The Impact of Internal Audit Characteristics on External Auditors' Reliance on Internal Audit Function | [Pakistan Journal of Life and Social Sciences • 2025]

Author(s):

1. Thamer M. Al-Wadai: Graduate School of Management, Post Graduate Centre, Management and Science University (MSU), University Drive, Off Persiaran Olahraga, Section 13, 40100, Selangor, Malaysia,

2. Ahmed Alsenosy: Graduate School of Management, Post Graduate Centre, Management and Science University (MSU), University Drive, Off Persiaran Olahraga, Section 13, 40100, Selangor, Malaysia,

Abstract:

The aim is to improve the audit practice within Saudi Arabian context. Specifically, this study investigates the effect of internal audit function's (IAF) characteristics (objectivity, competence, work performance, internal control system effectiveness, and corporate governance quality) on external auditors' (EAs) reliance on the IAF. Drawing upon the Resource-Based Theory (RBT), the research underscores the strategic significance of leveraging internal resources. RBT can provide deeper insights into how IAF characteristics shape EAs' reliance decisions. The study adopts a positivist paradigm with a deductive approach to test predictions derived from RBT. A quantitative approach is used to examine causal relationships between key IAF's characteristics and EAs' reliance. Primary data was collected using a structured, closed-ended questionnaire developed from previously well- established scales. Surveys were distributed via email to audit managers in Saudi Certified Public Accountants firms. A census approach targeting all 376 audit firms was adopted to ensure representativeness and generalizability. Reliance is driven by tangible factors like work performance, internal controls, and governance, while intangible characteristics as objectivity and competence have unpronounced roles. H1 is rejected as Objectivity has No significant effect on reliance. It is considered a baseline characteristic rather than a determinant in the Saudi context. H2 is also rejected as competence has negative significant effect. Highly competent internal auditors may assert independence, leading to less alignment with external auditors and reduced reliance. H3 is accepted as work performance has a positive significant effect. High performance aligns with external auditors' expectations, making it a key driver of reliance. Similarly, H4 is accepted as Internal Control System Effectiveness has a Positive significant effect. Effective controls indicate a robust audit environment, enhancing trust and reliance. Furthermore, H5 is accepted as Corporate Governance Quality has a positive significant effect. Strong governance fosters transparency and accountability, encouraging external auditors to rely more on internal audit work. The findings contribute to the theoretical understanding of the interplay between internal audit characteristics and external audit practices while offering practical recommendations for improving audit processes and for policymakers to strengthen internal controls, enhance corporate governance, and invest in professional development for internal auditors to foster high-quality reporting and external auditors' trust. The rejection of some hypotheses (e.g., objectivity and competence) indicates the need for further exploration of contextual factors that may diminish their impact. This study adds original value by providing empirical insights into the Saudi Arabian context, addressing a gap in the literature on the role of five IAF' characteristics in EAs' reliance decision.

Page(s): 6290-6306

DOI: 10.57239/PJLSS-2025-23.1.00490

Published: Journal: Pakistan Journal of Life and Social Sciences, Volume: 23, Issue: 1, Year: 2025

Keywords:

Internal Audit External Audit Reliance Corporate Governance Internal Controls Saudi Arabia ResourceBased Theory

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