The relationship between internal and external auditors of local authorities in England and Malaysia

This study examines the relationship between internal and external auditors, with particular emphasis on the co-operation between internal and external auditors, and the reliance of external auditors on the internal audit work, in local authorities. Previous studies indicate that some work has been undertaken to determine the factors that affecting external auditors' reliance on internal auditors' work. However, studies on the relationship between internal and external auditors, in terms of their co-operation,. and the impact of such a relationship on the external audit fees are still limited. In addition, all of the previous studies were conducted in the private sector context and so far nothing is known about the relationship between internal and external auditors in the public sector. Thus, the aim of this study is to fill this g~p by examining the relationship between two corporate governance mechanisms, namely, internal audit and external audit, and the factors that affect external auditors' reliance on internal auditors' work in two different countries, England and Malaysia. A mixed method approach, using both quantitative and qualitative methods, has been adopted in this study. Two different surveys of internal and external auditors concerned with their perceptions of the relationship between internal and external auditors were carried out in England and Malaysia. A total of 387 questionnaires were mailed to the Heads of Internal Audit in each of the English local authorities. Another 142 questionnaires were mailed to all the appointed auditors of the local authorities. Similarly, two different questionnaires were used for the Malaysian data collection. A total of 28 questionnaires were mailed to the Head of the Internal Audit Department and another 11 questionnaires were sent to the Directors of National Audit Department (external auditors) of local authorities. The survey findings indicate that the internal and external auditors in Malaysia perceived that they have a moderate level of co-operation between them, while the internal and external auditors in England perceived their level of co-operation as high. The external auditors in England were able to place reliance on the internal audit work. However, in Malaysia there was no reliance on internal . auditors' work by the external auditors, because the internal auditors did not perform work relevant to financial statement audits. The size of the internal audit department, the internal auditors' knowledge of the local authority, and top management support of the internal auditors' work were the significant factors perceived by the internal and external auditors of local authorities in England as affecting the level of external auditors' reliance on internal auditors' work. This study contributes to the extant literature by providing evidence using primary data from English and Malaysian local authorities. From a practical perspective this study could provide feedback to the relevant government departments and audit bodies on the need for policies that support and enhance the relationship between internal and external auditors.