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Keywords Internal control, Auditing
Abstract External auditors often rely on other professionals for the audit of the financial statements of their clients. Generally, external auditors rely on clients' internal auditors. Reliance on internal auditors results in cost savings to the client. The objective of this study is to determine which of the criteria as mentioned by AI 610 will be used by the external auditors to evaluate the work of the internal auditors. Respondents of the study consist of those from the big four and non-big four firms located in Kedah and Penang. A one-quarter replicate of 2^sup 8^ Kempthorne's design was used to determine the experimental task The findings of the study indicate that technical competence and scope of function are the two most important criteria that external auditors consider in their reliance on internal auditors. Malaysian Institute of Accountants (MIA), being the standard setter of the auditing standards in Malaysia, will have to develop precise and operational criteria for these factors in planning the audits. The study also shows that there was consistency in audit judgement.
Introduction
Internal auditors usually assist management in ensuring that there is a proper internal control system in place and that the operations of the company are carried out efficiently, economically and effectively. External auditors, on the other hand, are interested in the truth and fairness of the financial statements. In order to achieve this objective, the external auditors will usually evaluate the internal control system of the company to ensure that it is capable of preventing and detecting material mis-statements from occurring. External auditing standards require external auditors to determine whether or not, and if so to what extent, they will rely on their clients' systems of internal financial control in order to obtain assurance that their clients' financial statements are reliable.
External auditors can rely on the work of internal auditors in many respects in carrying out their external audit duties as both auditors are concerned that proper controls are in place. Internal auditors can assist external auditors to understand the internal control system that has been set up before any compliance or substantive work is being carried out. Other areas where internal auditors can be of assistance to the external auditors are, for instance,...