Auditing. Desai Et Al. 2011

Auditing: A Journal of Practice & Theory
Vol. 30, No. 1

February 2011
pp. 149171
American Accounting Association

DOI: 10.2308/aud.2011.30.1.149
Internal Audit Sourcing Arrangements and

Reliance by External Auditors
Naman K. Desai, Gregory J. Gerard, and Arindam Tripathy
SUMMARY: A companys internal audit IA function can be maintained in-house, outsourced to an IA service provider, or cosourced a combination of the in-house and
outsourced IA functions. This study explores the effect of these sourcing arrangements
on the external auditors assessed quality and reliance on the IA function. We predict
that external auditors consider the cosourced and outsourced IA functions to be equal
in terms of assessed quality and reliance. Furthermore, we predict that the external
auditors assessments of objectivity and competence will be greater for cosourced and
outsourced IA functions compared to in-house IA functions; therefore, external auditors
will have greater reliance on the cosourced and outsourced IA functions. Finally, we
predict that when the IA service provider also provides additional tax services to the
client, external auditor reliance is significantly decreased compared to when the service
provider does not provide tax services. One hundred and eight CPAs participated in this
study and were randomly assigned to one of five treatment conditions: in-house, cosource, outsource, cosource with tax services, and outsource with tax services. The
results support our predictions and indicate that external auditors place more reliance
on cosourced and outsourced IA functions compared to in-house IA functions. Furthermore, external auditors reliance on cosourced and outsourced IA functions decreases
when tax services are also provided by the IA service provider.
Keywords: cosourcing; external auditor reliance; internal audit; sourcing.
Data Availability: Please contact the authors regarding data availability.
INTRODUCTION
According to Statement on Auditing Standards No. 65 SAS No. 65, The Auditors Consideration of the Internal Audit Function in an Audit of Financial Statements, the external auditor is
Naman K. Desai is an Assistant Professor at the University of Central Florida, Gregory J. Gerard is an
Associate Professor at Florida State University, and Arindam Tripathy is an Assistant Professor at The
University of Washington Tacoma.
We appreciate the insightful comments and suggestions of Audrey Gramling Associate Editor, two anonymous reviewers,
Tina Carpenter, Bill Hillison, Malcolm McLelland, Jane Reimers, and conference participants at the 2007 American
Accounting Association Annual Meeting in Chicago, IL. We also specifically thank Dr. Ann Norris for advice on path
analysis. We are grateful to The Institute of Internal Auditors Research Foundation IIARF for providing research funding.
Although financially supported by the IIARF, the views expressed in this paper are those of the authors and do not
necessarily represent positions or opinions of the IIARF or The Institute of Internal Auditors IIA.
Editors note: Accepted by Audrey A. Gramling, Ad Hoc Associate Editor, under Dan Simunics Editorship.
Submitted: October 2007

Accepted: April 2010
Published Online: February 2011
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Desai, Gerard, and Tripathy
able to rely on the internal auditors work if the external auditor is satisfied that standards of
competence and objectivity have been met American Institute of Certified Public Accountants
AICPA 1991. Recently, in Auditing Standard No. 5, the Public Company Accounting Oversight
Board PCAOB made the decision to retain SAS No. 65 PCAOB 2007, 13. However, since the
time that SAS No. 65 was issued, different IA sourcing arrangements such as outsourcing and
cosourcing have evolved Serafini et al. 2003.
The general description of three possible sourcing arrangements is as follows: 1 in-house,
where a company maintains its own IA function, 2 outsourced, where an independent IA service
provider maintains the IA function, or 3 cosourced, where there is a partnership between an
in-house IA function and an independent IA service provider.1 Each sourcing arrangement has
advantages and disadvantages in terms of control of the IA function, business knowledge, costs,
and objectivity.2
Despite the various IA sourcing arrangements, recent guidance from the Institute of Internal
Auditors IIA does not recommend any single sourcing arrangement as being preferable to the
others IIA 2009, and to our knowledge there is no empirical research specifically on IA
cosourcing.3 However, studies indicate that the sourcing in-house versus outsourced of the IA
function has a significant effect on external auditors perceptions about the quality of the IA
function and the planned external audit effort for any particular audit engagement.4 For example,
an outsourced IA function is likely to be more objective than an in-house IA function Ahlawat
and Lowe 2004. Moreover, external auditors consider an outsourced IA function to be of a higher
quality only if the inherent risk associated with the company is high; external auditors are indifferent between outsourcing and in-house arrangements when the inherent risk associated with the
company is low Glover et al. 2008.
Since cosourcing is a combination of in-house and outsourcing, the extent of reliance placed
by the external auditor could either be lower due to the in-house personnel than the extent of
reliance on a purely outsourced IA function, or the same as that for a due to the presence of the
independent firm personnel purely outsourced IA function. Therefore, the first purpose of our
research is to investigate cosourcing where the high-risk areas are audited by a combination of
in-house internal audit employees and employees of an independent IA service provider as it
compares to in-house and outsourced IA functions, with respect to the external auditors reliance
on the IA function.
The second purpose of our research is to investigate the external auditors reliance decision in
the context of nonaudit services such as tax services provided by the IA service provider.
Although the Sarbanes-Oxley Act of 2002 SOX; U.S. House of Representatives 2002 prohibits
the external financial statement auditor from providing internal audit and certain other nonaudit
services to an external audit client, there are no such prohibitions placed on IA cosourcing or
outsourcing service providers. Thus, we are interested in whether the external auditors reliance
decision changes when an IA cosourcing or outsourcing provider also provides nonaudit services
such as tax services which might potentially compromise objectivity.
1
2
An independent IA service provider can be a public accounting firm e.g., one of the Big 4 firms or it can be an internal
audit firm e.g., Protiviti.
For example, see Del Vecchio and Clinton 2003, Rittenberg et al. 1999, Smith 2002, Aldhizer and Cashell 1997,
and Thomas and Parish 1999 for detailed discussions on the various advantages and disadvantages of these
arrangements.
A recent position paper IIA 2009 shows that the IIA has taken a neutral position on sourcing alternatives; instead of
advocating for a certain sourcing arrangement, the IIA has issued guidance on evaluating the optimal sourcing structure
for the IA function also see Schneider 2008; IIA 2001.
In this paper, the term internal audit quality refers to competence, objectivity, and technical skills of the IA function.

