assessment of their contribution to
the external audit.

Key words: internal audit; audit committees; external audit;

corporate governance; financial statement audits; Malaysia

Correspondence to: Dr. Nava Subramaniam, Griffith Business SUMMARY

School, Department of Accounting, Finance and Economics,
Griffith University, PMB 50 Gold Coast Mail Centre, Queensland This study provides empirical evidence on the
9726, Australia. Email: n.subramaniam@griffith.edu.au association between audit committee

ISSN 1090-6738
© Blackwell Publishing Ltd 2006. Published by Blackwell Publishing, 9600 Garsington
Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
2 M. M. Zain et al.
characteristics, internal audit function
characteristics and the internal auditors’
assessment of their contribution to financial
statement audits.
We hypothesise that specific audit committee
characteristics such as independence, members’
knowledge and experience in accounting and
auditing, and interactions with the internal audit
function (such as frequency of meetings and
review of internal audit reports) are associated
with internal audit’s propensity to contribute
towards the external audit. We also predict that
quality aspects of internal audit, namely the size
of the internal audit function and the level of
audit experience among internal audit staff will
impact on the extent to which the internal audit
function is able to contribute to financial
statement audits.
The study uses survey data from chief internal
auditors of 76 firms listed on the Malaysian Kuala
Lumpur Stock Exchange (KLSE).1 Consistent
with our predictions, our results indicate that audit
committee characteristics are associated with
internal auditors’ assessment of their contribution
to external audits. Specifically, positive
relationships are found between internal auditors’
evaluation of their contribution to the financial
statement audit and three audit committee
characteristics: (1) the proportion of independent
audit committee members, (2) the audit committee
members’ knowledge and experience of
accounting and auditing issues, and (3) audit
committee reviews of internal audit programmes,
budgets and their coordination with external
auditors. We also find positive relationships
between internal auditors’ assessment of their
contribution to external audit and both the size
of the internal audit unit and the level of audit
experience among internal audit staff.
The study adds to the growing body of
international literature concerned with linkages
between various corporate governance
mechanisms. From a practical perspective, the
study provides feedback to the regulators (i.e.
KLSE) on the need for policies that support and
enhance the link between the audit committee and
the internal audit function. The results also support
the current debate on the appointment of
independent audit committee members, and the
need for members to be knowledgeable in
accounting, auditing and finance. Further, issues
of appropriately resourcing the internal audit
function also appear important to improve internal
© Blackwell Publishing Ltd 2006
audit participation in the financial reporting
process.
INTRODUCTION
The contribution that internal auditors make
towards assisting external auditors in the financial
statement audit process has gained renewed
attention (Elliot & Korpi, 1978; Felix et al., 2001;
Wallace, 1984). Much of this interest has been
propelled by two key factors. First, the continuing
pressure on accounting firms to deliver services
more efficiently and to reduce audit costs
motivates a better understanding of how external
auditors may optimise work completed by internal
auditors. Second, corporate governance
developments have increased the focus on internal
control systems, and have identified the internal
audit function as playing a key role in assessing
and improving the quality of such systems
(Securities & Exchange Commission (SEC), 2003;
Cohen et al., 2002). Consequently, the internal audit
function has greater potential to aid the external
auditors in their audit planning, thus justifying
further research on the link between internal and
external auditors. Previous research suggests that
a positive relation exists between external auditors’
reliance on internal audit work and the strength of
the internal audit function (Abdel-khalik et al.,
1983; Brody et al., 1998; Maletta, 1993; Schneider,
1985). Further, the focus of prior studies is also
predominantly on understanding how various
attributes as prescribed by the auditing standards
(e.g. ISA 610; SAS 65; AUS 604), namely internal
auditors’ objectivity, competence and work
performance, affect external auditors’ assessment
of an internal audit function’s strength. In general,
the findings indicate that the greater the objectivity,
technical competence and quality of work
performance (i.e. the exercise of due professional
care), the larger the potential for internal auditors
to contribute to the external audit
(Krishnamoorthy, 2002).2
Our literature review, however, indicates that
prior studies have failed to examine the influence
of related corporate governance variables on the
link between the internal and external audit
functions. In particular, with the growing
recognition of the influence that audit committees
have on the financial reporting process (Beasley
et al., 1999; Carcello & Neal, 2000; Collier, 1993), a
key research question is whether such committees
impact internal audit contribution to financial
Int. J. Audit. 10: 1–18 (2006)
Internal Auditors’ Contribution to Financial Statement Audits
statement audits. The audit committee is
considered to be an important self-regulatory
governance mechanism with significant oversight
responsibilities over financial reporting, internal
control and audit activities (Blue Ribbon
Committee (BRC), 1999; United States (US)
Congress, 2002). In recent years, there has been
increasing controversy over financial reporting
problems and inadequate audit committee
oversight, resulting in greater demand for
understanding the impact that audit committees
have on the financial reporting process (Abbott
et al., 2004; DeZoort & Salterio, 2001).
Recommendations by authoritative bodies such
as the Public Oversight Board (POB) (PAE, 2000),
the BRC (1999), and the Malaysian Institute
of Corporate Governance (2000) have stressed
the importance of having independent,
knowledgeable and active audit committees to
enhance their financial reporting monitoring role.
While several empirical studies have examined the
impact of audit committees on financial reporting-
related outcomes such as audit quality and audit
fees (Carcello & Neal, 2000; Beasley et al., 1999;
Collier & Gregory, 1996), little work has been done
to examine how audit committees may affect
external auditors’ reliance on the internal audit
function.
Audit committees assume important
responsibilities with respect to internal audit, such
as reviewing the internal audit programme and
ensuring the adequacy of the scope of internal
audit activities. As such, audit committees have
the potential to enhance the effectiveness of the
internal audit function, and this, in turn, has
implications for internal auditors’ contribution to
external audit work. According to Krishnamoorthy
(2002), ‘decisions to rely on the internal audit
function and the resulting impact on audit
planning decisions form a complex process, and
future research should attempt to address this
issue’ (p. 118). Thus, further research on the
relationship between the internal audit function
and the audit committee and its implications for
external auditors’ reliance on internal audit work
is clearly warranted.
In this paper, we examine the relationship
between specific audit committee characteristics
(i.e. independence, members’ knowledge and
experience in accounting and auditing, and
interactions with the internal audit function
including frequency of meetings and review of
internal audit reports) and internal auditors’
© Blackwell Publishing Ltd 2006
3
assessment of their contribution towards financial
statement audits.3 An overarching rationale for the
study’s hypotheses is that a more independent,
competent and interactive audit committee is likely
to take actions within their span of control that may
result in more effective internal audit outcomes.
Consequently, improvements in internal audit
effectiveness and in the communication between
internal and external auditors are likely to
engender greater trust and hence more reliance
by the external auditor on the internal audit
function. External auditors are potentially able to
utilise assistance from internal auditors via two
approaches. The first is to have the internal
auditors work as assistants under their direct
supervision; the second approach is to rely on
relevant work completed by the internal audit
function on its own. Such assistance, in turn, is
likely to save external auditors’ time and effort
in their audit engagement. Prior studies by Felix
et al. (1998), and Al-Twaijry et al. (2004) provide
evidence of substantial interactions between the
internal and external auditors, including the
planning of audit work and assessing each other’s
working papers and reports.
The present study also extends previous research
in the area by examining the link between quality
aspects of an internal audit unit, namely the size of
the internal audit function and the level of audit
experience among internal audit staff, and internal
auditors’ assessment of their contribution to
financial statement audits. While Felix et al. (2001)
adopt a single measure of internal audit quality
based on the external auditors’ subjective
judgement of their clients’ internal audit units, we
focus on more objective aspects of an internal audit
function that affect its quality. We argue that a
larger sized internal audit unit is likely to be better
resourced, including having a broader work scope,
higher organisational status and wider staff talent
than a smaller unit. Likewise, the quality of
internal audit work is likely to be higher in internal
audit units with a larger proportion of staff with
audit experience than those with a lower
proportion of audit experience. By examining the
