The Relationship Between Internal Auditing and External Audit Fees: Evidence from Kuwait
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Published
Mar 1, 2017
Abstract
Although audit pricing has been one of the most studied topics in theaudit literature for more than three decades now, to date, very little research hasbeen conducted on this important issue in the Middle East Region. One importantquestion in this line of audit research has been related to whether audit fees areinfluenced by the contribution of client’s internal auditing (IA) to the externalaudit work. Much of existing research investigating this issue has been conductedin well-developed English-speaking countries, with almost no empirical evidenceprovided about this issue within the context of other parts of the world. Thepurpose of the current study is to examine this issue using data from the Kuwaitiaudit market. In particular, the current study uses a sample of audit engagementsperformed in the Kuwaiti market, to examine whether external audit fees areinfluenced by the contribution of the client’s internal audit function. The resultsshow that IA contribution in the external audit work is negatively related to theamount of external audit fees.
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Keywords
audit feesinternal auditingaudit marketsKuwait
References
• Boone, J. P., I. K. Khurana, and K. K. Raman. (2012). Audit Market Concentration and Auditor Tolerance for Earnings Management. Contemporary Accounting Research 29 (4): 1171- 1203.
• Carey, P., Simnett, R., & Tanewski, G. (2000). Voluntary Demand for Internal and External Auditing by Family Businesses. Auditing, A Journal of Practice and Theory, 19(1) 37-51.
• Carcello, J., Hermanson, D., Neal, R. and Riley, R., JR. (2002). Board Characteristics and Audit Fees. Contemporary Accounting Research, 19(3) 365-384.
• Chan, P., Ezzamel, M. and Gwilliam, D. (1993). Determinants of Audit Fees for Quoted UK Companies. Journal of Business Finance and Accounting, 20, (6) 765-786.
• Che Ahmad, A., and Houghton, K. (1996). Audit Fee Premium to Big Eight Firms: Evidence from the Medium-Size UK Auditees. Journal of International Accounting, Auditing, and Taxation, 5(1) 53-72.
• Craswell, A., and Francis, J. (1999). Pricing Initial Audit Engagement: A Test of Competing Theories. The Accounting Review, 74(2) 201-216.
• Davis, L., Ricchiute, and Trompeter, G.(1993). Audit Effort, Audit Fees, and The Provision of Non audit Services to Audit Clients. The Accounting Review, 68(1) 135-150.
• DeFond, M., Francis, J. and Wong, T. (2000). Audit Industry Specialization and Market Segmentation by Big 6 and Non-big 6 Accounting Firms. Auditing, A Journal of Practice and Theory, 19(1) 49-66.
• Elliott, R. K., and A. R. Korpi. (1978). Factors Affecting Audit Fees, Appendix Commission on Auditors’ Responsibilities. Cost-Benefit Analysis of Auditing, Research Study No. 3 By Melvin E. Shakun (AICPA).
• Felix, W. L., A. A. Gramling, and M. J. Maletta. (1998). Coordinating Total Audit Coverage: The Relationship between Internal and External Auditors. Altamonte Springs, FL: The Institute of Internal Auditors.
• Felix, W. L., A. A. Gramling, and M. J. Maletta.(2001). The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing this Contribution. Journal of Accounting Research, 39(3) 513-534.
• Firth, M. (2002). Auditor-Provided Consultancy Services and their Associations with Audit Fees and Audit Opinions. Journal of Business Finance & Accounting, 29(5) 661-693.
• Francis, J., and Stokes, D. (1986). Audit Prices, Product Differentiation and Scale Economies: Further Evidence from the Australian Market. Journal of Accounting Research, 24(2) 383-393.
• Francis, J. R., P. N. Michas, and S. Seavey. (2013). Does Audit Market Concentration Harm the Quality of Auditing Earnings? Evidence from Audit Markets in 42 Countries. Contemporary Accounting Research 30 (1): 325-355.
• Gerrard, I., Houghton, K. and Woodcliff, D. (1994). Audit Fees: The Effects of Auditee, Auditor and Industry Differences. Managerial Auditing Journal, 9(7) 3-11.
• Gist, W. (1992). Explaining Variability in External Audit Fees. Accounting and Business Research, 23(89) 74–79
• Goodwin-Stewart, J. & Kent, P. (2006). Relation between External Audit Fees, Audit Committee Characteristics and Internal Audit. Journal of Accounting and Finance, 46(4) 387– 404.
• Gonthier-Besacier, N., and Schatt, A. (2007). Determinants of Audit Fees for French Quoted firms. Managerial Auditing Journal, 22(2) 139-160.
• Gramling, A. A., Maletta, M. J., Schneider, A. & Church, B. K. (2004). The Role of the Internal Audit Function in Corporate Governance: A Synthesis of the Extant Internal Auditing Literature and Directions for Future Research. Journal of Accounting Literature, 23. 194–244.