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Internal Audit Sourcing Arrangements and Reliance by External Auditors
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One hundred and eight CPAs were randomly assigned to one of five treatments cases as part
of a 3 2 incomplete between-subjects factorial design. In three of the cases, the IA function is
described as either an in-house, cosourcing, or outsourcing arrangement. In the remaining two
cases, the IA function is described as either a cosourcing or outsourcing arrangement where the IA
service provider also provided tax services. The participants responded to questions about reliance,
perceptions about the quality of the IA function, planned external audit effort, and overall audit
risk and control risk.
The results indicate that participants assessed the quality and extent of reliance on the outsourced and cosourced where the IA services for the high-risk areas were provided by a combination of in-house employees and an independent IA service provider IA functions to be significantly greater than that of an in-house IA function. The assessed external audit effort for the
cosourced and outsourced IA functions was significantly lower than the external audit effort for
the in-house IA function. However, there were no significant differences in these measures between the cosourced and outsourced IA functions. The results also indicate that relative to cases in
which the IA service provider does not supply additional services, when cosourcing or outsourcing
service providers also provide tax services, it 1 reduces the perceived quality of, and the extent
of reliance on, the outsourced or cosourced IA functions, and 2 increases the associated external
audit effort.
Our study contributes to the extant literature in the following ways. First, we extend the work
of Glover et al. 2008 and Ahlawat and Lowe 2004 to investigate how cosourcing compares to
in-house and outsourced IA functions in relation to external auditors assessment of and reliance
on the IA function. Second, we investigate how these external auditor decisions are affected when
an independent IA firm providing IA cosourcing or outsourcing services provides additional
services such as tax services.
The rest of the paper is organized as follows. In the second section we describe IA sourcing
arrangements, review related literature, and present our hypotheses. The third section discusses
our research method, and section four presents the results. We conclude the paper with a summary
and discussion.
BACKGROUND AND HYPOTHESES
IA Sourcing Arrangements
Typically, the IA function is structured as one of the following arrangements: 1 in-house, in
which a company maintains its own IA function, 2 outsourced, in which an independent firm
conducts the IA, or 3 cosourced, where there is a partnership between the in-house IA function
and an independent firm. There are various advantages and disadvantages in terms of control of IA
function, business knowledge, costs, independence, etc., related to each of these sourcing arrangements for detailed discussion, see Del Vecchio and Clinton 2003; Rittenberg et al. 1999; Smith
2002; Thomas and Parish 1999.
For example, some of the advantages of an in-house IA function are: greater control over
audit operations, thereby protecting proprietary information; better understanding of business processes and associated risks than outsiders and nonemployees; and opportunities to train future
managers. Some disadvantages are: limited availability of specialized knowledge; limited geographical coverage of IA function; and higher probability of IA employees giving in to management pressures Del Vecchio and Clinton 2003.
The outsourcing of the IA function to an external independent firm provides benefits such as:
access to specialized knowledge of the independent firm which specializes in providing audit
services; greater geographic coverage of IA activities; greater flexibility in planning of IA activities because the company does not have to hire new employees when a temporary need for expert
knowledge arises; and relatively lower probability that outside IA personnel would give in to
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management pressures Del Vecchio and Clinton 2003. Some of the drawbacks of this sourcing
arrangement are: loss of proprietary information; IA personnel have limited exposure to the companys business processes and hence may require more time in understanding the workings of the
company; and lack of learning opportunities for the companys own employees Del Vecchio and
Clinton 2003; Rittenberg et al. 1999.
Aldhizer and Cashell 1997 and Aldhizer et al. 2003 discuss cosourcing as a cheaper and
more efficient way of providing the IA function in which in-house auditors can provide the
activities requiring constant attention, and external independent internal auditors can be utilized
for functions requiring special skills. Additional advantages of cosourcing arrangements are: desired level of control over IA services can be maintained by employing an IA management team
that coordinates IA services with a third party that has the expertise to carry out specific audit
functions; increased knowledge-sharing between the companys employees and outside firm employees; and if the appropriate IA areas are cosourced, the IA function is perceived to be of a high
quality in the opinions of investors, financial institutions, and external auditors Del Vecchio and
Clinton 2003; Smith 2002; Thomas and Parish 1999. These perceptions, in turn, could reduce the
external auditors assessed likelihood of the IAs findings being misrepresented or biased in some
manner. We will return to this point below.
Factors Affecting the External Auditors Evaluation of the IA Function
According to SAS No. 65 AICPA 1991, when an external auditor considers whether to rely
on the IA function, the external auditor must obtain a sufficient understanding of the IA function.
In this process the external auditor needs to assess the internal auditors competence e.g., education, experience, certifications, supervision, etc. and objectivity e.g., to whom does the internal
auditor report. In the post-Sarbanes-Oxley SOX era, because of the new requirements imposed
by SOX Sections 302 and 404, there is a potential for IA to play an increasingly important role
related to the controls of an organization Adamec et al. 2005. For example, SOX Section 302
requires management to certify the effectiveness of disclosure controls and procedures with respect to the firms quarterly and annual reports. In the same vein, SOX Section 404 requires firm
management to evaluate and report on the effectiveness of internal controls over financial reporting. More recently, Auditing Standard No. 5 PCAOB 2007 requires external auditors to conduct
an integrated audit, which focuses on two things: 1 expressing an opinion on whether the
financial statements are fairly stated, and 2 expressing an opinion on the effectiveness of the
companys internal control over financial reporting. These recent changes underscore the importance of the external auditors decision to rely or not rely on the IA function, especially since the
IA function is one of the key cornerstones of a companys corporate governance Adamec et al.
2005. Furthermore, the increased cost of complying with SOX Levinsohn 2004 also suggests
that companies are looking for effective ways to control audit costs, and cost savings will be
attained when the external auditor can rely on the internal auditors work Felix et al. 2001;
Krishnamoorthy 2002; Prawitt et al. 2009a; Gramling et al. 2004.
The evaluation of the IA function helps external auditors make decisions regarding the extent
of audit work to be performed during the year-end annual audit engagement, and it also helps in
identifying the specific areas of the business on which to focus the audit effort. Prior research
indicates that the external auditors decision to rely on the IA function is affected by various
criteria such as objectivity, competence, and work performance Clark et al. 1981; Brown 1983;
Schneider 1984, 1985; Brown and Karan 1986; Margheim 1986. Studies have shown that external
auditors are also sensitive to factors like the reporting structure for the director of the IA function
Abdel-khalik et al. 1983 and the source of evidence Hirst 1994.

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IA Sourcing and External Auditors Evaluation of the IA Function