effects of these two distinct aspects of an internal
audit unit on the contribution that internal audit
makes towards financial statement audits, the
results of this study will be able to inform the
design of such units.
Analysis of our hypotheses is based on data
collected from 76 publicly-listed companies from
Malaysia. Malaysia was chosen as the location for
Int. J. Audit. 10: 1–18 (2006)
4 M. M. Zain et al.
the study because evidence has been fragmentary
from newly industrialised economies and less
developed capital markets. Whilst prior work in
this area provides evidence from a strong and
sophisticated capital market environment (Edge
& Farley, 1991; Felix et al., 2001; Gramling, 1999;
Maletta, 1993; Maletta & Kida, 1993; Margheim,
1986; Messier & Schneider, 1988; Schneider, 1984,
1985), only a limited number of studies have been
conducted in countries where capital markets are
less developed and where corporate governance
mechanisms are still evolving (Al-Twaijry et al.,
2004).
According to the Corporate Disclosure-Listing
Requirement (Section 344A), as issued by the Kuala
Lumpur Stock Exchange (KLSE) (2000), all publicly-
listed companies in Malaysia are mandated to
establish an audit committee. Further, the audit
committee should comprise a minimum of three
members, the majority of whom must be
independent directors. The chairman of the audit
committee is required to be an independent
director and also a member of the Malaysian
Institute of Accountants (KLSE, 2000). The listing
requirements also advocate the establishment of
an internal audit function according to the best
practices guidelines of the Malaysian Code of
Corporate Governance (MCCG) (Finance
Committee on Corporate Governance, 2000). If a
company does not have such a function, the board
of directors is required to disclose this fact with
reasons why the function has not been put into
place.
Our results indicate that audit committee
characteristics impact internal auditors’
assessment of their contribution to external audits.
Specifically, positive relationships are found
between the perceived internal audit contribution
to the financial statement audit and three audit
committee characteristics: (1) the proportion of
independent audit committee members, (2) the
audit committee members’ knowledge of
accounting and auditing issues, and (3) audit
committee reviews of internal audit programmes,
budgets and their coordination with external
auditors. Further, our results also indicate positive
relationships between aspects of internal audit
quality, namely the size of the internal audit unit
and level of audit experience among internal audit
staff, and internal audit contribution to external
audit. These results provide further support to
previous studies by Felix et al. (2001) and Brody
et al. (1998), which suggest that internal audit
© Blackwell Publishing Ltd 2006
quality is a key determinant of external auditors’
reliance on internal audit work.
The remainder of this paper is organised as
follows. The next section provides the background
of the current study, while the third section
discusses the hypotheses development. The fourth
section delineates the research method while the
fifth section reports and discusses the results of
the study. The final section concludes the paper,
notes the limitations of the study and discusses
opportunities for further research.
BACKGROUND
When planning an audit engagement, the external
auditor assesses the risk of material misstatement
in the client’s financial statements. This includes
a review of the internal control system of the
client. The internal audit function is part of an
organisation’s internal control system and thus the
external auditors will seek an understanding of the
function as part of their overall audit planning
process (ISA 610; SAS 65; AUS 604). Based on this
understanding, the external auditor evaluates the
suitability and extent of reliance to be placed on
work undertaken by the internal audit function, so
as to minimise any duplication of audit work.
Internal audit procedures upon which the external
auditors may rely include testing of internal
controls and substantive testing procedures.
Professional auditing standards (e.g. ISA 610)
suggest that, when assessing the work of internal
audit, an external auditor should consider (1) the
characteristics of internal auditors such as their
competency, objectivity and work performance,
and (2) the nature of the assertion such as the level
of materiality, inherent risk, and subjectivity of the
assertion, particularly at the account balance level.
These factors have been the focal variables for a
stream of research, predominantly experimental
in nature, investigating their effect on external
auditors’ decisions to rely on internal audit work
(Edge & Farley, 1991; Margheim, 1986; Schneider,
1985; Brown, 1983). In general, consistent with the
auditing standards, findings of prior studies
suggest that both the characteristics of internal
auditors and the nature of the assertion impact
external auditors’ perceptions of the reliability of
internal audit work and hence the extent to which
internal audit may contribute towards the financial
statement audit. Maletta & Kida (1993) and Maletta
(1993) also found that inherent risk affects internal
audit reliance decisions by interacting with factors
Int. J. Audit. 10: 1–18 (2006)
Internal Auditors’ Contribution to Financial Statement Audits
such as internal auditor objectivity and work
performance.
A more recent study by Felix et al. (2001)
indicates that external auditors’ reliance on
internal audit is influenced by their perceptions of
the quality of the internal audit function, as well
as, conditional on the level of inherent risk, the
availability of internal audit staff to assist in the
external audit and the extent of coordination
between internal and external auditors. Overall,
the results suggest that clients can affect the extent
of internal audit contribution to financial statement
audits by investing in internal audit quality,
managing availability of internal audit time and
facilitating coordination between internal and
external auditors.
In summary, the extant literature indicates that
external auditors’ reliance on internal audit work
is a function of their assessment of internal audit
effectiveness. The internal audit function, however,
is part of a larger system of governance
mechanisms within an organisation. In particular,
the audit committee is another key corporate
governance feature that has the potential to impact
internal audit effectiveness through its monitoring
and oversight duties and responsibilities.
According to corporate governance guidelines
such as the Auditing and Assurance Standard
Board of the Australian Accounting Research
Foundation (2002) and the MCCG (Finance
Committee on Corporate Governance, 2000), the
audit committee has oversight responsibility for
areas associated with preparing reliable financial
statements and this includes the internal audit
function. In meeting its responsibility towards
internal audit, the committee may undertake
several monitoring initiatives. First, audit
committees can question and review internal audit
programmes and reports. Second, they may
demand a greater coverage of work where
inadequate assurances are detected. Third, audit
committees may also enhance the communication
between internal and external auditors.
However, previous research indicates that the
mere presence of an audit committee does not
ensure its effectiveness and that attributes such as
its composition and diligence must be considered.
For example, Scarbrough et al. (1998), based on a
survey of 72 chief internal auditors (CIAs) from
Canada, found that audit committees consisting
solely of non-employee (outside) directors meet
more frequently with CIAs and are more likely
to review internal audit reports than those
© Blackwell Publishing Ltd 2006
5
committees comprising at least one or more inside
directors. Likewise, Raghunandan et al. (2001), in a
US study, report that audit committees with only
independent directors and at least one member
with an accounting or finance background are
more likely to have longer meetings with the
CIA, to provide private access to the CIA, and to
review internal audit proposals. Further, the results
of a study by Goodwin (2003), using data from
Australia and New Zealand, suggest that
independence and accounting experience of audit
committee members have a complementary impact
on the committee’s relations with internal audit.
HYPOTHESES DEVELOPMENT
Figure 1 presents the conceptual model for this
study. In this section, hypotheses are developed
between audit committee characteristics and
internal auditors’ assessment of their contribution
to financial statement audits.
Independence of audit committees
Independence has been defined as having ‘no
relationship to the corporation that may interfere
with the exercise of their independence from
management and the corporation’ (BRC, 1999).4
Several empirical studies that have explored
the association between audit committee
independence and financial reporting outcomes
indicate that firms with more independent
members display better financial reporting quality.
For example, Beasley et al. (2000) found that
companies committing financial statement fraud
have less independent committees than the
industry benchmarks. Likewise, Abbott et al.
(2003), based on 78 matched pairs of fraud and no-
fraud companies, found that no-fraud companies
tend to have more independent audit committees
than fraud companies.
We propose that audit committees consisting
solely of independent (or outside) directors will be
more effective and are likely to call for greater
depth and scope of internal audit activities and
procedures, which in turn would enhance internal
controls and the effectiveness of the internal audit
function. There are two motivations for
independent directors to seek a more effective
internal audit function.
First, independent audit committee members
are more likely to demand higher audit quality
in order to protect their reputation (Abbott &
Int. J. Audit. 10: 1–18 (2006)
6 M. M. Zain et al.