• Habib, A., and Islam., A. (2007). Determinants and Consequences of Non-audit Service Fees Preliminary Evidence from Bangladish. Managerial Auditing Journal, 22(5), 446-469.
• Hay, D. C., Knechel, W. R. & Wong, N. (2006). Audit Fees: A Meta-Analysis of the Effect of Supply and Demand Attribute. Contemporary Accounting Research, 23(1) 91–141.
• Hay, D., Knechel, W. R. & Ling, H. (2008). Evidence on the Impact of Internal Control and Corporate Governance on Audit Fees. International Journal of Auditing, 12(1) 9–24.
• Ho, Sandra and Hutchinson, Marion (2010). Internal Audit Department Characteristics/ Activities and Audit Fees: Some Evidence from Hong Kong Firms. Journal of International Accounting, Auditing and Taxation, 19(2) 121-136.
• International Federation of Accountants (IFAC). (2013). International Auditing and Assurance Standards Board ISA 610: International Standard on Auditing “Using the Work of Internal Auditors”. New York: Author.
• Kim, J. B., Liu, X., and Zheng, L. (2012). The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and evidence. The Accounting Review 87(6) 2061-2094.
• McMeeking, K., Peasnell, K., and Pope, P. (2007). The Effect of Large Audit Firm Mergers on Audit Pricing in the UK. Accounting and Business Research, 37(4) 301-319.
• Neter, J., Wasserman, W. and Kutner, M. (1983). Applied Linear Regression Models. Homewood, Irwin, Illinois.
• Sarens, G. (2009). Internal Auditing Research: Where are we Going? Editorial. International Journal of Auditing, 13(1) 1–7.
• Simunic, D. (1980). The Pricing of Audit Services: Theory and Evidence. Journal of Accounting Research, 18(1) 161-190.
• Singh, H., Woodliff, D., Sultana, N., and Newby, R. (2013). Additional Evidence on the Relationship between an Internal Audit Function and External Audit Fees in Australia. International Journal of Auditing, 18(1) pp. 27-39.
• Spira, L. F. & Page, M. (2003). Risk Management: The Reinvention of Internal Control and the Changing Role of Internal Audit. Accounting, Auditing & Accountability Journal, 16(4) 62–640.
• Stein, M. T., D. A. Simunic, and T. B. O’Keefe. (1994). Industry Differences in the Production of Audit Services. Auditing: A Journal of Practice and Theory, 13(1) 128-142.
• Whisenant, S., Sankaraguruswamy, S., and Raghunandan, K. (2003). Evidence on the Joint Determination of Audit and Non-Audit Fees. Journal of Accounting Research, 41(4) 721-744.
• Zain, M., Zaman, M., and Mohamed, Z. (2015). The Effect of Internal Audit Function Quality and Internal Audit Contribution to External Audit on Audit Fees. International Journal of Auditing,19(3) 134-147.
• Carey, P., Simnett, R., & Tanewski, G. (2000). Voluntary Demand for Internal and External Auditing by Family Businesses. Auditing, A Journal of Practice and Theory, 19(1) 37-51.
• Carcello, J., Hermanson, D., Neal, R. and Riley, R., JR. (2002). Board Characteristics and Audit Fees. Contemporary Accounting Research, 19(3) 365-384.
• Chan, P., Ezzamel, M. and Gwilliam, D. (1993). Determinants of Audit Fees for Quoted UK Companies. Journal of Business Finance and Accounting, 20, (6) 765-786.
• Che Ahmad, A., and Houghton, K. (1996). Audit Fee Premium to Big Eight Firms: Evidence from the Medium-Size UK Auditees. Journal of International Accounting, Auditing, and Taxation, 5(1) 53-72.
• Craswell, A., and Francis, J. (1999). Pricing Initial Audit Engagement: A Test of Competing Theories. The Accounting Review, 74(2) 201-216.
• Davis, L., Ricchiute, and Trompeter, G.(1993). Audit Effort, Audit Fees, and The Provision of Non audit Services to Audit Clients. The Accounting Review, 68(1) 135-150.
• DeFond, M., Francis, J. and Wong, T. (2000). Audit Industry Specialization and Market Segmentation by Big 6 and Non-big 6 Accounting Firms. Auditing, A Journal of Practice and Theory, 19(1) 49-66.
• Elliott, R. K., and A. R. Korpi. (1978). Factors Affecting Audit Fees, Appendix Commission on Auditors’ Responsibilities. Cost-Benefit Analysis of Auditing, Research Study No. 3 By Melvin E. Shakun (AICPA).
• Felix, W. L., A. A. Gramling, and M. J. Maletta. (1998). Coordinating Total Audit Coverage: The Relationship between Internal and External Auditors. Altamonte Springs, FL: The Institute of Internal Auditors.
• Felix, W. L., A. A. Gramling, and M. J. Maletta.(2001). The Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing this Contribution. Journal of Accounting Research, 39(3) 513-534.