SAS No. 65 does not specifically address the sourcing of IA function as one of the factors to
be evaluated by the external auditors while assessing the quality of the IA function. However, prior
research indicates that the sourcing specifically, in-house versus outsourcing of the IA function
has a significant effect on 1 external auditors perceptions about the quality of the IA function,
2 the extent of reliance placed on the IA function, and 3 the planned external audit effort for
any particular audit engagement. For example, Ahlawat and Lowe 2004 propose that an outsourced IA function is likely to be more objective than an in-house IA function, and that in-house
internal auditors are more likely to acquiesce to management pressures than outsourced internal
auditors who are independent of company management. Similarly, external auditors consider
internal auditors to be more objective and independent when the internal auditors are not employees of the company Gramling and Vandervelde 2006.
Glover et al. 2008 show that external auditors reliance on the IA function is related to the
interaction between whether the IA function is outsourced and the level of inherent risk. In other
words, when inherent risk is low, external auditors reliance on the IA function is the same
regardless of whether the IA function is in-house or outsourced; however, when inherent risk is
high, external auditors reliance on the IA function is greater when the IA function is outsourced
compared to in-house. Glover et al. 2008 posit attribution theory see, e.g., Jaspars et al. 1983;
Eagly and Chaiken 1993 as the reason for this perceived higher reliance on the IA function in the
presence of high inherent risk. Attribution theory suggests that when individuals evaluate a
sources message, individuals assess a sources incentives to bias the message. Glover et al. 2008
argue that in-house internal auditors are usually directly or indirectly accountable to the management, and their job continuity, promotions, and incentives are decided by that management. On the
other hand, the outsourced internal auditor is not directly under managements chain of command,
nor is the outsourced internal auditor likely to lose his/her job if a client company fails. Due to the
above factors, there exists a close alignment between an in-house IA function and management
which could adversely affect the external auditors perception of objectivity and reliance on
in-house IA function compared to outsourced IA function. According to Glover et al. 2008, 197,
external auditors will attribute favorable reports by in-house internal auditors to incentives to
please or align with management rather than to work performed by the internal auditors.
Prior research also indicates that the assessed inherent risk of an audit influences the external
auditors decision to rely on the work of the IA function Maletta 1993 and that external auditors
will spend more audit effort when assessed inherent risk is high Maletta and Kida 1993. Glover
et al. 2008 suggest that external auditors attribute the work of internal auditors with incentives
to please or align with management only when the inherent risk associated with a company is high
in their study, low/high inherent risk was manipulated via high/low fixed salary for managers,
small/large bonuses for managers, and conservative/aggressive accounting positions by managers.
They do not find a significant difference in the assessed objectivity of, and reliance on, the
in-house and outsourced IA functions when the assessed inherent risk is low. Glover et al. 2008
do not specifically mention the accounts or functions of the company that are affected by high
inherent risk. It is unlikely that all the accounts or functions of a company will be equally affected
by the high inherent risk. Usually certain key accounts and functions of the company would
require greater attention compared to others. Therefore, insights can be gained through research
that specifically identifies the accounts and functions that are affected by the high risk and then
manipulate the sourcing of IA function.
Based on attribution theory, if the external auditors attribute internal auditors reports to their
incentives only in scenarios where risk is relatively high Glover et al. 2008, a company could
cosource IA work related to the relatively high-risk areas a combination of in-house employees
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and employees of an independent firm would perform this work and maintain an in-house function to perform the remaining work. Such a cosourcing arrangement could help ensure that the
perceptions regarding the quality of the IA function, and extent of reliance placed on the IA
function, are not compromised. This, in turn, would ensure that the external audit effort and costs
would be similarly low for both the outsourced and cosourced IA functions compared to the
in-house IA function Felix et al. 2001; Gramling et al. 2004; Prawitt et al. 2009b.5 Based on the
above discussion, we posit the following hypotheses:
H1a: External auditors perceptions about the quality of the IA function will be 1 the same
for a cosourced IA function where the high-risk areas are audited by an independent
firm and a pure outsourced IA function, and 2 significantly lower for an in-house IA
function compared to an outsourced or cosourced IA function.
H1b: External auditors extent of reliance placed on the IA function will be 1 the same for
a cosourced IA function where the high-risk areas are audited by an independent firm
and for a pure outsourced IA function, and 2 significantly lower for an in-house IA
Prior studies, such as Margheim 1986, Gaumnitz et al. 1982, Schneider 1985, DeZoort et
al. 2001, and Prawitt et al. 2009a, have shown that external auditors effort is negatively
correlated with the overall quality of the IA function. Therefore, if the perceived quality of the
outsourced and cosourced IA functions is equally high in comparison to the in-house IA function,
there will be no significant difference in the planned audit effort for the cosourced and outsourced
IA functions. However, the planned audit effort will be significantly higher for the in-house IA
function.
H1c: External auditors planned effort for the year-end annual audit will be 1 the same for
a cosourced IA function where the high-risk areas are audited by an independent firm
and for an outsourced IA function, and 2 significantly higher for an in-house IA
Sourcing the IA Function and Provision of Additional Services by the IA Service Provider
SOX and related standards mandate that external auditors cannot provide IA or certain consulting services for their financial statement audit clients. A primary motivation underlying SOX
was to enhance objectivity. For example, if an accounting firm provided certain consulting services and also performed the financial statement audit, the firms external auditors might compromise their objectivity. Internal auditors, on the other hand, are under no such restrictions. Therefore, firms which provide cosourced or outsourced IA services could seek to provide additional
services beyond IA cosourcing and outsourcing provided they are not the external auditor as
well. For example, in a recent KPMG report on the evolution of internal auditing, one of the areas
identified for value creation by the IA function is tax strategy and planning: to create value, IA
can help analyze existing tax structure to help determine the tax strategy the organization may
want to pursue in light of new initiatives and their potential effects. It would consider whether the
tax planning strategy aligns with strategic objectives KPMG 2007, 7. Therefore, an independent
outside firm could be hired to do IA cosourcing or outsourcing, as well as other consulting services
such as tax.
In an internal audit context, there is very little prior research that examines how external
The internal audit function is an important factor affecting external audit costs Felix et al. 2001.

