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Article
Publication date: 2 November 2012

Liuchuang Li, Gaoliang Tian and Baolei Qi

The purpose of this study is to examine whether auditor's unqualified opinion on internal control (ARIC) is a powerful proxy for the effectiveness of internal control in…

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1496

Abstract

Purpose

The purpose of this study is to examine whether auditor's unqualified opinion on internal control (ARIC) is a powerful proxy for the effectiveness of internal control in Chinese context. A rich body of research conducts their designs on an assumption that companies have more effectiveness of internal controls if they disclose ARICs. This study argues that the ARICs are not always reliable, because audit market is well characterized by excessive competition and market supervision is poorer in China compared to developed countries.

Design/methodology/approach

The study uses 2008 and 2009 years Chinese listed‐firms data and the Tobit regression to test the relationship between ARIC and accrual quality. The paper employs the Heckman model for self‐selection bias, which are possibly introduced by choice in disclosing ARICs.

Findings

The paper finds that firms disclose ARICs do not report lower abnormal accruals relative the non‐ARIC firms, and firms with ARICs issued by dominant auditors show more reliable accruals relative to non‐ARIC firms and firms that disclose ARICs but fail to be issued by dominant auditors. The results are robust to additional accrual quality measure, additional audit quality measure, and the correction of self‐selection bias by using the inverse Millo ratio approach.

Originality/value

The results suggest that implementing Chinese‐SOX could be facilitated by improving audit quality.

Details

Nankai Business Review International, vol. 3 no. 4
Type: Research Article
ISSN: 2040-8749

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Article
Publication date: 1 August 1995

Rocco R. Vanasco, Clifford R. Skousen and Curtis C. Verschoor

Professional accounting associations in various countries andgovernmental and other quasi‐official bodies have played an importantrole not only in the evolution of internal

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4098

Abstract

Professional accounting associations in various countries and governmental and other quasi‐official bodies have played an important role not only in the evolution of internal control reporting on a global scale, but also in educating management, investors, financial institutions, accountants, auditors, and other interested parties highlighting the pervasiveness of the effects of a sound internal control structure in corporate reporting as well as other aspects of an organization′s success. These associations include the Institute of Internal Auditors (IIA), the American Institute of Certified Public Accountants (AICPA), the General Accounting Office (GAO), the Securities and Exchange Commission (SEC), the Cadbury Committee, the Institute of Chartered Accountants of England and Wales (ICAEW), the Scottish Institute of Chartered Accountants (SICA), the Canadian Institute of Chartered Accountants (CICA), and others. Business failures, management fraud, corporate misconduct, international bribery, and notorious business scandals in all sectors of business have prompted the US government to take drastic action on internal control reporting to safeguard public interest. Several professional and government committees were formed to study this precarious situation: the Treadway Commission, the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, the Packard Commission, the Cohen Commission, the Adams Commission in Canada, the Cadbury Committee in the UK, and others. The principal motivation for the changing dynamics has been growing public pressure for greater corporate accountability. The government′s pressure on the accounting profession and management of public corporations has been pivotal in spearheading internal control reporting. Examines the role of professional associations, governmental agencies, and others in promulgating standards for internal control reporting, and the impact of legislation on this aspect of internal auditing in the USA and worldwide.

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Managerial Auditing Journal, vol. 10 no. 6
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 27 July 2020

Nancy Chun Feng

Using a sample of US nonprofit organizations, where the identity of the auditor in charge of the audit is revealed, I investigate whether individual auditor…

Abstract

Purpose

Using a sample of US nonprofit organizations, where the identity of the auditor in charge of the audit is revealed, I investigate whether individual auditor characteristics (gender, engagement size and tenure) are associated with audit quality.

Design/methodology/approach

To investigate how individual audit partner characteristics affect audit quality, I follow Petrovits et al. (2011) and Fitzgerald et al. (2018) who investigate client characteristics and partner tenure as determinants of ICDs in nonprofits. I add three characteristics of the auditor in charge – gender, engagement size and tenure – to their models. In additional analyses, I use subsamples partitioned by client risk and audit firm size, and find that individual auditor characteristics generally play a more significant role in the issuance of ICDs and QAOs for riskier clients than for less risky clients.

Findings

My results show that female auditors are more likely to report internal control deficiencies and issue qualified audit opinions (QAOs) to nonprofits. I also find that auditors with more Single Audit engagements within the same year are less likely to report ICDs. In addition, auditor tenure is negatively associated with the likelihood of issuing an ICD report, suggesting that auditors become complacent as the length of the auditor–client relationship lengthens or, alternatively, that they are better able to assist their clients in correcting ICDs and in maintaining stronger internal control environments as they gain client-specific knowledge over time. Additional analysis suggests tenure and engagement load results are sensitive to the sample specification employed.