• Firth, M. (2002). Auditor-Provided Consultancy Services and their Associations with Audit Fees and Audit Opinions. Journal of Business Finance & Accounting, 29(5) 661-693.
• Francis, J., and Stokes, D. (1986). Audit Prices, Product Differentiation and Scale Economies: Further Evidence from the Australian Market. Journal of Accounting Research, 24(2) 383-393.
• Francis, J. R., P. N. Michas, and S. Seavey. (2013). Does Audit Market Concentration Harm the Quality of Auditing Earnings? Evidence from Audit Markets in 42 Countries. Contemporary Accounting Research 30 (1): 325-355.
• Gerrard, I., Houghton, K. and Woodcliff, D. (1994). Audit Fees: The Effects of Auditee, Auditor and Industry Differences. Managerial Auditing Journal, 9(7) 3-11.
• Gist, W. (1992). Explaining Variability in External Audit Fees. Accounting and Business Research, 23(89) 74–79
• Goodwin-Stewart, J. & Kent, P. (2006). Relation between External Audit Fees, Audit Committee Characteristics and Internal Audit. Journal of Accounting and Finance, 46(4) 387– 404.
• Gonthier-Besacier, N., and Schatt, A. (2007). Determinants of Audit Fees for French Quoted firms. Managerial Auditing Journal, 22(2) 139-160.
• Gramling, A. A., Maletta, M. J., Schneider, A. & Church, B. K. (2004). The Role of the Internal Audit Function in Corporate Governance: A Synthesis of the Extant Internal Auditing Literature and Directions for Future Research. Journal of Accounting Literature, 23. 194–244.
• Habib, A., and Islam., A. (2007). Determinants and Consequences of Non-audit Service Fees Preliminary Evidence from Bangladish. Managerial Auditing Journal, 22(5), 446-469.
• Hay, D. C., Knechel, W. R. & Wong, N. (2006). Audit Fees: A Meta-Analysis of the Effect of Supply and Demand Attribute. Contemporary Accounting Research, 23(1) 91–141.
• Hay, D., Knechel, W. R. & Ling, H. (2008). Evidence on the Impact of Internal Control and Corporate Governance on Audit Fees. International Journal of Auditing, 12(1) 9–24.
• Ho, Sandra and Hutchinson, Marion (2010). Internal Audit Department Characteristics/ Activities and Audit Fees: Some Evidence from Hong Kong Firms. Journal of International Accounting, Auditing and Taxation, 19(2) 121-136.
• International Federation of Accountants (IFAC). (2013). International Auditing and Assurance Standards Board ISA 610: International Standard on Auditing “Using the Work of Internal Auditors”. New York: Author.
• Kim, J. B., Liu, X., and Zheng, L. (2012). The Impact of Mandatory IFRS Adoption on Audit Fees: Theory and evidence. The Accounting Review 87(6) 2061-2094.
• McMeeking, K., Peasnell, K., and Pope, P. (2007). The Effect of Large Audit Firm Mergers on Audit Pricing in the UK. Accounting and Business Research, 37(4) 301-319.
• Neter, J., Wasserman, W. and Kutner, M. (1983). Applied Linear Regression Models. Homewood, Irwin, Illinois.
• Sarens, G. (2009). Internal Auditing Research: Where are we Going? Editorial. International Journal of Auditing, 13(1) 1–7.
• Simunic, D. (1980). The Pricing of Audit Services: Theory and Evidence. Journal of Accounting Research, 18(1) 161-190.
• Singh, H., Woodliff, D., Sultana, N., and Newby, R. (2013). Additional Evidence on the Relationship between an Internal Audit Function and External Audit Fees in Australia. International Journal of Auditing, 18(1) pp. 27-39.
• Spira, L. F. & Page, M. (2003). Risk Management: The Reinvention of Internal Control and the Changing Role of Internal Audit. Accounting, Auditing & Accountability Journal, 16(4) 62–640.
• Stein, M. T., D. A. Simunic, and T. B. O’Keefe. (1994). Industry Differences in the Production of Audit Services. Auditing: A Journal of Practice and Theory, 13(1) 128-142.
• Whisenant, S., Sankaraguruswamy, S., and Raghunandan, K. (2003). Evidence on the Joint Determination of Audit and Non-Audit Fees. Journal of Accounting Research, 41(4) 721-744.
• Zain, M., Zaman, M., and Mohamed, Z. (2015). The Effect of Internal Audit Function Quality and Internal Audit Contribution to External Audit on Audit Fees. International Journal of Auditing,19(3) 134-147.
How to Cite
Al-Hajri, Meshari O. 2017. “The Relationship Between Internal Auditing and External Audit Fees: Evidence from Kuwait”. Studies in Business and Economics 20 (1). https://doi.org/10.29117/sbe.2017.0100.
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Articles