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auditors perceive IA functions that also perform consulting work and receive compensation for
such work. DeZoort et al. 2001 conducted an experiment to investigate how internal auditor
compensation fixed salary versus salary plus incentive compensation, role traditional versus
consulting, and task objective versus subjective relate to external auditor reliance on the IA
function and related audit effort.6 They found that consulting services provided by the IA function
do not relate to the external auditors reliance decision. Furthermore, the provision of consulting
services does not increase audit effort i.e., budgeted audit hours unless the internal auditors
receive incentive compensation. To our knowledge, there is no other research that investigates IA
functions and provision of consulting services. Therefore, to gain additional insight, we examine
research related to the context of external auditors and the provision of nonaudit services NAS.
The literature on external auditors and the provision of NAS contains mixed results regarding
whether auditor independence/objectivity is impaired by the provision of NAS. In a comprehensive review of the literature on NAS and auditor independence, Schneider et al. 2006, 170
conclude a myriad of studies have examined this issue, though the findings are difficult to
summarize due to differences in user groups, time periods, and the specific type of NAS examined. Although the stakeholder groups in the literature classified by Schneider et al. 2006
include auditors, financial statement users, and managers, we will focus on findings from the
auditor literature. For example, Frankel et al. 2002 suggest that providing NAS affects external
auditor independence because the auditor is more likely to allow discretionary accruals. However,
a number of studies either do not find a significant relationship between provision of NAS and
impaired auditor independence e.g., Prawitt et al. 2010; Ashbaugh et al. 2003; DeFond et al.
2002; Kinney et al. 2004; Davis et al. 1993. The results of Jenkins and Krawczyk 2003 and
Lavin 1976 suggest that accountants view only certain types of NAS as leading to independence
impairment e.g., legal consulting, bookkeeping.
The provisions of SOX are only relevant to external auditors, not internal auditors. Therefore,
while SOX prohibits external auditors from providing most tax services as well as internal audit
and certain other consulting services to their financial statement audit clients, internal audit firms
are allowed to provide such services. The Institute of Internal Auditors does not restrict the
internal auditor from providing consulting services. It actually defines the IA function as an
independent, objective, assurance and consulting activity designed to add value and improve an
organizations operations Reding et al. 2009. The boards of directors can likely subject to
approval of the audit committee allow an outside firm that provides IA services to a company to
also provide tax services. However, the objectivity concern underlying the SOX requirement to
separate external auditing from other services could extend to the IA functionespecially given
the possible cosourcing and outsourcing arrangements with independent outside firms providing
multiple services. It is possible that external auditors could perceive these sourcing arrangements
as affecting the IA functions objectivity. Moreover, based on attribution theory Jaspars et al.
1983; Eagly and Chaiken 1993, the provision of tax services by the IA service provider should
increase the perceived incentive to align with the management. This is because now the IA
services provider has an additional incentive to gain financial benefits arising from providing tax
services. This, in turn, could lower the perceived objectivity of the IA function in the eyes of the
external auditor.
DeZoort et al.s 2001 manipulation of role is different from the one in this study. Here we manipulate whether tax
services are provided by the IA function as opposed to saying that the role of the IA function is traditional versus
consulting. Furthermore, because DeZoort et al. 2001 manipulated compensation as fixed salary versus fixed salary
plus incentive compensation, the IA function was an in-house function the incentive compensation plan would not exist
for an outsourced function and likely not for a cosourced function; at any rate, sourcing was not included in their
experiment.
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Although DeZoort et al. 2001 did not find a relationship between the IA functions provision
of consulting services and the external auditors reliance decision, they did find that external
auditors assess the objectivity of the IA function as lower compared to when the IA function
provided traditional internal auditing. However, that study pre-dates SOX, and it only looked at
in-house IA arrangements, so it is unclear whether the reliance result no relationship between
providing consulting and external auditor reliance generalizes to the present time or to situations
involving cosourcing or outsourcing. Based on the heightened objectivity concerns of regulators in
the post-SOX era, we hypothesize that when IA cosourcing/outsourcing service providers additionally provide tax services, external auditors will view the IA function as less objective and
independent and will rely less on the IA function even if the companys audit committee approved
of the outsourcing arrangement and even if the personnel providing tax and IA services are
different. Stated formally:
H2a: The perceived quality of the IA function will be significantly lower when the independent firm to which the IA function is outsourced or cosourced also provides additional
tax services to the company than when the independent firm to which the IA function
is outsourced or cosourced provides only IA services.
H2b: The extent of reliance placed on the IA function will be significantly lower when the
independent firm to which the IA function is outsourced or cosourced also provides
additional tax services to the company than when the independent firm to which the
IA function is outsourced or cosourced provides only IA services.
H2c: The planned external audit effort will be significantly higher when the independent firm
to which the IA function is outsourced or cosourced also provides additional tax
services to the company than when the independent firm to which the IA function is
outsourced or cosourced provides only IA services.
RESEARCH METHOD
Participants
A total of 108 experienced CPAs from one Big 4 and a number of regional accounting firms
participated in the experiment however, three participants failed the manipulation checks and
were removed from the final analysis. The data were collected by one of the researchers on-site
during firm training sessions. The participants had an average of 6.67 years of auditing experience
with a standard deviation of 4.06 years. The minimum experience was two years and the maximum was nine years. Out of the 105 usable responses, 76 were current Big 4 auditors, while the
rest were CPAs employed by regional firms all of the non-Big 4 CPAs had prior Big 4 audit
experience. Our analysis indicates no significant differences in responses between past Big 4 and
current Big 4 participants. We also measured other demographic variables such as years of experience in public accounting, and self-assessed experience with evaluating internal audit functions.
No statistically significant differences were noted across treatments with respect to any of these
variables.7
Research Design
The design was a 3 2 incomplete between-subjects factorial. The factors were sourcing
arrangement in-house, cosourcing, or outsourcing and provision of tax services by cosourcing or
7
We conducted an analysis using the following covariates: Big 4 versus non-Big 4, self-assessed experience in evaluating
clients internal audit functions, and years of experience as an external auditor. These covariates did not significantly
vary with our manipulations, nor did they significantly correlate with our measured variables.

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outsourcing service provider tax services provided or not. The in-house group was not exposed
to the provision of tax service manipulation; therefore, there were five treatment groups.8 Table 1
illustrates the design. All the participants were randomly assigned, within all training sessions
visited, to one of five treatments.
Experimental Task and Procedures
We developed three cases designed to manipulate sourcing as in-house, cosourced, or outsourced. Additionally, to manipulate provision of tax services by cosourcing or outsourcing service
provider, we developed two additional cases by stating that 1 the Big 4 accounting firm to which
the IA function was outsourced or cosourced also provided tax services to the company, and 2
the companys audit committee approved such an arrangement and that the personnel providing
tax services were different from the personnel providing IA services to the company. In each of the
five cases, the overall pressures on management associated with the companys operations were
described to be moderately high i.e., manager compensation was based on performance, the
company was in a very competitive industry, and it was involved in complex business operations.
We also indicated the specific accounts that would be exposed to high misstatement risk as a result
of these high pressures. This was necessary because in the cosourcing case we indicate that these
complex and high-risk areas were audited by a combination of in-house IA department employees
and employees of an independent Big 4 accounting firm, while the in-house internal audit department audited all the other areas. In all cases involving outsourcing and cosourcing, the participants
were specifically told that the Big 4 firm providing the internal audit services was not the same
firm providing external audit services.
We obtained measures of a number of variables, including level of objectivity, competence,
technical skills, control risk, overall audit risk, the extent to which the internal auditors were likely
to acquiesce to management, and the extent of reliance placed on the IA function for the high-risk
and low-risk areas please see the Appendix which were used to develop our dependent
measures.9 We conducted a factor analysis on these measures to obtain the three constructs or
factors quality, reliance, and effort that were used as dependent measures to test our hypotheses.
External audit effort was measured by the extent to which external auditors would adjust the
planned audit hours for the relatively complex and high inherent risk areas and the other relatively
low inherent risk areas. This was measured on a scale of 5 substantially reduce effort to 5
substantially increase effort, with 0 being no change in effort. As an additional check, we also
collected information about the perceived inherent risk associated with the company on a scale of
110 low to high. Ideally, the perceived level of inherent risk should not change across
treatments.10
RESULTS
Manipulation and Other Checks
We incorporated the following three manipulation checks in our experiments to ensure the
participants carefully read the cases and attended to the manipulations. First, participants were
8
9
10
Because H1aH1c make predictions about in-house versus cosourcing and outsourcing, and H2aH2c make predictions
about cosourcing and outsourcing with and without also providing tax services, a complete between-subjects factorial
design is not used.
These scales are similar to the ones used by Glover et al. 2008 and DeZoort et al. 2001.
Participants also answered specific questions about reliance on low-risk areas, and adjustment to budgeted audit hours
for low-risk areas. For the reliance and budget hours measures in the low-risk areas, there were no significant differences
across treatment conditions and in comparing reliance on low-risk areas to reliance on high-risk areas, we found the
expected theoretical relationship of more reliance on low-risk areas. Therefore, our primary analysis focuses on the
high-risk areas.
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TABLE 1
Experimental Design
(3 2 Incomplete between-Subjects Factorial)
Sourcing Arrangement
No Tax Services
Tax Services
In-House
NA see footnote 8
Cosourcing Does not provide Tax Services

