Highlights of internal audit research

Academic research provides many insights into internal audit. Here are some of them.
By Cynthia Bolt-Lee, CPA; D. Scott Showalter, CPA, CGMA; and Al Y.S. Chen, CPA/CITP, CGMA, Ph.D.

Highlights of internal audit research
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Academic research in internal audit provides best practices and pertinent information for external and internal auditors. Below, we summarize recent internal audit research from leading academic accounting journals. The research reveals useful information such as how incentive-based compensation for internal auditors might compromise their objectivity, how smaller companies use continuous audit technology, and how the quality of the internal audit function could affect delays in issuing financial statements.


After the passage of the Sarbanes-Oxley Act of 2002, the number of days required to complete audits and issue financial statements increased. Researchers Mina Pizzini, Shu Lin, and Douglas Ziegenfuss explored whether the quality of the internal audit function affects this delay. Their work, published in the February 2015 issue of Auditing: A Journal of Practice & Theory, examines the impact of the internal audit function on timely reporting by developing a proxy for the internal audit function to measure the quality and volume of an organization's internal auditing contributions. Their model of internal audit function quality, which is based on professional standards and prior research, encompasses five dimensions: competence, objectivity, fieldwork quality, fieldwork scope, and an organization's investment in internal auditing.

Using data from 216 organizations, the authors calculated "audit delay" as a measure of the quality of the internal audit function and its associated contribution to the financial statement audit. They found that higher-quality internal audit functions reduce audit delays by approximately 3.1 to 3.9 days. The research attributes the reduction to the competence of the internal audit personnel and the quality of the audit effort put forth. The research also found that when external auditors rely on procedures performed by an independent audit function, audit delay is reduced by 4.1 to 6.6 days. Particularly revealing is the fact that this delay is not seen when internal auditors serve as direct assistants to the external auditors.

The article, titled "The Impact of Internal Audit Function Quality and Contribution on Audit Delay," provides insights into the benefits that can be achieved through a quality internal audit function and better coordination with the external auditor. These findings confirm the benefits of investing in high-quality internal auditors and should encourage external auditors to leverage the resources the internal audit function offers to provide a timely audit.


Reliance by external auditors on the efforts of their clients' internal audit function has been shown to result in a more efficient and effective financial statement audit. Such reliance requires a determination that the internal auditor is both competent and objective according to PCAOB Auditing Standard 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements. Recent research examines the impact on perceived objectivity when a chief audit executive receives incentive-based compensation. While bonuses provide positive benefits such as retention and motivation, AU-C Section 610, Using the Work of Internal Auditors, requires external auditors to consider an "appropriate remuneration policy" as a factor in the evaluation of objectivity.

Authors Lucy Chen, Sally Chung, Gary Peters, and Jeannie Wynn surveyed 183 organizations listed on the New York Stock Exchange and analyzed their financial data for fiscal year 2006. The authors' rigorous research design considered variables that might affect the survey results, such as the client's industry, total assets, nonaudit fees, auditor longevity, audit committee composition, and the age of the client. A survey of the chief audit executives of 420 NYSE-listed companies resulted in usable data from 183 organizations about their incentive-based compensation. The authors combined the results with an analysis of financial, audit fee, and compensation data from proxy statements, Audit Analytics, Compustat, and Thomson Reuters Institutional Holdings.

Eighty-one percent of responding organizations provided incentive-based compensation. Of these, 64% provided stock or stock option bonuses.

The authors concluded that there is a correlation between incentive-based compensation linked to company performance and higher audit fees. Incentive-based compensation of the internal audit function influences external auditors' determination of internal auditor objectivity and, accordingly, increases their assessment of risk, particularly when such bonuses are paid in stock and not cash. Assessment of higher risk tends to increase audit fees.

The authors' results provide insight for businesses when designing the compensation plan for their internal auditors and also for external auditors in their audit risk assessment. "Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective" appeared in the May 2017 issue of Auditing: A Journal of Practice & Theory.