Audit Committee
Characteristics

Composition
• Independence
• Financial knowledge and
experience

Interaction activities
• Frequency of meetings
• Involvement in CIA dismissal
• Reviewing IA programme and
processes
Internal auditors’ assessment
of their contribution to
financial statement audits

Internal Audit Function

Characteristics
• Unit size
• Internal audit staff expertise

Figure 1: The conceptual model

Parker, 2000; Carcello & Neal, 2000). According
to reputational capital enhancement theory,
independent directors generally hold a high
reputation in the business community and they
view the directorship as a means of further
developing their reputation as experts in decision
making (Fama & Jensen, 1983). It is thus argued
that independent directors are more likely to
fear damage to their reputation as a result of
financial misstatements (Abbott & Parker, 2000).
Consequently, we expect more independent audit
committees to demand a higher level of audit
quality in order to identify and avoid any financial
misstatements, and the resulting reputational
damage.
Second, independent directors are not
economically dependent on the company, and
thus are arguably less biased over an entity’s
financial outcomes (Beasley et al., 2000). For
instance, they would have less incentive to accept
any mismanagement that may affect a firm’s
financial performance due to their financial
independence. Consequently, when faced with
financial reporting issues that may need further
investigation, e.g. an accounting policy treatment,
more independent audit committees are likely to
seek in-depth audit coverage.
Thus, as more independent audit committees
are likely to promote higher quality internal audit
processes, the likelihood of external auditors
relying more on an internal audit function would
also increase with the level of audit committee
independence. Invariably, increasing external
auditor reliance will be reflected in internal
auditors’ assessment of their contribution to
financial statement audits. Hence, we predict that
internal auditors perceive that their contribution to
external audits is greater when the audit committee
comprises a higher proportion of independent
members.
Therefore, based on the preceding discussion the
following hypothesis is suggested:
Hypothesis 1: There is a positive relationship
between the proportion of independent members
on audit committees and internal auditors’
assessment of their contribution to financial
statement audits.
Audit committee members’ financial
knowledge and experience
Audit committee members’ knowledge and
experience relating to accounting, auditing and/or
finance have been regarded as an important
dimension affecting audit committee effectiveness
(DeZoort, 1998; Kalbers & Fogarty, 1993). A key
recommendation of The Treadway Commission
(1987) and the BRC (1999) in the US is for audit

© Blackwell Publishing Ltd 2006 Int. J. Audit. 10: 1–18 (2006)