Cosourcing Provides Tax Services
Outsourcing Does not provide Tax Services

Outsourcing Provides Tax Services
This table exhibits the basic research design of this study. The main variables are the sourcing arrangements manipulated across three levels and presence or absence of tax services
manipulated across two levels.
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asked to identify the appropriate description of the IA function from a set of choices. Second, they
were asked to list the high-risk areas specifically mentioned in the case. Third, they were asked to
identify if the IA service provider also provided tax services. Three out of the 108 participants
failed this manipulation test and their responses were removed from the following analysis.
The cases were designed to hold inherent risk constant across treatments; the inherent risk
was described in the cases as relatively high e.g., management compensation consisted of relatively low fixed salary and large bonuses based on earnings targets. Statistical tests revealed no
significant differences across treatments for participants assessments of inherent risk.
Results: IA Sourcing and External Auditors Evaluation of the IA Function
Table 2 presents means and standard deviations for the five treatments. The first three data
columns of Table 2 are used to test the first hypotheses. The means show a clear pattern of results
in which the in-house treatment appears to be different from the other two treatments. To obtain an
overview of our multivariate results, we performed a one-way between-subject multivariate analysis of variance on eight measures the measures are described above and listed in Table 2
associated with external auditors perceptions about the IA function. This analysis revealed a
significant multivariate effect for sourcing arrangement, Wilks lambda 0.08, F 16, 106
16.38; p 0.0001. Table 3 shows Pearson correlations for the dependent variables in the
MANOVA. Of the three measures related to the quality of the IA function competence, objectivity, and technical skill, only objectivity is significantly associated with the other measures.
Since we are employing multiple variables to measure perceived IA quality and risk/reliance
related to the IA function, we used exploratory factor analysis with varimax rotation to determine
if the different variables related to quality and risk/reliance load on their respective single factors.
The results indicate that two out of the three variables competence and objectivity measuring
perceived quality of the IA function load on one factor 0.77 and 0.65, respectively termed IA
Quality we do not further analyze the technical skill variable because it did not load on any
factors; the means and standard deviations for technical skill are reported in Table 2. Furthermore,
control risk, overall audit risk, likelihood of acquiescing to management, and reliance on high risk
areas load on a second factor factor scores: 0.69, 0.84, 0.86, and 0.85, respectively termed
Risk/Reliance. The negative relationship between reliance and the other variables indicates that
higher assessed level of risks translates into lower assessed level of reliance. The Cronbachs
Alpha was 0.79 and 0.83 for the variables loading on the IA Quality and Risk/Reliance factors,
respectively. Also, the variances explained by the variables loading on the IA Quality and Risk/
Reliance factors were 1.32 and 2.35, respectively. These two factors, plus the measure of audit
effort adjustment, were analyzed using univariate ANOVA and Tukeys HSD Honestly Significant
Difference test shown below.
H1a predicts that external auditors perceptions about the quality of the IA function will be the
same for a cosourced IA function and a pure outsourced IA function, and significantly lower for an
in-house IA function. H1b predicts that external auditors extent of reliance placed on the IA
function will be the same for a cosourced IA function and a pure outsourced IA function, and
significantly lower for an in-house IA function. The results of an ANOVA analysis, conducted by
using the factor scores as proxies for IA quality and risk/reliance, indicate that there is a significant
effect of sourcing arrangement on the assessed quality F 2, 60 22.93; p 0.0001 and
reliance F 2, 60 142.30; p 0.0001 of the IA functions see Table 4. The results of Tukeys
HSD tests indicate that there is no significant difference in the IA quality factor for the IA
functions employing cosourcing and outsourcing. However, the IA quality factor was significantly
higher for the cosourcing/outsourcing IA functions than for the in-house function. These results
support H1a. The same pattern of results hold for the risk/reliance factor: the in-house IA function
is assessed as more risky i.e., there is less reliance; recall the negative factor loading for the
February 2011
160
TABLE 2
Means and Standard Deviations for Measures as a Function of Sourcing Arrangement
Data for Hypotheses 1a-1c
Data for Hypotheses 2a-2c
Measure
Objectivity
Competence
Technical Skills
RelianceHigh-Risk Areas
Overall Control Risk
Overall Audit Risk
Acquiescence to Management
Adj. Audit Hrs.High-Risk Areas
In-House
M
(SD)
Cosource
M
(SD)
Outsource
M
(SD)
Cosource/Tax
M
(SD)
Outsource/Tax
M
(SD)
5.67
0.73
7.95
0.67
8.14
0.65
5.52
0.60
4.67
0.73
5.95
0.67
6.81
0.68
2.10
0.54
7.86
0.73
8.19
0.68
8.43
0.75
7.52
0.87
3.48
1.03
3.76
0.83
3.14
1.01
0.62
0.50
7.90
0.94
8.33
0.73
8.48
0.68
7.52
1.08
3.52
0.81
3.67
1.32
3.05
0.86
0.52
0.75
5.10
0.54
8.14
0.73
8.29
0.72
4.86
0.57
5.62
0.80
6.38
0.80
6.29
0.72
1.67
0.73
5.81
0.75
8.24
0.70
8.43
0.68
4.90
0.62
5.52
0.87
6.43
0.81
5.57
0.68
1.57
0.51
This table exhibits mean responses across the five treatments for the eight measures.
Sample size equals 21 for each of the five treatments columns.
Variable Definitions:
Objectivity perceived objectivity of IAF by external auditors range 010;

Competence perceived competence of IAF by external auditors range 010;
Technical Skills perceived technical skills of IAF by external auditors range 010;
RelianceHigh-Risk Areas extent of external auditors reliance on high-risk areas range 010;
Overall Inherent Risk overall inherent risk assessed by external auditor range 010;
Overall Control Risk overall control risk assessed by external auditor range 010;
Overall Audit Risk overall audit risk assessed by external auditor range 010;
Acquiescence to Management the perceived likelihood that internal auditors will acquiesce to management and
not report honestly range 010;
Adj. Audit HrsHigh-Risk Areas extent to which external auditors want to increase or decrease audit effort range
5 to 5 for high-risk areas;
M mean; and
SD std. dev.
reliance measure compared to the positive loadings for control risk, overall audit risk, likelihood
of acquiescing to management than the cosourcing/outsourcing functions; however, the cosourcing and outsourcing functions did not significantly differ. These results support H1a and H1b.
Table 4 also presents results for the factors decomposed into their individual measures, and
results for adjustments to audit hours for high-risk areas. Of note, from the individual measures,
the sourcing arrangement is affecting the external auditors assessments of objectivity F 2, 60
52.76; p 0.0001, but not competence. In designing the cases, we attempted to hold competence
constant across treatments the description of IA personnel across the three treatments had similar
educational background, professional qualifications, and experience, so the difference between

February 2011
Competence
Objectivity
Competence
Technical Skills
Reliance (High-Risk Areas)
Overall Audit Risk
0.18
Technical
Skills
Reliance
(High Risk Areas)
Overall
Control Risk
Overall
Audit Risk
Acquiescence to
Management
Adj. Audit Hrs.