Continuous auditing technology provides numerous real-time benefits that help a company achieve auditing, data analysis, and other management objectives. Research appearing in the International Journal of Accounting Information Systems (April 2016) compares its use in large businesses to its use in small, non-publicly held businesses with fewer than 500 employees.

Authors Pall Rikhardsson and Richard Dull conducted interviews with CFOs and other financial personnel at seven small businesses in Iceland. While their study is relatively small, this area is one that has not been explored previously in internal audit research. The study highlights intriguing differences between how large and small companies use continuous auditing technology.

In the article, titled "An Exploratory Study of the Adoption, Application and Impacts of Continuous Auditing Technologies in Small Businesses," the authors stated that, according to their research, small businesses generally buy packaged software audit systems and run their continuous auditing efforts through the finance department instead of through an internal audit function. These companies are typically motivated to adopt continuous auditing technologies to improve management information systems and to fix a specific data problem. This contrasts with larger companies that implement continuous auditing technology in order to improve processes and make them more transparent.

The companies reported that the use of continuous auditing technology resulted in a perceived increase in business value, as well as reductions in time and costs. The authors found that additional benefits included an increase in preventive controls, a decrease in corrective controls, and a greater understanding of the value and reliability of financial data. Even though the packaged systems these companies purchased were generally not capable of performing advanced audit functions, interviewees reported that IT innovation was another positive side effect of using continuous auditing technology.

None of the survey respondents indicated changes in their audit approach, unlike larger companies that integrate continuous auditing technology with their internal audit function. Research results highlight the need for small businesses to ensure that all stakeholders in their organization are part of the decision-making process for new technologies, such as continuous auditing technologies, to ensure maximum benefits and improved systems.


An increasingly dynamic risk landscape combined with disruptive technology requires a focus on recruiting and retaining quality staff for the internal audit function. The article, titled "Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views From External Auditors" (Accounting Horizons, March 2016), examines external auditors' unfavorable view about the internal audit profession and how this view negatively influences the size and quality of the applicant pool.

Authors Geoffrey Bartlett, Joleen Kremin, Kelli Saunders, and David Wood performed an experiment involving 93 experienced auditing professionals and found that external auditors are twice as likely to apply for a position described as an "accounting position" than an identical one described as either an "in-house" or "outsourced" internal audit position. These findings suggest that external auditors have negative perceptions of internal audit, which can cause significant challenges in recruiting talent from a pool of experienced candidates.

The authors performed a second experiment and found that external auditors would present a relatively unfavorable picture of internal audit to a fictional "high-performing student" seeking work in the field while recommending internal audit more favorably to a theoretical student described as a "mediocre performer."

The authors used the results of a survey of 41 current or former external auditors to offer insights into potential improvements for critical areas of internal audit to make it a more appealing career. The suggestion that survey participants made most frequently included making the type of work more interesting (by requiring less mundane internal control work), followed by raising the status of the internal audit function, allowing more opportunities for value-added work, increasing pay, and providing more opportunities for advancement within an organization. Other recommendations respondents made included enhancing work/life balance, allowing auditors the flexibility to work from home, and possibly renaming the internal audit function to make the position more attractive.

Editor's note

This article is part of an occasional series that samples accounting research and distills key findings for busy practitioners and preparers. These summaries explain the implications of a wide range of research and give CPAs the opportunity to apply the results in day-to-day activities. Readers interested in more detail should review the full text of each article to explore the hypothesis, research process, statistical analysis, supporting theories, and conclusions.

About the authors

Cynthia E. Bolt-Lee, CPA, M.Tax., is a professor of accounting in the Baker School of Business at The Citadel in Charleston, S.C. D. Scott Showalter, CPA, CGMA, is the director of the master of accounting program and a professor of practice in accounting at North Carolina State University in Raleigh, N.C. Al Y.S. Chen, CPA/CITP, CGMA, Ph.D., is a professor of accounting at North Carolina State University.

To comment on this article or to suggest an idea for another article, contact Courtney Vien, a JofA senior editor, at Courtney.Vien@aicpa-cima.com or 919-402-4125.

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