Research limitations/implications

One caveat of this study is that self-selection bias may be present when a client chooses an audit firm, the audit firm selects a client, and the audit firm assigns a partner to the engagement. Future study with more advanced econometric models is needed to mitigate self-selection bias. Another limitation is that my sample consists of nonprofit organizations and may not be generalizable to for-profit firms. Another caveat of this study is that the tenure variable is truncated compared to prior literature (e.g. Fitzgerald et al., 2018). Also given the rarity of audit quality measures in the nonprofit setting, internal control deficiencies and qualified opinions are used as proxies for audit quality because they reflect both the quality of audit work and the quality of organizations' internal control and financial reporting. Future studies with data including additional audit quality measures could shed more light on the topic.

Originality/value

This study contributes to the literature in several ways. First, this study offers a more comprehensive examination on the impact that a broader set of individual auditor characteristics on audit quality in the nonprofit setting, compared to Fitzgerald et al.'s (2018) study. Second, the findings should be of interest to policymakers who recently mandated engagement partner disclosures from US audit firms (PCAOB, 2015b). Finally, another distinctive feature of this study is that I examine the impact of individual auditor characteristics on audit quality in a setting where Big 4 audit firms are not dominant.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 32 no. 4
Type: Research Article
ISSN: 1096-3367

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Article
Publication date: 4 September 2009

Arnold Schneider

The purpose of this paper is to examine the impact of internal control opinions on individuals' judgments about investments.

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3896

Abstract

Purpose

The purpose of this paper is to examine the impact of internal control opinions on individuals' judgments about investments.

Design/methodology/approach

The approach used is a behavioral experiment where risk assessments and judgments about investments are made for four internal control opinion scenarios.

Findings

The results indicate that the type of internal control opinion made no difference for either risk assessments or investment decisions.

Research limitations/implications

Participants are provided with data sets that do not contain all of the information they may acquire when they make actual investment decisions. Also, there is a lack of real consequences for making good or poor investment decisions.

Practical implications

The type of internal control opinion has no effect on risk assessments or investing intentions. Thus, other considerations apparently dominate internal control opinions when making judgments about investments.

Originality/value

This is the first paper to examine whether intentions to invest might be affected by internal control opinions.

Details

Managerial Auditing Journal, vol. 24 no. 8
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 5 January 2015

Andrew D. Chambers and Marjan Odar

The purpose of this paper is to explore how internal auditing may recover from being one of the corporate governance gatekeepers that failed to prevent the global…

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6810

Abstract

Purpose

The purpose of this paper is to explore how internal auditing may recover from being one of the corporate governance gatekeepers that failed to prevent the global financial crisis.

Design/methodology/approach

This paper draws on the theory of professions and provides a brief analysis of internal auditing history, ending with an appraisal of contemporary status.

Findings

Internal auditing has not been “fit for purpose” and can be enhanced. Low expectations of internal audit are currently addressed by enhanced guidelines from a number of parties. Internal audit needs to move firmly into the corporate governance space – to audit corporate governance more effectively and to provide more dependable assurance to boards.

Practical implications

The global Institute of Internal Auditors can use recent enhanced internal auditing guidelines as a springboard to regain their lead. Internal audit needs to cut the umbilical cord that ties it to management. The accepted “dual reporting” of internal audit is flawed.

Social implications

Society cedes professional status to an occupational group when it is in society’s best interests to do so. An attribute of a profession is its accent on serving the public interest. It is unsatisfactory that, five years after the global financial crisis broke, the international Standards for internal auditing still do not articulate the correct professional conduct on making external disclosures in the public interest when internal auditors are aware of serious wrongdoing not satisfactorily addressed internally.

Originality/value

This paper comprises a conceptual analysis to challenge the internal audit profession.

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Article
Publication date: 3 February 2014

Andrew D. Chambers

– The purpose of this paper is to analyse and comment on recent enhanced pronouncements on internal auditing.

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2240

Abstract

Purpose

The purpose of this paper is to analyse and comment on recent enhanced pronouncements on internal auditing.

Design/methodology/approach

The paper uses content analysis of five 2012-2013 sources of guidance, set out in the tables of this paper and summarised within the text, together with conceptual interpretations.

Findings

Recent pronouncements respond, with considerable consensus, to stakeholder and public concerns and fill a partial vacuum left by The Institute of Internal Auditors' Standards. Principally this is about successfully enhancing the scope of internal audit and internal audit's independence from management.

Research limitations/implications

While the paper is conceptual rather than empirical, it builds on the processes followed by the parties who developed the examples of enhanced guidance reviewed in this paper. Those processes included careful development by leaders in the field, public consultation of preliminary proposals, and final amended guidance based on feedback received.

Practical implications

There are implications for staffing of internal audit functions and the seniority and calibre of chief audit executives.

Originality/value

There has been no other attempt to map these developments. It has been done with a view to identifying possible ways forward for internal auditing, especially those which have a high degree of support and which are still to be incorporated into generally accepted internal auditing.

