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Reliance on
External auditors reliance internal auditors
on internal auditors and its impact
on audit fees
509
An empirical investigation
Received 15 September 2008
Mishiel Said Suwaidan Revised 9 September 2009
Department of Accounting, Yarmouk University, Irbid, Jordan, and Accepted 14 February 2010

Amer Qasim
Department of Accounting, Faculty of Economics and Administrative Sciences,
Al-Zaytoonah Private University of Jordan, Amman, Jordan

Abstract
Purpose The purpose of this paper is to investigate the perceptions of a sample of Jordanian external
auditors for the importance given by them to a number of factors which may influence their reliance on
an internal auditor during their external audit. The paper also examines the relationship, if any, between
the degree of reliance on the internal and external audit fees.
Design/methodology/approach A sample of 100 external auditors is employed to investigate the
perceptions of external auditors as to the importance given by them to a number of factors which may
influence their reliance on an internal auditor during their external audit. Also, a cross-sectional multiple
regression analysis is conducted to examine the impact of this reliance on audit fees.
Findings The results of the paper indicate that external auditors in Jordan consider the objectivity,
competence and work performance of internal auditors as very important factors affecting their reliance
decisions. It is found that objectivity had the highest mean score (4.353), followed by competence
(4.188) and work performance (4.156). The results of the multiple regression analysis indicated that the
size of the audited company is the most important variable in explaining the variation in audit fees paid
by the sample companies. As for the reliance variable, it is found insignificant.
Originality/value It is believed that no previous research has examined these issues on the basis of
Jordanian data. Thus, the current paper aims to extend the literature on these topics on a developing
country with different characteristics. The results of this paper will be of concern to companies in their
attempt to reduce external audit fees. Audit firms may also benefit from the paper in terms of reducing
the efforts of external auditors due to the understanding and cooperation between external and internal
auditors.
Keywords Developing countries, Jordan, External auditing, Auditors fees
Paper type Research paper

1. Introduction
Evidence gathered from empirical studies indicates an increasing trend in internal audit
providing support for external audit (Felix et al., 2001; Haron et al., 2004). Advocates
for higher levels of internal audit participation and contribution to the external audit
argue that this participation is beneficial to both external and internal auditors. On the Managerial Auditing Journal
Vol. 25 No. 6, 2010
one hand, external auditors may utilize the experience of the internal auditors to reduce pp. 509-525
the duplication of work and, in effect, the cost of the external audit. In addition, internal q Emerald Group Publishing Limited
0268-6902
auditors can help external auditors understand the firms internal control system DOI 10.1108/02686901011054845
MAJ and the level of compliance with it. On the other hand, internal auditors may benefit from
25,6 the expertise of external auditors in areas that the internal audit department needs.
Internal auditors may also benefit from exposure to different audit techniques employed
by the external auditors (Reckers and Lee, 1997; Haron et al., 2004; Schneider, 2009).
This contribution by internal audit also has the potential for the reduction of external
audit fees (Wallace, 1984; Stein et al., 1994; Felix et al., 2001; Al-Twaijry et al., 2004).
510 While client firms are interested in getting the maximum benefits from their internal
audit investments, they are continually looking for ways to control external audit fees.
For example, Felix et al. (2001) found that the extent to which internal audit contributes
to external audit is a significant variable in determining external audit fees. This
suggests that client firms have financial incentives to encourage external auditors to rely
on internal auditors in the conduct of their external audit.
However, the decision external auditors take regarding the degree to which they may
rely on the internal audit work during an audit engagement should be supported by
a full understanding of the strength of their clients internal audit function. This kind of
understanding is usually achieved during the test of controls phase in which external
auditors evaluate their clients internal controls to ensure that they are capable of
preventing and detecting material misstatement occurring. In this regard, the issuance
of professional auditing standards has attempted to provide guidance for external
auditors on the proper use of the internal audit during an external audit. In 1975,
Statement on Auditing Standards (SAS) 9 was the first professional standard to deal
with the external-internal auditor relationship. SAS 9 required external auditors to
evaluate the internal auditors objectivity, competence and work performance before
determining the extent to which they may rely on the work of internal auditors.
However, SAS 9 was criticized on the ground that it did not provide specific guidance for
the accomplishment of this evaluation, leaving the degree of reliance up to the judgment
of the individual auditors (Reckers and Lee, 1997). Thus, SAS 65 was issued in 1991 to
clarify the working relationship that must exist between the external and internal
auditors, and to provide increased guidance for external auditors on how to evaluate and
test the internal auditors objectivity, competence and work performance (Reinstein et al.,
1994).
The objectives of this study are twofold:
(1) to study the perceptions of a sample of Jordanian external auditors as to the
importance given by them to a number of factors which may influence their
reliance on internal auditor during their external audit; and
(2) to investigate the relationship, if any, between the degree of reliance on the
internal and external audit fees.