(High Risk Areas)
0.10
0.12
0.57***
0.01
0.36**
0.49***
0.18
0.13
0.36**
0.57***
0.12
0..28*
0.67***
0.47***
0.72***
0.18
0.17
0.67***
0.51***
0.59***
0.61***
0.19
0.14
0.53***
0.40**
0.56***
0.76***
*, **, *** Indicates p .05, p .01, and p .0001, respectively.

n 63.
TABLE 3
Correlations Coefficients for Measures from In-House, Cosourcing, and Outsourcing Treatments
161
February 2011
162
TABLE 4
Means for Measures as a Function of Sourcing Arrangement
Measure
F-values
HSD Test
22.93***
142.30***
ICO
ICO
Factor 1 Decomposed Into Individual Measures

Objectivity
Competence
52.76***
1.62
ICO
ICO
Factor 2 Decomposed Into Individual Measures

Overall Audit Risk
36.75***
12.68***
36.68***
129.51***
Factor 1: IA Quality
Factor 2: Risk/Reliance
Adj. Audit Hrs. (High-Risk Areas)
44.46***
I
I
I
I
C
C
C
C
O
O
O
O
ICO
*** Indicates p .0001.

This table exhibits the F-test 2, 60 df and Tukeys HSD test investigating differences in means across the three treatments:
In-House, Cosource, and Outsource.
Tukeys HSD test .01; I, C, and O are for in-house, cosource, and outsource.
Interpretation of Tukey HSD results: e.g., Factor 1 IA Quality: I In-House is significantly less than C, and C and
O are not significantly different.
objectivity and competence is reasonable. Additionally, there is a significant effect of sourcing

arrangement on the adjustment of audit hours for high-risk areas F 2, 60 44.46; p 0.0001.
The adjustment to audit effort is higher for the in-house IA function compared to the cosourced/
outsourced functions, and not significantly different between cosourced and outsourced functions.
These results support H1c.
Results: Sourcing the IA Function and Provision of Additional Services by the IA Service
Provider
The last four columns of Table 2 show the means and standard deviations for the four
treatments related to the second set of hypotheses. The means show a pattern of results in which
the provision of tax services has an effect on most measures. For an overview of our multivariate
results, we performed a 2 cosourcing/outsourcing 2 presence or absence of tax services
performed by service provider between-subjects multivariate analysis of variance on nine measures the measures are described above and listed in Table 2 associated with external auditors
perceptions of the IA function. This analysis revealed a significant multivariate main effect for tax;
Wilks lambda 0.065, F 8, 73 130.86; p 0.0001. The sourcing by tax multivariate
interaction was not significant Wilks lambda 0.91, F 8, 73 0.91; p 0.53 and neither was
the sourcing multivariate main effect Wilks lambda 0.86, F 8, 73 1.42; p 0.20. Table
5 shows Pearson correlations for the dependent variables in the MANOVA. These results once
again show that of the three measures related to the quality of the IA function competence,
objectivity, and technical skill, only objectivity is significantly associated with the other measures.
We conduct another exploratory factor analysis with varimax rotation, as we did when testing
the first set of hypotheses. The factor analysis results indicate that two out of the three measures

February 2011
Competence
Objectivity
Competence
Technical Skills
Overall Audit Risk
*** Indicates p 0.0001.

n 84.
0.12
Technical
Skills
0.06
0.14
Reliance
(High Risk Areas)
0.71***
0.01
0.14
Overall
Control Risk
0.65***
0.10
0.05
0.62***
Overall
Audit Risk
0.71***
0.06
0.12
0.74***
0.64***
Acquiescence to
Management
0.73***
0.01
0.11
0.73***
0.69***
0.62***
Adj. Audit Hrs.

(High Risk Areas)
0.56***
0.12
0.06
0.54***
0.48***
0.52***
0.60***
TABLE 5
Correlations Coefficients for Measures from Cosourcing, Cosourcing/Tax, Outsourcing, and Outsourcing/Tax Treatments
163
February 2011
164
competence and objectivity load on a single factor 0.52 and 0.88, respectively termed IA
Quality, as before. The results also indicate that control risk, overall audit risk, likelihood of
acquiescing with management, and reliance high-risk areas load on a second factor factor
scores: 0.85, 0.86, 0.88, and 0.89, respectively termed Risk/Reliance, as before. The Cronbachs
Alpha was 0.72 and 0.86 for the variables loading on the IA Quality and Risk/Reliance factors,
respectively. Also, the variances explained by the variables loading on the IA Quality and Risk/
Reliance factors were 1.34 and 2.47, respectively. The negative relationship between reliance and
the other variables indicates that higher assessed level of risks translates into lower assessed levels
of reliance.
H2a and H2b posit that the perceived quality of the IA function and external auditors reliance
on the IA function will be relatively lower when the accounting firm to which the IA function is
outsourced or cosourced also provides tax services to the company. H2c posits that the planned
external audit effort will be higher when the accounting firm to which the IA function is outsourced or cosourced also provides tax services. We conducted a two-way ANOVA with two
between-subjects factors, sourcing cosourcing versus outsourcing and tax presence or absence
of tax services performed by service provider on the two factor scores see Table 6. The results
indicate that the sourcing arrangement by tax interaction was not statistically significant. There
was a significant main effect of providing tax services on the perceived quality of the IA function
F 1, 80 767.59; p 0.0001. When the IA service provider also provides tax services, the
external auditors assessment of IA quality decreases. The sourcing arrangement had a significant
main effect on the perceived quality of the IA function F 1, 80 4.76; p 0.05. Outsourcing
was perceived as higher quality compared to cosourcing.
Analysis of the individual measures not shown in Table 6 indicates that the differences in IA
quality factor are due to the objectivity measure and not the competence measure. Furthermore, for
the objectivity measure there is a significant sourcing arrangement by tax interaction F 3, 80
TABLE 6
Two-Way ANOVAs for Measures as a Function of Sourcing Arrangement and Tax
Measure and Source
MS
Factor 1: IA Quality
Tax
Sourcing Arrangement Tax
2.178
74.96
0.743
4.76*
767.59***
0.21
Factor 2: Risk/Reliance
Tax
0.15
43.49
0.01
1.53
95.07**
0.02
Adjust Audit Hrs. High Risk

Tax
0.19
23.05
0.00
0.48
57.62***
0.00
*, **, *** Indicates p .05, p .01, and p .0001, respectively.

df 1, 80
This table tabulates results of a two way ANOVA; sourcing arrangement is at two levels cosourcing or outsourcing and
tax is at two levels presence or absence of tax services performed by the IA service provider.

