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SBE, Vol.20, No.1, 2017
ISSN 1818-1228
THE RELATIONSHIP BETWEEN INTERNAL
AUDITING AND EXTERNALAUDIT FEES:
EVIDENCE FROM KUWAIT
Meshari O. Al-Hajri
Associate Professor in the Department of Accounting,
Kuwait University, Kuwait
Abstract:
Although audit pricing has been one of the most studied topics in the
audit literature for more than three decades now, to date, very little research has
been conducted on this important issue in the Middle East Region. One important
question in this line of audit research has been related to whether audit fees are
influenced by the contribution of client’s internal auditing (IA) to the external
audit work. Much of existing research investigating this issue has been conducted
in well-developed English-speaking countries, with almost no empirical evidence
provided about this issue within the context of other parts of the world. The
purpose of the current study is to examine this issue using data from the Kuwaiti
audit market. In particular, the current study uses a sample of audit engagements
performed in the Kuwaiti market, to examine whether external audit fees are
influenced by the contribution of the client’s internal audit function. The results
show that IA contribution in the external audit work is negatively related to the
amount of external audit fees.
Keywords
: audit fees, internal auditing, audit markets, Kuwait.
I. INTRODUCTION
Due to the growing competition in audit
markets, and the increasing complexity in the
required audit procedures, one of the major
challenges external audit firms have been facing
in recent years is the need to be cost-efficient
and at the same time preserve adequate audit
quality. One way for audit firms to achieve that
has been through the utilization of audit client’s
internal audit (IA) in the performance of the
external audit work. The contribution of the
client’s IA department to external audit work
can be beneficial not only for audit firms but
also for audit clients as well. That is true since
this kind of cooperation is expected to result in
some synergic outcomes including high audit
quality and cost efficiency (Gramling
et al
.,
2004; Sarens, 2009). Audit clients are expected
to cherish such cooperation since it can lead to
reducing the cost of their external audit (Zain
et al
., 2015). In addition, and especially in
light of the recent emphasis on the promotion
of effective and strong corporate governance
and control, having a better understanding
of how internal and external audit interact is
very useful for the enhancement of integrity
and reliability of corporate financial reporting
(Spira and Page, 2003; Goodwin-Stewart and
Kent, 2006).
The impact of IA contribution to external audit
work on audit fees has been an interesting
research issue for several audit researchers.