Signalling theory embedded in the throughput model to examine the influence of culture upon external auditors' reliance on the internal audit function

Albawwat, Ibrahim Emair

August 2017

Thesis or dissertation

© 2017 Ibrahim Emair Albawwat. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright holder.

International Standard on Auditing (ISA) 610 (Revised 2013) allows external auditors (EAs) to rely on the internal audit function (IAF) in obtaining audit evidence if the latter meets certain quality criteria. The revisions made to the standard are intended to introduce a more robust framework for the evaluation of the IAF quality and enable reliance to be placed on internal auditors to provide direct assistance, in addition to the already permitted use of work already performed by the IAF. The literature reports that reliance on the IAF is a determinant of external audit fees and significantly increases the efficiency of the audit. However, this is not the case in all countries; some studies find low reliance on the IAF by EAs in certain developing countries has no significant impact on audit efficiency. Accordingly, the main purpose of the current study is to examine the potential influence of the cultural dimensions of EAs on their reliance-related judgements and decisions in the light of the latest revisions made on ISA 610 and a related revised standard: ISA 315. Further, this study attempts to enhance our understanding of the manner in which such reliance may reduce audit fees.

To achieve the above, two conceptual models are developed on the basis of Signalling Theory (Spence, 1973) and the Throughput Model (Rodgers, 2006). These models incorporate the latest revisions made to the related ISAs in the process of tracing the influence of three dimensions of Hofstede’s measure of culture (i.e. power distance, uncertainty avoidance, and individualism) on the EAs reliance process, and visualise how reliance on the IAF has an impact on audit fees. A quantitative methodology is employed to examine the paths of the study’s models. Data are collected using a self-administered questionnaire which was directed to a sample of EAs in Jordan. Data are then analysed using Partial Least Squares Structural Equation Modelling (PLS-SEM) techniques.

The results of the study show that culture dimensions can significantly influence EAs’ judgements and decisions regarding their reliance on the IAF. In particular, the evaluation judgement and reliance decision relating to the IAF made by Jordanian EAs who are collectivist, uncertainty avoidant, and accept a high power distance are negatively affected. The results also show that revisions made to ISA 315 have a positive impact on EAs’ judgements in respect of the extent to which the IAF meets the reliance requirements. Furthermore, the results reveal that Jordanian EAs’ reliance on the IAF has an indirect impact on audit fees through reducing audit work hours.

This study contributes to the existing literature on the interaction between national culture and audit by providing empirical evidence of how the process of making a reliance decision on the IAF in accordance with ISA 610 is influenced by specific cultural hallmarks in Jordan. Moreover, this study adds to the literature on EAs’ reliance on the IAF by introducing models embedding Signalling Theory in the Throughput Model to gain better understanding of how EAs rely on the IAF by tracing the sub-processes of different stages of the reliance decision, as well as clarifying how reliance impacts upon audit fees. Furthermore, this study enriches the literature by providing empirical evidence of the impact of the revised ISA 315 on the process of EAs’ reliance on the IAF. The findings of this study have practical implications that could be of interest to many different parties, such as standards setters, EAs, the IAF and auditees. These parties can influence the IAF contributions to the external audit, thereby enhancing its efficiency.

Business School, The University of Hull
Rodgers, Waymond
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