February 2011
165
4.11; p 0.05. This interaction indicates that the perceived objectivity is adversely affected when
the IA service provider to whom the IA function is cosourced or outsourced also provides tax
services. However, such an adverse effect is greater for a cosourced IA function than for an
outsourced IA function.
The results indicate a significant main effect of providing tax services on the perceived
risk/reliance of the IA function F 1, 80 95.07; p 0.0001. The results also indicate that there
is no effect of sourcing arrangement F 1, 80 1.53; p 0.21 on the perceived risk/reliance of
IA function. Overall, these results provide strong evidence in support of H2a and H2b.
There is a significant main effect for tax Table 6, F 1, 80 57.62; p 0.0001 indicating
an increase in the planned external audit effort in the treatments where the internal auditors
provide tax services compared to the treatments where the internal auditors do not provide tax
services. In the cosource with tax and outsource with tax scenarios, the planned increase in
external audit effort is 1.67 and 1.57, respectively, while the planned increase in the cosource no
tax and outsource no tax scenarios is only 0.62 and 0.52 Table 2. These results provide
evidence in support of H2c.
Discussion of Results Related to Low-Risk Areas
As we mentioned above, although we had measures of 1 reliance on low-risk areas, and 2
adjustments of audit hours for low-risk areas, the primary analysis focused on the related measures
for high-risk areas. When we analyzed the measures related to low-risk areas, an interesting
pattern was found. Using a one-way ANOVA with IA sourcing arrangement as a between-subjects
factor with three levels: in-house, cosourcing, or outsourcing we found that there was no effect of
sourcing arrangement on either reliance on low-risk areas or adjustments of audit hours for lowrisk areas. However, the results changed significantly when we examined the cosourcing and
outsourcing treatments that included the additional provision of tax services. Using a two-way
ANOVA with two between-subjects factors, sourcing cosourcing versus outsourcing and tax
presence or absence of tax services performed by service provider, we found that tax had a
significant main effect the sourcing by tax interaction was not statistically significant for 1
reliance on low-risk areas F 1, 80 210.86; p 0.0001, and 2 adjustments of audit hours for
low-risk areas F 1, 80 6.60; p 0.05. The cosourced and outsourced IA functions provision
of tax services resulted in reduced reliance on low-risk areas and increased adjustments to audit
hours effort. These results suggest that even for the low-risk areas where the sourcing of the IA
function had no effect on the quality, reliance, and effort, the additional incentive to receive
compensation for tax services is viewed as something that would reduce the objectivity and
independence of the IA function. In turn, this reduces the external auditors assessed quality of,
and reliance on, the IA function and results in an increase in external audit effort.
Path Analysis
To complement our analysis, we investigate whether sourcing arrangement plays a separate
role in the external auditors reliance decision beyond the normative factors mentioned in SAS No.
65 objectivity and competence. Therefore, we conduct a path analysis to determine whether the
effect of sourcing is in-house, outsourcing, and cosourcing fully mediated by external auditors
assessments of objectivity and competence or whether the sourcing arrangement has explanatory
power in addition to i.e., not fully mediated by the assessments of objectivity and competence.
Figure 1 presents the path analysis results; overall, the model fits the data well. The goodness
of fit index and adjusted goodness of fit index are 0.81 and 0.79, respectively, and the Chi-square
statistic is insignificant 2 = 7.90, p-value 0.196. The results of the path analysis suggest that
for the high-risk areas, sourcing arrangement has a significant effect on the extent of reliance
February 2011
166
FIGURE 1
Path Analysis Examining Sourcing Arrangements (In-House, Cosourcing, Outsourcing) and
Related Decisions
0.138
0.167
0.414*
0.424*
0.410*
Technical Skill
Competence
0.121
0.235*
Objectivity
0.245*
Reliance
(High Risk Areas)
-0.108
Inherent Risk
-0.109
Control Risk
-0.020
-0.013
-0.352*
-0.269*
Audit Risk
-0.169*
Auditor Effort
-0.105
Acquiesce
-0.256*
Note: *p < .05
placed on the IA function.11 This effect is beyond the effect on reliance that is explained by the
assessment of objectivity there is no difference in the assessed technical skills and competence
across the three sourcing arrangements.
For the high-risk areas, the type of sourcing arrangement has a significant effect only on audit
risk and likelihood of acquiescing to management. Similarly, the assessed audit risk and likelihood
of internal auditors acquiescing to management have a significant effect on the extent of reliance
placed on the IA function. There is no effect of the assessed control risk and inherent risk on the
11
Please refer to Norris 2005 and Glover et al. 2008 for a more detailed description of the method used to conduct the
path analysis.

February 2011
167
extent of reliance placed on the IA function. The results also indicate that sourcing arrangement
has a significant effect on audit effort; however, that effect is fully mediated by the effect of
sourcing arrangement on reliance.
CONCLUSION
Prior research has examined the effects of maintaining an in-house IA function versus outsourcing an IA function on external auditors perceptions and reliance decisions. This study contributes to the extant literature by examining the effects of a third sourcing arrangement, cosourcing relative to in-house or outsourced sourcing arrangements on the external auditors
assessments of quality, reliance, and external audit effort. We find that external auditors assess the
quality of outsourced and cosourced where the IA services related to high-risk areas are provided
by an outside firm IA functions to be higher than the quality of an in-house IA function. Likewise,
external auditors are willing to rely on cosourced and outsourced IA functions to a greater extent
than in-house IA functions. Our findings suggest that there is no significant difference in external
auditors assessments of objectivity, competence, and reliance for the outsourced and cosourced IA
functions in the high inherent risk areas. We also find that the greater reliance on the cosourced
and outsourced IA functions is correlated with significantly lower external audit effort relative to
the in-house function. However, there is no significant difference in external audit effort for the
cosourced and outsourced IA functions. The results also indicate that there were no significant
differences in external auditors assessments of their willingness to rely on the IA function and
ratings of related effort for the low-risk areas across the three sourcing arrangements.
The overall results indicate that the quality of the IA function affects external auditors
assessments of reliance on the IA function and related ratings of effort only for the high-risk areas.
The results also imply that in a cosourcing arrangement, the presence of independent outside IA
personnel during the audit of high-risk areas despite the presence of in-house IA personnel
mitigates the probability of the external auditors attributing the work of the IA function to incentives to please or align with management. Hence, it could be beneficial for companies to have
some independent outside firm personnel be part of the IA personnel who provide IA services for
high inherent risk areas.
With the exception of DeZoort et al. 2001 and now this study, there are no other studies that
examine an IA function that also performs other NAS. The board of directors can subject to
approval of the audit committee allow an outside internal audit firm to additionally provide tax
services. Therefore, our study evaluates the effect of IA cosourcing and outsourcing when additional services i.e., tax services are provided on external auditors assessments of quality, reliance, and audit effort. We find an adverse effect on assessments of IA quality and external auditor
reliance on the IA function in cases where the outside IA firm also provides tax services. This
adverse effect on assessed quality and reliance also translates into a significant increase in external
audit effort. This result implies that the objectivity concerns that prevent an external auditor from
providing other NAS are also prevalent in an internal audit context. The sample used for this study
consisted entirely of external auditors. It is possible that since external auditors are prevented from
providing other NAS, they would consider the provision of NAS by the internal auditor to have an
adverse effect on objectivity. It would be interesting to observe if other stakeholders have the same
perceptions as the external auditors.
Our study finds that external audit effort associated with a cosourcing arrangement where
high-risk areas are cosourced to an independent firm are 1 lower than that for an in-house IA
function, and 2 equal to that for an outsourced IA function. Although we do not specifically
examine any monetary benefits accruing to the company, prior literature e.g., Felix et al. 2001
does suggest that enhanced reliance and lower effort leads to lower external audit costs. The
findings of this research are limited to the extent that we do not attempt to identify an optimal
February 2011
168
cosourcing arrangement from the viewpoint of controlling external audit efforts and costs and
from the viewpoint of a company. The results indicate that external auditors consider cosourced
i.e., the IA services for high-risk areas are provided by an independent firm and outsourced IA
functions to be equal in terms of quality and reliance. However, this result could potentially
change if the design of the cosourcing arrangement differed.
Practitioner literature suggests that there are several benefits of cosourcing Serafini et al.
2003; Smith 2002; Thomas and Parish 1999. A detailed field study analysis on a firm-by-firm
basis could be useful in identifying detailed characteristics in terms of which specific activities
and sub-functions of IA should be outsourced and others which should be handled in-house of an
optimal cosourcing arrangement. Finding such an optimal arrangement could potentially be an
interesting future research opportunity. There are various types of cosourcing arrangements Del
Vecchio and Clinton 2003, and future research could examine the effects of these various arrangements on external auditors judgments related to assessed quality, reliance, and effort. Another
interesting research avenue would be to examine the difference in external audit reliance and effort
on IA functions in situations where the outsourced and cosourced internal audit service provider is
a Big 4 firm versus a non-Big 4 firm, or when the IA service provider is a public accounting firm
versus a nonaccounting firm that specializes in providing IA services, or when the IA service
providers also provide other ancillary services other than tax to their IA clients.
APPENDIX
LIST OF QUESTIONS RELATED TO THE DEPENDENT VARIABLES
Quality Related Questions
1. Based on the information given, to what extent do you believe the internal audit department
is objective when performing compliance testing and financial auditing tasks?
Not at all
Objective
Extremely
Objective
|_____________________________________________________________
|
|
|
|
|
|
|
|
|
|
0
10
2. Based on the information given, to what extent do you believe the internal audit department
is competent in performing compliance testing and financial auditing tasks?
Not at all
Competent
Extremely
Competent
|_____________________________________________________________
|
|
|
|
|
|
|
|
|
|
0
10
3. Based on the information given, do you believe the internal audit function has sufficient
technical skills e.g., education level and professional certification to effectively perform compliance testing and financial auditing tasks?
Doesnt have any
Technical Skills
Has sufficient
Technical Skills
|_____________________________________________________________
|
|
|
|
|
|
|
|
|
|
0