Internal Auditors’ Contribution to Financial Statement Audits
committee members to be financially literate. This
is not surprising as some of the common oversight
duties of audit committees include developing an
understanding of the entity’s risk management,
financial decisions, and cost–benefit analysis of
operational decisions. Financial knowledge and
experience, particularly in accounting, auditing
and finance is important for audit committee
members because many oversight judgements
are subjective and such knowledge will help in
discerning internal auditors’ review of financial
decisions. In other words, in the absence of
objective criteria, members lacking in financial
knowledge and experience are more likely to make
sub-optimal decisions in primary oversight areas
such as the implications of accounting policy
changes on financial reports (DeZoort, 1998).
In addition, the internal control systems
and reporting procedures within organisations
are becoming increasingly complex and
technologically advanced. Audit committee
members with the requisite financial knowledge
and experience are thus more likely to ask the
‘right’ questions and therefore should more easily
detect any mis-information or incongruity in
the financial reports. Also, results from prior
studies suggest that audit committee members
with oversight experience and knowledge in
accounting, auditing and finance make
judgements more similar to external auditors
than less experienced audit committee members
(DeZoort, 1998). In a similar vein, DeZoort &
Salterio (2001) found that, relative to audit
committee members with less experience, those
with more experience are able to sympathise and
better relate to the risks undertaken by the
external auditors.
Thus, compared to a less financially literate audit
committee, a more financially literate committee is
likely to better enhance internal audit structures
and processes, which in turn increases the
probability of internal audit work being adopted
by external auditors and/or external auditors
using internal auditors to assist with their audit
procedures. Consequently, such reliance is likely
to be reflected in the internal auditors’ assessment
of their contribution to financial statement audits,
i.e. the higher the audit committee financial
knowledge and experience, the greater the internal
auditors’ evaluations of their involvement in the
external audit.
In sum, the foregoing arguments lead to the
following hypothesis:
© Blackwell Publishing Ltd 2006
7
Hypothesis 2: There is a positive relationship
between the knowledge and experience of
audit committee members in accounting,
auditing and finance and internal auditors’
assessment of their contribution to financial
statement audits.
The extent of interaction between the audit
committee and the internal audit function
The BRC (1999) emphasises the importance of
strong working relations between audit
committees and internal audit in preventing
material misstatements in financial reports.
Likewise, the Guidelines on Internal Audit Function
for Directors of Public-Listed Companies in Malaysia
(KLSE, 2000, p. 9) state that ‘internal audit serves
as a corporate resource in support of the audit
committee, thus a close relationship between the
two enhances the internal audit function and its
ability to contribute to corporate success’. Audit
committee interaction with internal auditing,
however, is a broad concept and encompasses a
variety of activities (Raghunandan et al., 1998). In
this study, guided by previous studies, we focus
on three main aspects: (1) frequency of meetings
between the audit committee and the CIA, (2) audit
committee involvement in the dismissal of the CIA,
and (3) review of internal audit programmes and
procedures including the internal audit budget,
and their reports on internal controls, coordination
of activities with external auditors, and risk
management processes.
Frequency of meetings with the chief
internal auditor
The audit committee and the internal audit
function can benefit from regular meetings as this
allows exchange of relevant information on a
timely basis (Raghunandan et al., 1998; Scarbrough
et al., 1998). As a result of frequent meetings, the
audit committee will remain informed and
knowledgeable, enabling it to assist the internal
auditors to resolve any problems identified. More
frequent meetings also provide opportunities to
explore and undertake in-depth discussions on
ways to improve an organisation’s financial
reporting system. Thus, it can be argued that
the frequency of meetings between the audit
committee and the CIA is likely to enhance the
effectiveness of the internal audit function, and
consequently motivate external auditors’ reliance
Int. J. Audit. 10: 1–18 (2006)
8 M. M. Zain et al.
on the internal audit function. This, in turn, should
have a subsequent impact on internal auditors’
views on their contribution to financial statement
audits.
Involvement in the dismissal of the chief
internal auditor
The status of the internal audit unit has significant
implications for its effectiveness. Specifically, the
greater the independence of internal auditors,
including freedom from management pressure, the
greater is the likelihood that they can remain
objective and free from bias (Raghunandan &
McHugh, 1994). It is argued that when the audit
committee is involved in key decisions such as the
replacement of the CIA, there will be greater
empowerment of the internal function. In other
words, management influence over the internal
audit function decreases and consequently internal
auditors would feel more confident in undertaking
audit investigations, particularly when dealing
with more sensitive issues that may involve senior
management. Prior studies indicate that external
auditors assess internal audit as being more
reliable and effective when it is independent
of management influence (Schneider, 1985;
Margheim, 1986). Thus, we argue that a positive
relationship exists between audit committee
involvement in the dismissal the CIA and internal
auditors’ assessment of their contribution to
financial statement audits.
Involvement in reviewing internal audit
programme and processes
One of the responsibilities of an audit committee
is to ensure that management has designed and
implemented a proper and effective internal audit
programme (BRC, 1999). In order to fulfil this
responsibility effectively, audit committees are
required to review the internal audit programme
and ensure that its scope and the allocated
resources are acceptable. Further, the audit
committee also has a responsibility to review the
results or outcomes of the internal audit
programme and activities, including the extent to
which such activities are coordinated with the
external audit programme. It can be argued that
the greater the extent of audit committee review
of the internal audit programme and processes,
the greater the probability of identifying any
weaknesses in the internal audit activities, and
© Blackwell Publishing Ltd 2006
consequently of improving the internal monitoring
function.
Prior studies (Goodwin, 2003; Goodwin &
Yeo, 2001; Raghunandan et al., 2001; Scarbrough
et al., 1998) suggest that the extent of the
interaction between audit committees and internal
auditing, particularly the review of internal
audit’s involvement in risk management and other
programmes is important in supporting the status
of internal audit in the organisation. An internal
audit function that receives strong support
from the audit committee is likely to be more
objective and forceful in implementing control
improvements, and this should contribute more
towards the enhancement of internal audit quality.
This should enhance external auditors’ reliance on
the internal audit function and internal auditors’
assessment of their contribution to the financial
statement audit. Hence, the third hypothesis is as
follows:
Hypothesis 3: There is a positive relationship
between the extent of audit committee interaction
with the internal audit function and internal
auditors’ assessment of their contribution to
financial statement audits.
The characteristics of the internal
audit function
For an internal audit unit to be effective, it needs
to be well-resourced in order to meet the
quantitative and qualitative demands of the audit
process. Both the quantity of audit effort and
the quality of professional care exercised will
determine the overall quality of the internal audit
work. In this study, we argue that both the size of
the internal audit function and the extent of prior
audit experience of internal audit staff are likely to
enhance the quality of the internal audit function.
For instance, in a larger internal audit unit, there
will be more staff and consequently it can be
expected that the scope of internal audit work
covered would be much greater than in a smaller
sized unit. Empirical findings by Al-Twaijry et al.
(2004), based on questionnaire and interview
responses from internal and external auditors
