The Effect of an Internal Audit Function on Audit Effort

This study utilizes workpaper evidence from a Big 4 firm to examine how the degree of reliance placed on an internal audit function influences the nature, timing and extent of external audit effort. After controlling for assessed misstatement risk, the degree of reliance is found to significantly influence the timing, but not nature and extent of evidential effort. When the degree of reliance is assessed as high, the external auditor shifts effort from year-end procedures to interim procedures. Because tests of controls are conventionally performed at interim, and substantive tests at year-end, this shift seems to suggest that a "reliance approach" to auditing is followed in the presence of a reliable internal audit function.