10
February 2011
169
Risk/Reliance Related Questions

1. Based on the information presented in this case, to what extent do you recommend that
your firm rely on tests of controls already performed by internal auditors on the relatively high
inherent risk areas?
No Reliance
Moderate Reliance
Extensive Reliance
|_____________________________________________________________
|
|
|
|
|
|
|
|
|
|
0
10
2. Based on the information presented in the case, what is the overall assessed Control Risk
associated with the company?
Low Risk
Moderate Risk
High Risk
|_____________________________________________________________
|
|
|
|
|
|
|
|
|
|
0
10
3. Based on the information presented in the case, what is the overall assessed Audit Risk
associated with the company?
Low Risk
Moderate Risk
High Risk
|_____________________________________________________________
|
|
|
|
|
|
|
|
|
|
0
10
4. How likely do you believe it is that the internal auditors might give in i.e., acquiesce to
the companys management and fail to issue an appropriate finding in the event of a disagreement?
Not at all
Likely
Extremely
Likely
|_____________________________________________________________
|
|
|
|
|
|
|
|
|
|
0
10
Audit Effort Related Question

1. Based on the information given in this case, how would you suggest adjusting audit hours
for testing controls over the relatively high-risk areas?
Significantly
Decrease
Significantly
Increase
Do Not Adjust
|_____________________________________________________________
|
|
|
|
|
|
|
|
|
|
-5
-4
-3
-2
-1
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Auditing: A Journal of Practice & Theory

Vol. 30, No. 1

American Accounting Association

Internal Audit Sourcing Arrangements and

Submitted: October 2007

Desai, Gerard, and Tripathy

Auditing: A Journal of Practice & Theory

Internal Audit Sourcing Arrangements and Reliance by External Auditors

Auditing: A Journal of Practice & Theory

Desai, Gerard, and Tripathy

Auditing: A Journal of Practice & Theory

Internal Audit Sourcing Arrangements and Reliance by External Auditors

IA Sourcing and External Auditors Evaluation of the IA Function

Auditing: A Journal of Practice & Theory

Desai, Gerard, and Tripathy

Auditing: A Journal of Practice & Theory

Internal Audit Sourcing Arrangements and Reliance by External Auditors

Auditing: A Journal of Practice & Theory

Desai, Gerard, and Tripathy

Auditing: A Journal of Practice & Theory

Internal Audit Sourcing Arrangements and Reliance by External Auditors

Auditing: A Journal of Practice & Theory

Auditing: A Journal of Practice & Theory

Cosourcing Does not provide Tax Services

Outsourcing Does not provide Tax Services

Desai, Gerard, and Tripathy

Internal Audit Sourcing Arrangements and Reliance by External Auditors

Auditing: A Journal of Practice & Theory

Desai, Gerard, and Tripathy

Objectivity perceived objectivity of IAF by external auditors range 010;

Auditing: A Journal of Practice & Theory

Adj. Audit Hrs.

*, **, *** Indicates p .05, p .01, and p .0001, respectively.

Internal Audit Sourcing Arrangements and Reliance by External Auditors

Auditing: A Journal of Practice & Theory

Desai, Gerard, and Tripathy

Factor 1 Decomposed Into Individual Measures

Factor 2 Decomposed Into Individual Measures

Adj. Audit Hrs. (High-Risk Areas)

*** Indicates p .0001.

objectivity and competence is reasonable. Additionally, there is a significant effect of sourcing

Auditing: A Journal of Practice & Theory

*** Indicates p 0.0001.

Adj. Audit Hrs.

Internal Audit Sourcing Arrangements and Reliance by External Auditors

Auditing: A Journal of Practice & Theory

Desai, Gerard, and Tripathy

Adjust Audit Hrs. High Risk

*, **, *** Indicates p .05, p .01, and p .0001, respectively.

Auditing: A Journal of Practice & Theory

Internal Audit Sourcing Arrangements and Reliance by External Auditors

Auditing: A Journal of Practice & Theory

Desai, Gerard, and Tripathy

Note: *p < .05

Auditing: A Journal of Practice & Theory

Internal Audit Sourcing Arrangements and Reliance by External Auditors

Auditing: A Journal of Practice & Theory

Desai, Gerard, and Tripathy

Auditing: A Journal of Practice & Theory

Internal Audit Sourcing Arrangements and Reliance by External Auditors

Risk/Reliance Related Questions

Audit Effort Related Question

Auditing: A Journal of Practice & Theory

Desai, Gerard, and Tripathy

, , Indicates p .05, p .01, and p .0001, respectively.

, , Indicates p .05, p .01, and p .0001, respectively.