working in Saudi Arabia, suggest that external
auditors believe that internal audit function size is
an important indicator of its quality. Furthermore,
in larger sized functional units, there will be more
opportunity and flexibility to have a staff rotation
schedule. Given that, over time, internal audit
staff are likely to develop familiarity with the
Int. J. Audit. 10: 1–18 (2006)
Internal Auditors’ Contribution to Financial Statement Audits
operational and other organisational employees,
staff rotation is likely to promote a more healthy
relationship, resulting in more objective audit
investigations. Empirical findings by Gul &
Subramaniam (1994) likewise support staff
rotation. Based on an experimental study of
internal auditors, they found that internal auditors
in situations of high familiarity with operating
personnel were less objective when faced with an
audit conflict than those auditors in situations of
low familiarity.
At the same time, we argue that the larger
the proportion of internal audit staff with prior
audit experience, the higher the internal audit
quality. It is expected that a functional unit
with experienced staff will undertake duties
more efficiently because they should be more
competent and conversant in discharging their
responsibilities based on prior work experience.
For instance, when more experienced staff
encounter difficult situations or complex multi-
tasks, they will be able to deal with such
situations more quickly and effectively than
their less experienced counterparts. In addition,
internal audit staff with prior experience and
expertise in auditing are also expected to
provide more valuable input towards
improving the internal controls of the
organisation (Brody et al., 1998). As reported in
Al-Twaijry et al.’s (2004) study, more than 50%
of the external auditor respondents viewed the
level of relevant experience of internal audit
staff to be a major and significant factor
affecting their decision to rely on the internal
audit function. Thus, it can be argued that a
higher proportion of staff with prior audit
experience should enhance the quality of the
internal audit function, leading to greater
propensity for external auditors to rely on
internal audit work. Consequently, such reliance
potentially affects internal auditors’ assessment
of their contribution to the external audit
process. The above discussion thus leads to the
following two hypotheses:
Hypothesis 4(a): There is a positive relationship
between the size of the internal audit function
and internal auditors’ assessment of their
contribution to financial statement audits.
Hypothesis 4(b): There is a positive relationship
between internal audit staff audit expertise and
internal auditors’ assessment of their
contribution to financial statement audits.
© Blackwell Publishing Ltd 2006
9
RESEARCH METHOD
Sample selection
Data were collected through a mailed
questionnaire survey.5 A total of 504 questionnaires
were sent to the CIAs of public companies listed
on the KLSE main board.6 In order to send a
matched questionnaire to the external auditor, we
requested respondents to enclose the name of the
partner in charge of the organisation’s financial
statement audit and the address of the company’s
external audit firm.
We received 101 (20.03%) responses, of which
76 (17.9%) were useable. Of the 25 non-useable
responses, 14 were eliminated due to the companies
having fully outsourced their internal audit
function and therefore information relating to the
quality of the internal audit unit was unavailable.
The remaining 11 responses were excluded due
to incomplete information. Upon receiving
the questionnaires from the internal auditor
respondents, we also sent a matching questionnaire
to the partner of the external audit firm responsible
for conducting the financial statement audit.7
However, we only received four (0.04%) responses
out of the 90 matched questionnaires sent to the
external audit firm partners.8 Therefore, due to the
unavailability of matching data, hypotheses testing
is based on the responses from the CIA respondents.
Model specification
The regression model, as shown below, was used
to test our hypotheses.
IACONTRB = b0 + b1AVAIL + b2COORD + b3IR +
b4OUTSIDE + b5ACEXP + b6FREQ
+ b7DISMISS + b8REVIEW1 +
b9REVIEW2 + b10REVIEW3 +
b11IAQUAL1 + b12IAQUAL2 + e
where:
IACONTRB = Internal auditors’ assessment of
percentage of internal audit
contribution to financial statement
work (0% = internal audit did not
perform any of the work required to
complete the audit to 100% = internal
audit performed all of the work
required to complete the audit).
AVAIL = Extent to which internal auditors
agree that the internal audit
department has time available to
assist in performance of the financial
statement audit (1 = strongly disagree
to 5 = strongly agree).
Int. J. Audit. 10: 1–18 (2006)
10
COORD = Internal auditors’ assessment of their
relationship with external auditors
(1 = coexistence, 2 = coordination,
3 = integration, 4 = partnering).
IR = Risk of material misstatement
occurring in the client’s financial
statements, in the absence of controls
(inherent risk), as reported by
the internal auditor (0 = low;
1 = moderate/high).
OUTSIDE = Number of outside directors on the
audit committee as a percentage of
total directors on the audit committee.
ACEXP = The extent of audit committee
member knowledge and experience
in accounting and auditing (1 = poor,
2 = below par, 3 = good, 4 = very
good, 5 = excellent).
FREQ = The frequency of meetings between
the chief internal auditor and the
audit committee.
DISMISS = Audit committee involvement in the
dismissal of the chief internal auditor
(0 = no, 1 = yes).
REVIEW1 = Audit committee review of IA
proposals related to: programme/
plans, budget and coordination with
external auditors (0 = nil reviews to
3 = all three key areas reviewed).
REVIEW2 = Audit committee review of the results
of internal auditing related to:
financial reporting, internal control
and compliance with law and
regulation (0 = nil reviews to 3 = all
three key areas reviewed).
REVIEW3 = Audit committee oversight of:
internal audit involvement in risk
management, management responses
to internal auditing/suggestions and
any difficulties/scope restrictions
encountered by internal auditing
(0 = nil reviews to 3 = all three key
areas reviewed).
IAQUAL1 = Natural log of the total number of
staff in the internal audit department
divided by the natural log of total
assets.
IAQUAL2 = The proportion of staff with prior
work experience in auditing over the
total number of staff in the internal
audit function.
The model is an adapted version of that used in
Felix et al. (2001), with the three variables, AVAIL,
COORD and IR included in the current model as
control variables. The following seven variables of
the regression model relate to audit committee
composition and interaction measures, with
OUTSIDE testing hypothesis 1, ACEXP testing
hypothesis 2, and FREQ, DISMISS, REVIEW1,
© Blackwell Publishing Ltd 2006
M. M. Zain et al.
REVIEW2, and REVIEW3 testing hypothesis 3.
Further, instead of using a single measure of
internal audit quality as adopted by Felix et al.
(2001), our study tests two specific quality-related
variables of an internal audit unit. These are (1)
IAQUAL1, being the size of the internal audit
department9 and (2) IAQUAL2, being the
proportion of internal audit staff with prior work
experience in auditing divided by the total number
of staff in the internal audit function. These two
variables test hypotheses 4(a) and 4(b).
RESULTS
Table 1 provides a breakdown of the sample by
industry type. There are nine industry
classifications represented, with the majority of
companies coming from either the trading and
services sector or the industrial sector.
Table 2 provides descriptive statistics for the
variables in the regression model while Table 3
reports the correlations between the variables.
Table 2 indicates that the mean availability of
internal audit to assist the external auditor is
just over the mid-point of 3 while the average
relationship between the two functions falls
between coexistence and coordination. On
average, audit committees meet with the CIA
about four times per year and are involved in
reviewing the work of internal audit. While the
mean percentage of independent directors on the
audit committee is only 73%, internal auditors’
evaluation of members’ accounting and finance
expertise appears to be relatively high. From
Table 3 it can be seen that generally the variables
are not highly correlated with each other, with
none of the correlation coefficients exceeding 0.4.
Table 1: Sample by industry type
Industry classifications Sample Sample
frequency percent
Industrial product 19 25.0
Consumer product 5 6.6
Technology 4 5.3
Trading and services 26 34.2
Properties 10 13.2
Plantation 6 7.9
Construction 4 5.3
Hotels 1 1.3
Infrastructure project 1 1.3
76 100.0
Int. J. Audit. 10: 1–18 (2006)
Internal Auditors’ Contribution to Financial Statement Audits 11