Details

Managerial Auditing Journal, vol. 29 no. 2
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 March 2010

Douglas A. Brook

The Chief Financial Officers Act of 1990 (and the subsequent Government Management Reform Act of 1994) mandated federal agencies to prepare corporate-style annual…

Abstract

The Chief Financial Officers Act of 1990 (and the subsequent Government Management Reform Act of 1994) mandated federal agencies to prepare corporate-style annual financial statements and subject them to independent audit. Over a decade later, it is reasonable to ask what the consequences of CFO Act financial statements have been. Accrual accounting produces auditable financial statements that establish accountability, contribute to the credibility of financial information, and identify long-term financial issues; but financial statements are not linked to the processes for resource-allocation decisions, nor do they produce information needed by managers. Some of these shortcomings are explained by contextual and sectoral differences.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 22 no. 1
Type: Research Article
ISSN: 1096-3367

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Article
Publication date: 1 May 1994

Barry J. Cooper, Philomena Leung and Clive Mathews

Describes a recent study of internal audit in Australia which was drawnfrom surveys of the chief executives and internal audit managers of awide range of organizations in…

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2119

Abstract

Describes a recent study of internal audit in Australia which was drawn from surveys of the chief executives and internal audit managers of a wide range of organizations in the private and public sectors. The response from chief executives was a very positive one and there was strong support for a number of concepts including a positive perception of the profile of internal audit, the usefulness of internal audit as a training ground for managers, and the need for internal audit as a means of improving the operational efficiency of organizations. However, despite the high status of internal audit acknowledged by chief executives, there is an apparent misunderstanding of the internal audit process. This has led to confusion between perceived status and reality. There appears to be inconsistency among chief executives and internal audit managers about the areas covered by internal audit. The question of the role and scope of internal audit within individual organizations requires clarification by consultation between management and internal audit departments. The wide range of skills necessary to fulfil management′s expectations of the internal audit function and the disparity between individual internal audit managers on a number of issues, leads us to the question of whether an internal audit profession does in fact exist. While it is apparent from the survey that there are a number of fundamental issues confronting internal audit in Australia, the underlying support for internal audit is nevertheless encouraging.

Details

Managerial Auditing Journal, vol. 9 no. 3
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 5 January 2010

Hasnah Haron, Dato' Daing Nasir Ibrahim, K. Jeyaraman and Ong Hock Chye

Concern has been raised over the dubious utility of internal control (IC) reports that contain vague disclosures of unclear meaning or that contain sweeping, albeit, and…

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4220

Abstract

Purpose

Concern has been raised over the dubious utility of internal control (IC) reports that contain vague disclosures of unclear meaning or that contain sweeping, albeit, and confusing statements. The purpose of this paper is to examine, from a Malaysian perspective, the internal audit control variables, which are directly responsible for the company to disclose their audit statements voluntarily or mandatorily and make it transparent to the shareholders and public.

Design/methodology/approach

A total of 121 publicly traded companies were selected using the systematic sampling method from the target population of 599 companies listed on the main board of Bursa Malaysia. The names of the heads of internal audit function of the sample were obtained from the Institute of Internal Auditors Malaysia. Structured interviews were conducted with 40 heads of internal audit function out of 121 companies in order to protect anonymity of the companies that did not feel comfortable responding in writing.

Findings

The significant findings of this paper are that those companies which are performing well disclose their IC reports voluntarily and demonstrate a perfect relationship between their IC opinions with high internal audit quality assurance. On the other hand, there is a high level of risk management among those companies who have mandatory IC disclosures. In addition, these companies conduct frequent audit committee meetings due to the pressure from the external auditors.

Originality/value

The studies on voluntary and mandatory disclosures by combining the characteristics of IC with audit committee effectiveness are seldom researched in the existing literature. The key contribution of this paper is the usage of IC disclosures coupled with an empirical and theoretical approach for examining the appropriate determinants influencing them.

Details

Managerial Auditing Journal, vol. 25 no. 2
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 February 1987

Lawrence B. Sawyer

How closely does internal audit match the attributes of a profession? In terms of its relatively short history — and in comparison with the longer‐established professions…

Abstract

How closely does internal audit match the attributes of a profession? In terms of its relatively short history — and in comparison with the longer‐established professions — it would seem that in the United States it already meets many of the necessary criteria: public service obligations, training and accreditation, standards of practice, publication and dissemination activities; there is also evidence of employer requirements and practices becoming more exacting. However there is some way to go before full recognition and acceptance as a distinct professional discipline are achieved. One crucial dilemma is over independence, as between loyalty to employers or profession, in situations of conflict. A concept of a management‐oriented service is advocated as one of the most constructive resolutions for future development.

Details

Managerial Auditing Journal, vol. 2 no. 2
Type: Research Article
ISSN: 0268-6902

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