Two studies on the effect of internal audit source on reliance decisions

The purpose of this dissertation is to investigate how internal audit source, inhouse or outsourced, affects external auditors' decisions to rely upon the work of the internal audit function in an integrated audit in two experimental settings. Chapter 1 examines how internal audit source affects external auditors' reliance decisions while obtaining evidence in an integrated audit under varying levels of risk. Eighty-nine practicing auditors were provided with a hypothetical audit case that manipulated internal audit source, business risk and account risk and were asked to indicate the degree of reliance that could be placed on the work of internal auditors. The results show that external auditors placed more reliance on the work of outsourced internal auditors irrespective of the level of business or account risk. The results also show that external auditors' reliance decisions are sensitive to the level of account risk.;Chapter 2 examines how external auditors' reliance decisions impact jurors' judgments of audit quality and auditor liability in an integrated audit failure situation. One hundred-one mock jurors were asked to read a hypothetical audit failure case which manipulated auditor reliance on the work of internal auditors and the internal audit source. The results indicate that external auditor reliance on the work of internal auditors significantly decreases jurors' evaluations of audit quality and increases jurors' evaluations of auditor liability. In addition, internal audit source affects the relationship between auditor reliance and jurors' evaluations of audit quality and liability.