Table 2: Descriptive statistics

Variable Minimum Maximum Mean Standard deviation Median
IACONTRB 00 80.00% 33.68% 21.14% 30.00%
AVAIL 1 5 3.34 1.27 4
COORD 1 4 1.80 0.86 2
IR 0 1 0.78 0.42 1
OUTSIDE 38% 100% 73% 12% 75%
ACEXP 2 5 3.76 0.80 4
FREQ 0 8 4.35 1.13 4
DISMISS 0 1 0.8 0.4 1
REVIEW1 0 3 2.48 0.77 3
REVIEW2 0 3 2.77 0.62 3
REVIEW3 0 3 2.78 0.56 3
IAQUAL1 1 50 7.04 8.82 4.5
IAQUAL2 0 0.22 0.79 0.28 1
Note: see model specification in text for definitions of variables.

Table 4 presents the regression results of the
internal auditors’ assessment of their contribution
to the financial statement audit. The overall model
is significant (p < 0.001), with an adjusted R2 of
0.343. Standard regression diagnostics were
performed including tests for multicollinearity,
auto-correlation and heteroskedasticity, and the
results appear to be within acceptable limits
(Coakes & Steed, 2002).
The regression results support a significant
positive association between the proportion of
independent audit committee members
(Hypothesis 1) and internal auditors’ assessment of
their contribution to the external audit (p = 0.005).
This suggests that internal auditors believe that
they make a greater contribution to the external
audit when the audit committee is more
independent. The regression results also indicate a
significant relation between internal auditors’
assessment of their contribution to the financial
statement audit and the extent of audit committee
members’ knowledge of accounting and auditing
issues (p = 0.009), thus supporting Hypothesis 2. A
positive coefficient indicates the relationship is as
predicted, whereby the stronger the level of audit
committee knowledge, the higher the perceived
contribution of internal auditors to the external
audit work.
Hypothesis 3 is only partially supported since,
of the five aspects of audit committee interactions
with the internal audit function, only the review of
internal auditors’ proposals related to the internal
audit programme/plans, budget and coordination
with external auditors (REVIEW1) is significantly
(p = 0.068) related to internal audit contribution to
the financial statement audit. None of the other
four dimensions are significant, i.e. frequency of
meetings and involvement in the dismissal of the
CIA (FREQ and DISMISS), audit committee review
of financial reporting, internal control systems and
compliance with law and regulation (REVIEW2),
and audit committee oversight of internal audit
involvement in risk management, management
responses to internal auditing/suggestions and
any difficulties/scope restriction encountered by
internal audit (REVIEW3).
Hypotheses 4(a) and 4(b) are both supported
with the coefficients of IAQUAL1 and IAQUAL2
significant in the predicted direction (p = 0.001 and
p = 0.001). These results suggest that the larger
the size of the internal audit unit, the greater the
internal auditors’ perception of their contribution
to the external audit. Likewise, the larger the
proportion of internal audit staff with accounting
and auditing experience, the greater the internal
auditors’ assessment of their contribution to the
external audit. Hence, it appears that internal audit
characteristics in terms of size and staff expertise
have a significant effect on the assessment by
internal auditors of their contribution to the
financial statement audit.
In terms of the control variables, the results
of the present study are largely consistent with
Felix et al.’s (2001) findings in that the control
variable relating to the availability of the internal
audit department to assist external auditors in
performing the financial statement audit (AVAIL)
is significant and positively related to internal
auditors’ assessment of their contribution to the
financial statement audit (p = 0.042). Likewise, the

© Blackwell Publishing Ltd 2006 Int. J. Audit. 10: 1–18 (2006)

 12

© Blackwell Publishing Ltd 2006

Table 3: Pearson correlation coefficients for the variables in the model
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
IACONTRB (1) 1.00 0.302** 0.318** 0.074 0.286* 0.015 0.252* 0.302** 0.034 0.054 0.199 0.151 0.119
AVAIL (2) 1.00 0.257* 0.145 −0.051 −0.080 0.05 0.107 0.080 −0.102 0.069 −0.011 0.014
COORD (3) 1.00 −0.051 0.259* −0.303** 0.097 0.217* 0.202 0.033 0.146 0.176 0.201
IR (4) 1.00 0.158 0.045 0.037 0.263* −0.057 −0.079 0.001 0.090 0.063
IAQUAL1 (5) 1.00 −0.363** −0.081 0.111 0.155 0.207 0.063 0.204 0.285*
IAQUAL2 (6) 1.00 −0.064 −0.172 0.081 −0.129 0.009 −0.026 −0.112
OUTSIDE (7) 0.192 0.005 0.041 0.196 0.231* 0.084
ACEXP (8) 1.00 0.121 0.063 −0.084 0.272** 0.107
FREQ (9) 1.00 −0.045 0.015 0.115 0.069
DISMISS (10) 1.00 0.277** 0.352** 0.100
REVIEW1 (11) 1.00 0.143 0.304**
REVIEW2 (12) 1.00 0.239*
REVIEW3 (13) 1.00
**Correlation is significant at the 0.01 level (two-tailed).
*Correlation is significant at the 0.05 level (two-tailed).
Variables are as defined in model specification in text.
M. M. Zain et al.

