Research Summary 9: External Auditors’ Reliance on Internal Auditors’ Work.

How fees influence planning decisions.

his study investigated whether clients’ fee pressures on audit engagements affected audit managers’ decisions on how much to rely on work performed by a client’s internal auditors. It also examined whether fee pressure from the client could be mitigated when an audit partner placed a strong emphasis on quality audit work and professional skepticism.

Audit managers were asked to modify a preliminary time budget for a case scenario. They were told that the preliminary budget was appropriate unless the manager was willing to rely on work already completed by the client’s internal auditors. The internal auditors’ competence was described as questionable. The case said the audit client had expressed a preference—either for lower audit fees or for quality audit work. The partner was also described as having expressed a preference—either for efficiency and profitability or for audit quality and professional skepticism.

The results showed that when the client wanted lower audit fees, managers decreased audit hours by 16%, while managers whose hypothetical client emphasized the need for quality audit work cut the hours by only 10%, even though the client did not request lower fees. In both cases, in order to reduce planned audit hours, the auditors relied on the work of internal auditors whose skills were questionable. While this does not provide direct evidence that auditor independence or audit effectiveness was impaired, practitioners might want to consider the appropriateness of reducing planned audit work when a client requests a fee reduction. Further, of interest is that even when the client did not express a preference for lower audit fees, managers still reduced planned hours, despite the questionable quality of the internal auditors’ work.

Even without explicit client fee pressure, competition among firms for clients might cause managers to rely on a client’s internal auditors’ work in order to cut audit hours. Reducing hours is a way of lowering fees, which might make managers’ firms more competitive in the market, even if reducing audit hours compromises audit independence and effectiveness. Finally, the results showed that the partners’ stated preferences did not mitigate the effects of client fee pressure on managers’ planning decisions.

For the full text of the research paper, see Auditing: A Journal of Practice & Theory, vol. 18, Supplement, 1999.

AUDREY A. GRAMLING, CPA, PhD, CIA, is assistant professor of accounting, School of Business, at Georgia State University, Atlanta, Georgia. Her e-mail address is .

This series is based on work published in Auditing: A Journal of Practice & Theory. The intent is to bridge the gap between researchers and practitioners by offering concise practice summaries of cutting-edge research in the field of auditing.


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