FACTORS THAT INFLUENCE THE RELIANCE OF EXTERNAL AUDITOR ON INTERNAL AUDITORS WORK AND ITS IMPACT ON EXTERNAL AUDITOR S FEE

Abstract

Purpose The purpose of this research is to examine the factors that the external auditors consider important for their reliance on the internal auditor’s work and to examine if there’s any relationship between the external auditor’s reliance and external audit fees in Pakistani audit firms specifically in Karachi. Methodology & Design This research is quantitative in nature and involved both primary and secondary data that collected by means of a self-administered cross-sectional survey. A questionnaire was floated to test the reliance variable from a sample of Pakistani external and internal auditors. A sectional multiple regression analysis was conducted to test this reliance. SPSS was used to run, Pearson’s Correlation, One Sample T-Test and Multiple Linear Regression tests in order to assess the internal consistency of scale, relationship amongst variables and the impact of individual independent variables on the dependent variable respectively. was cross Findings The key factors considered important by the external auditors for reliance are objectivity, competence and work performance. Not much research has been done in Pakistan regarding this issue and this study aims to find a satisfactory outcome regarding the extent of external auditor reliance and its impact on audit fee. Practical Implications This study has provided valuable insights with respect to internal and external auditor understanding amongst each other and the impact of audit fee due to different factors. Moreover the findings have once again reinstated the degree of reliance acts as an important predictor of changes in audit fees. Recommendations Further research is necessary to verify the results of this paper by replicating the research with other companies and auditors in other cities as well like Lahore and Islamabad. Other audit firms must be approached in Karachi to increase the sample size overall. Furthermore, there is a need to carry out research in the future to see ifthe system of internal audit in Pakistan develops to a level that external auditors are more willing to rely on its work rather than charging a fee according to the balance sheet weightage. Limitations Similar to every study, this study has its limitations. The first limitation is the limited number of companies used in the multiple regression analysis i.e. twenty clients in total (10 per each audit firm). Also the selection of companies was not done randomly. This casts some doubts about the generalization of the results of the study to the entire population. In addition the sample sizes used in the questionnaire also limit the generalizability of the results.