Int. J. Audit. 10: 1–18 (2006)

Internal Auditors’ Contribution to Financial Statement Audits 13

Table 4: Regression results: internal audit contribution model

IACONTRB = b0 + b1AVAIL + b2COORD + b3IR + b4OUTSIDE + b5ACEXP + b6FREQ + b7DISMISS +
b8REVIEW1 + b9REVIEW2 + b10REVIEW3 + b11IAQUAL1 + b12IAQUAL2 + e
Variables Exp sign ß VIF t-value p-value*
Intercept −0.718 −3.319 0.002
Control
AVAIL + 0.034 1.389 1.753 0.042
COORD + 0.070 1.485 2.388 0.010
IR − −0.059 1.386 −1.017 0.156
Experimental
OUTSIDE + 0.494 1.238 2.665 0.005
ACEXP + 0.072 1.292 2.425 0.009
FREQ + −0.023 1.199 −1.126 0.264
DISMISS + −0.075 1.444 −1.210 0.231
REVIEW1 + 0.048 1.455 1.510 0.068
REVIEW2 + −0.044 1.456 −1.041 0.302
REVIEW3 + 0.014 1.399 0.314 0.377
IAQUAL1 + 2.133 1.542 3.505 0.001
IAQUAL2 + 0.249 1.337 2.897 0.001
*p-values represent one-tailed tests when direction of coefficient is consistent with expectations.
R2 = 0.448
Adjusted R2 = 0.343
F-ratio = 4.267
Signif. F < 0.0001
n = 76
Variables are as defined in model specification in text.

effect of the relationship between internal and
external auditors (COORD) is also significant and
positively related to internal auditors’ assessment
of their contribution to the financial statement audit
(p = 0.010). The direct impact of inherent risk (IR),
i.e. the risk of material misstatement occurring in
the absence of internal controls, on internal
auditors’ evaluation of their contribution to the
external audit, however, appears to be insignificant.
A possible reason for this result may relate to
differences in the respondents in that external
auditors were the assessors of IR in Felix et al.
(2001), while in the present study the respondents
were internal auditors. In particular, these two
groups may differ in their conceptualisation of
inherent risk. For instance, external auditors’
assessment of inherent risk tends to be oriented
towards the traditional audit risk model, while
internal auditors’ view of inherent risk is likely to
be based on a business risk approach to their audits
(Colbert & Alderman, 1995).
DISCUSSION
Overall, our findings indicate that audit committee
composition and the committee’s review of internal
audit plans and budgets both have a significant
influence on internal auditors’ assessment of their
contribution to the external audit. In particular, a
more competent and interactive audit committee
appears to have a positive effect on the internal
auditors’ assessment of their contribution to
external audit work. These findings provide
empirical support for the Treadway Commission
(1987) and KLSE (2000) recommendations for more
independent, knowledgeable and diligent audit
committees, suggesting that such committees
impact the financial reporting process. The results
of this study also provide additional support to the
findings of Felix et al. (2001) who focused on
external auditors’ perceptions of internal audit
contribution to the financial statement audit.
Factors relating to the management of the internal
audit function, such as the extent of coordination
between internal and external auditors and the
availability of internal auditors to assist the external
auditors, are found to have a significant effect on
internal auditors’ assessment of their contribution
to financial statement audits. However, we do not
find any direct or interaction effects of inherent risk
on internal auditors’ perceptions of their
contribution.

© Blackwell Publishing Ltd 2006 Int. J. Audit. 10: 1–18 (2006)

