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Distinctive characteristics of entities with an internal audit department and the association of the quality of such departments with errors

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  • WANDA A. WALLACE
  • RICHARD W. KREUTZFELDT

Abstract

. This research identifies those characteristics that could potentially influence a choice to create an internal audit department and tests via discriminant analysis to evaluate whether such attributes significantly distinguish between companies with and without an internal audit department. In addition, qualitative characteristics of such departments are described, as is the association of such traits with errors and the overall control environment. A sample of 260 companies is examined. Companies with internal audit departments are observed to be significantly larger, more highly regulated, more competitive, more profitable, more liquid, more conservative in accounting policies, more competent in their management and accounting personnel, and subject to better management controls. Key discriminant variables are the degree of regulation, decentralization, size, the duration of association with present auditors, the existence of an audit committee, EDP control, and pressures by external parties on management to achieve budgetary goals. Qualitative attributes of internal audit are systematically associated with the overall quality of the control environment, as well as errors. The most important attribute appears to be the independence of internal audit in terms of the propriety of the reporting level. An advantage of internal auditing is that external auditors report a 10 percent reduction in the number of hours incurred and greater flexibility appears to exist in the proportion of work performed in off†peak periods. Résumé. Les auteurs dressent l'inventaire des caractéristiques susceptibles d'influer sur le choix de créer un service de vérification interne et soumettent ces attributs à des tests, par voie d'analyse discriminante, afin de déterminer s'ils permettent d'établir une distinction claire entre les entreprises ayant et n'ayant pas de service de vérification interne. De plus, ils décrivent les caractéristiques qualitatives de ces services, de même que l'association de ces carctéristiques aux erreurs et au contexte global du contrôle. Les auteurs procèdent à l'examen d'un échantillon de 260 entreprises. L'étude révèle que les entreprises possédant des services de vérification interne sont beaucoup plus souvent des entreprises de grande taille, faisant l'objet d'une réglementation plus rigoureuse, plus concurrentielles, plus rentables, ayant davantage de liquidités, plus prudentes dans leurs conventions compatables, possédant une équipe de gestion et un personnel comptable plus compétents et soumises à de meilleurs contrôles de gestion. Les principales variables discriminantes sont le degré de réglementation, la décentralisation, la taille, la durée de l'association avec les vérificateurs actuels, l'existence d'un comité de vérification, le contrôle dans un cadre informatique et les pressions exercées par les tiers sur la direction pour l'atteinte des objectifs budgétaires. Les attributs qualitatifs de la vérification interne sont systématiquement asociés à la qualité globale du cadre de contrôle, de même qu'aux erreurs. L'attribut le plus important semble être le degré d'autonomie du service de vérification interne, c'est†à †dire le caractère approprié de ses liens hiérarchiques. La vérification interne comporte un avantage: les vérificateurs externes font état d'une réduction de 10 pour cent dans le nombre d'heures consacrées à la vérification, et il semble exister une plus grande souplesse dans la proportion du travail de vérification effectué en dehors des périodes de pointe.

Suggested Citation

  • Wanda A. Wallace & Richard W. Kreutzfeldt, 1991. "Distinctive characteristics of entities with an internal audit department and the association of the quality of such departments with errors," Contemporary Accounting Research, John Wiley & Sons, vol. 7(2), pages 485-512, March.
  • Handle: RePEc:wly:coacre:v:7:y:1991:i:2:p:485-512
    DOI: 10.1111/j.1911-3846.1991.tb00826.x
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    References listed on IDEAS

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    2. Yew-Kwang Ng, 2009. "Why Is a Financial Crisis Important? The Significance of the Relaxation of the Assumption of Perfect Competition," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 8(2), pages 91-114, August.
    3. Krane, Ronja & Eulerich, Marc, 2020. "Going global: Factors influencing the internationalization of the internal audit function," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 41(C).
    4. Abiodun Omidiji & Nives Botica Redmayne & Dimu Ehalaiye & Ernest Gyapong, 2024. "Internal audit in microfinance institutions‐ evidence from transitional and developing economies," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 32(1), pages 109-141, January.
    5. Like Jiang & Paul André & Chrystelle Richard, 2018. "An international study of internal audit function quality," Accounting and Business Research, Taylor & Francis Journals, vol. 48(3), pages 264-298, April.
    6. G. Sarens, 2007. "A Research Note on the Relationship between the Control Environment and the Size of the Internal Audit Function in Belguim," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/441, Ghent University, Faculty of Economics and Business Administration.
    7. Gerrit Sarens & Mohammad J. Abdolmohammadi & Rainer Lenz, 2012. "Factors associated with the internal audit function's role in corporate governance," Journal of Applied Accounting Research, Emerald Group Publishing Limited, vol. 13(2), pages 191-204, September.
    8. G. Sarens, 2007. "The Agency Model as a Predictor of the Size of the Internal Audit Function in Belgian Companies," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/458, Ghent University, Faculty of Economics and Business Administration.
    9. Gerrit Sarens & Marco Allegrini & Giuseppe D'Onza & Robert Melville, 2011. "Are internal auditing practices related to the age of the internal audit function?: Exploratory evidence and directions for future research," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(1), pages 51-64, January.
    10. Nava Subramaniam & Lisa McManus & Jiani Zhang, 2009. "Corporate governance, firm characteristics and risk management committee formation in Australian companies," Managerial Auditing Journal, Emerald Group Publishing, vol. 24(4), pages 316-339, April.
    11. Murad Harasheh & Roberta Provasi, 2023. "A need for assurance: Do internal control systems integrate environmental, social, and governance factors?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(1), pages 384-401, January.
    12. Tsvetanova, Yulia, 2014. "Features of Internal Audit in Pharmaceutical Industry," MPRA Paper 56344, University Library of Munich, Germany.
    13. Indranil Bardhan & Shu Lin & Lizhong Hao, 2023. "Internal audit function and the precision and accuracy of management forecasts," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 27(4), pages 1339-1365, December.
    14. Marc Eulerich & Carolin van Uum, 2017. "Die Interne Revision als Unterstützer von Vorstand und Aufsichtsrat [The Internal Audit Function between Executive and Supervisory Board]," Schmalenbach Journal of Business Research, Springer, vol. 69(3), pages 275-310, September.
    15. Philomena Leung & Barry J. Cooper & Luckmika Perera, 2011. "Accountability structures and management relationships of internal audit: An Australian study," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(9), pages 794-816, October.
    16. Abdullah Mohammed Alzharani & Abdullah Mohammed Alzharani, 2015. "An Empirical Investigation Of Audit Committee Effectiveness And Risk Management: Evidence From Saudi Arabia," Accounting & Taxation, The Institute for Business and Finance Research, vol. 7(1), pages 39-49.
    17. Abdolmohammadi, Mohammad J. & Sarens, Gerrit, 2011. "An Investigation of the Association between Cultural Dimensions and Variations in Perceived Use of and Compliance with Internal Auditing Standards in 19 Countries," The International Journal of Accounting, Elsevier, vol. 46(4), pages 365-389.
    18. Tao, Ngoc Bich & Hutchinson, Marion, 2013. "Corporate governance and risk management: The role of risk management and compensation committees," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(1), pages 83-99.
    19. Meng Lyu & Xiaojie Christine Sun & Bing Wang, 2023. "Chief Audit Executive as Supervisory Board Member and Executive Compensation Contracts," Abacus, Accounting Foundation, University of Sydney, vol. 59(1), pages 258-299, March.

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