14
We find that internal audit quality factors, such
as the size of the function and the proportion of
internal audit staff with audit experience, are
significantly associated with internal auditors’
evaluations of their contribution to external audits.
These findings suggest that organisations that
channel the appropriate level and type of resources
into their internal audit function may reap benefits
in terms of increasing the internal audit function’s
potential to contribute towards external audits.
Consequently, it can be argued that such factors
have implications for reducing external audit fees
through external auditor reliance on internal audit
work and/or through improved audit coverage.
For instance, both Felix et al. (2001) and Elliot &
Korpi (1978) found a negative relationship between
external auditors’ reliance on internal audit work
and audit fees. Further, the results also suggest
that, with appropriately sized internal audit units,
and the resultant positive impact on internal
auditors’ potential to contribute to external audit,
external auditors’ time may be freed up and their
audit efforts therefore diverted to areas not covered
by the internal audit function. Consequently, with
increasing internal audit contribution to external
audits, an organisation’s overall audit coverage
and quality may be improved. Further research
to this effect, however, is needed to clarify the
impact of increasing internal audit contribution
to financial statement audits on both audit fees and
audit quality.
CONCLUSION
This study extends the present literature by
examining the relationship between the
characteristics of both the audit committee and
the internal audit function and the extent of the
internal auditors’ assessment of their contribution
towards the financial statement audit. The study
was motivated by the potential influence that audit
committees have on the breadth and scope of the
internal audit function, which, in turn, may affect
the potential for internal auditors to contribute to
the financial statement audit. Furthermore,
internal audit quality management, through the
size of the internal audit function and the level of
internal audit expertise, was also expected to be
associated with internal auditors’ contribution to
financial statement audits. The results of the study
generally support our hypotheses.
In addition, the study adds to the growing body
of international literature concerned with the
© Blackwell Publishing Ltd 2006
M. M. Zain et al.
link between different corporate governance
mechanisms. From a practical perspective, the
study provides feedback to the regulators (e.g.
KLSE) on the need for policies that support and
enhance the link between the audit committee
and the internal audit function. The results also
support the current debate on the appointment
of independent audit committee members, and
the need for members to be knowledgeable in
accounting, auditing and finance. Nevertheless,
as advocated by Turley & Zaman (2004), future
research needs to pay greater consideration to the
organisational and institutional contexts in which
audit committees operate. In particular, future
studies ought to adopt a more qualitative approach
to more carefully examine the processes through
which audit committees impact internal audit
quality, and hence internal auditors’ propensity to
contribute to external audits. The findings of this
study also reveal further issues of appropriate
resourcing of internal audit units as being
important to improve internal audit participation
in the financial reporting process.
The results of the study, however, should be
interpreted with caution. Besides the usual caveats
of survey research, there are several limitations to
this study. First, the study is wholly based on
responses from internal auditors. Due to a very low
response rate from external auditors in replying to
a matched questionnaire sent to them regarding
their client, the measures for the extent of internal
audit contribution to the financial statement audit
and the assessment of inherent risk were derived
from internal auditors’ responses alone. As such,
issues of perceptual differences between internal
and external auditors arise and limit the
generalisability of our results. However, when
using internal auditors’ assessment of their
contribution to financial statement audits, Morrill
& Morrill (2003) found strong and positive
correlations between 69 external and internal
auditors’ evaluations on the proportion of external
audit work completed by the internal audit
department (Pearson’s r = 0.78), and on the
number of external audit activities in which
internal audit work is used (Pearson’s r = 0.62).
Thus, such empirical support suggests that internal
auditors’ assessment of their contribution to the
external audit process is comparable to external
auditors’ evaluations of their contribution. Second,
the problem of response bias exists given that both
the independent and dependent variable measures
were derived from the same respondent, i.e.
Int. J. Audit. 10: 1–18 (2006)
Internal Auditors’ Contribution to Financial Statement Audits
internal auditors. Third, the survey response rate,
with only 17.9% useable responses, appears to be
rather low. As such, the representativeness of the
study may be limited. However, prior studies in
the area also report low survey responses rates
such as 12.6% by Felix et al. (2001) and 10.1% by
Carey et al. (2000).
The findings of this study suggest opportunities
for further research. For example, the impact of
internal audit contribution to external audit on
both audit fees and audit quality is an area that
needs further examination. While Felix et al. (2001)
found a negative relationship between internal
audit contribution and external audit fees, it
is possible that the quality of internal auditors’
work may also enhance overall external audit
quality. Relatedly, in the present study, we did not
distinguish internal auditors’ prior audit
experience (IAQUAL2) as being internal or external
audit experience, and it is possible that such a
distinction may also have implications for internal
audit quality. For instance, those with prior
external audit experience may be better able to
relate to external auditors and thus enhance
internal audit’s potential to contribute to the
external audit process. Further, a related area for
study would be to examine whether there are
differences in the management of the internal audit
function between developed and developing
capital markets and whether any differences
impact internal audit contribution to external
audit. Last but not least, more case-based studies
on the level of audit competition and strategies for
improving the relationship between internal and
external audit could be undertaken in order to gain
a richer understanding of the processes involved
in producing high quality financial reports.
NOTES
1. In 2003, the KLSE was renamed Bursa Malaysia.
2. Auditing standards recognise that internal
auditors may contribute to the external audit by
either working as assistants under the direct
supervision of the external auditors or
performing independent work upon which the
external auditor can rely (SAS 65; IAS 604).
3. In this study, internal auditors’ assessment of
their contribution to financial statement is seen
to closely reflect external auditors’ evaluations
of internal audit’s contribution to such audits.
This is based on two key points. First, prior
studies have found that the relationship
© Blackwell Publishing Ltd 2006
15
between the two types of auditor can be close
and highly interactive, suggesting internal
auditors are highly familiar with external
auditors’ needs (Al-Twaijry et al., 2004; Felix
et al., 1998). Second, based on a survey of
auditors from 69 firms, Morrill & Morrill (2003)
provide further empirical data indicating a high
correlation between both the internal and
external auditors’ assessments of internal audit
contribution to the external audit (Pearson
r = 0.78).
4. The BRC (1999) states that directors should not
be considered independent if (1) the director
or a member of his/her immediate family is or
has been an employee of the company or its
affiliates within the past five years; (2) the
director receives compensation for work other
than board service; or (3) the director serves as
a partner or controlling shareholder or executive
of a business with which the company has
significant business.
5. Before sending the survey questionnaire, the
instrument was pilot tested in Malaysia and
Australia, with five practitioners and ten
academics participating in the pilot study.
Minor changes to the wording of some
questions were undertaken. In general,
however, the respondents felt that the
instrument was clear and concise.
6. We excluded from our sample companies
classified in the finance industry as such
companies are also governed by other bodies
and regulations, i.e. Bank Negara Regulations
whereby the requirements for internal controls
are more stringent.
7. In contrast to Felix et al.’s (2001) study, we
did not ask CIAs to forward matching
questionnaires to their external auditor in order
to ease the process. We felt that this may put
them under pressure to complete the task, and
hence lower the response rate. Therefore we
only asked them to enclose the name of the
partner in charge and their public accounting
firm, to whom we subsequently sent a matching
questionnaire.
8. We undertook 25 random telephone calls to the
non-respondent external audit firms to enquire
on the low response rate and most of the
external auditor non-respondents stated the
following reasons for not replying: (i) concerns
over the exposure of information proprietary to
the client company with respect to the quality
of clients’ internal audit departments, and the
Int. J. Audit. 10: 1–18 (2006)
16
related threat to their position as the clients’
external auditor; (ii) lack of time to attend to the
survey questionnaire, and (iii) due to rotation of
partners in charge, new partners claimed that
they did not have sufficient knowledge about
the quality of the client’s internal audit
department.
9. For this variable, we use the natural log of the
total number of staff in the internal audit
department divided by the natural log of total
assets. We scale by total assets because the size
of the function is likely to be associated with the
size of the organisation.
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AUTHOR PROFILES
Mazlina Mat Zain is a Lecturer in the Faculty of
Management, Multimedia University, Malaysia.
Mazlina’s research interests are in the areas of
corporate governance and financial reporting
quality.
Nava Subramaniam is Associate Professor in
the Department of Accounting, Finance and
Economics, Griffith University, Australia. She is
presently the Associate Editor of the Journal of
Applied Management Accounting Research (JAMAR),
and Joint Editor of Accounting, Accountability and
Performance. Her main research interests are in
corporate governance, management control
systems, and organisational performance,
especially focusing on the relationship between
governance mechanisms, internal and external
auditors, and organisational performance.
Int. J. Audit. 10: 1–18 (2006)
18
Jenny Stewart is a Professor in the Department
of Accounting, Finance and Economics, at Griffith
University. She has held previous positions at the
University of Queensland, Queensland University
of Technology, Nanyang Technological University,
© Blackwell Publishing Ltd 2006
M. M. Zain et al.
Lincoln University, the University of Adelaide and
the University of South Australia. Jenny’s main
research interests are in corporate governance,
focusing in particular on the roles of the audit
committee and internal and external auditors.
Int. J. Audit. 10: 1–18 (2006)