This study contributes to the existing literature in several ways. First, we are not aware
of any prior studies that test the reliance of external auditors on the work of internal
auditors and the impact of this reliance on external audit fees in Jordan. In addition,
whilst previous research in this area provides evidence from sophisticated capital
market environments (Schneider, 1984; Gramling, 1999; Felix et al., 2001;
Goodwin-Stewart and Kent, 2006; Munro and Stewart, 2009), only a limited number of
studies have been conducted in countries where capital markets are less developed and
where corporate governance mechanisms are still evolving (Al-Twaijry et al., 2004).
Thus, we extend prior research by examining these issues in the context of a developing
country with an emerging capital market. Second, the results of previous studies Reliance on
regarding the impact of internal audit contribution on audit fees are inconclusive. For internal auditors
instance, Stein et al. (1994) found no significant relationship between internal audit
contribution and external audit fees, while Felix et al. (2001) found this variable to be a
significant determinant of external audit fees. Goodwin-Stewart and Kent (2006) found
that the investment in internal auditing, as measured by the number of internal auditors
on staff, is associated with higher external audit fees. Therefore, the issue may be more 511
complex than anticipated and provides avenues for future research. Finally, the results
of the study have potential practical implications for external and internal auditors, and
companies that employ internal auditors to understand factors influencing external
auditors reliance decisions, and possibly external audit fees. For example, external
auditors may benefit from the study in terms of reducing their efforts due to better
understanding and cooperation between them and internal auditors.
The remainder of the study is organized as follows. Section 2 provides a literature
review of the empirical studies relevant to the current study. Section 3 discusses the
methodology employed by the study to achieve its objectives. Section 4 reports and
discusses the results of the study, Section 5 considers limitations of the study and
Section 6 summarizes the study and presents its main conclusions.

2. Literature review
A number of studies have been undertaken to investigate the contribution of internal
auditors in the external audit work and/or the relative importance of factors affecting
external auditors evaluation of internal auditors strength. Brown (1983) examined the
factors that might be considered important by external auditors in order to evaluate
the reliability of the internal audit function. Questionnaires were distributed to
101 external auditors representing four auditing firms of the Big Eight firms in the
USA. The results of the study indicated that two factors dominated the auditors
judgments of internal audit work. These factors are:
(1) independence of internal auditor; and
(2) satisfaction with the internal audit function during previous audits
(work performance).

As for the competence factor, it was found to be the least important factor.
Schneider (1984) addressed the issue of how auditors evaluate the strength of the
internal audit function. Based on SAS 9, three factors were investigated. These factors
are internal auditors competence, objectivity and work performance. In order to achieve
the objective of the study, a questionnaire was designed and distributed to Certified
Public Accountant (CPA) firms in the State of Ohio, USA. The results of the study
indicated that the work performance was the most important factor followed by
competence and objectivity.
Wallace (1984) investigated the relationship between a companys expenditures on
internal auditing and external audit fees. Toward this end, a regression analysis was
undertaken for 31 companies for the year 1981. The regression contains variables that
are believed to have a relationship with external audit fees such as operating revenues,
net income, total assets, number of subsidiaries and the expenditures on the internal
auditing department. The study found that there is a significant negative association
between expenditures on internal auditing department and external audit fees.
MAJ In another study, Schneider (1985) investigated the relative importance of the three
25,6 factors addressed by SAS 9 (competence, work performance and objectivity) as
perceived by external auditors. Twenty Big Eight CPA managers and supervisors
were asked to evaluate the strength of 16 profiles of existing companies. Findings of the
study showed that competence and work performance were perceived as almost equally
important in evaluating internal audit strength. It was also found that external auditors
512 rely on internal audit in order to reduce their external audit work.
Margheim (1986) examined whether auditors actually adjust the nature and extent of
audit procedures due to reliance on internal auditors. Thousand cases were mailed to
CPA auditors working for the Big Eight firms. The results of the study indicated that
external auditors intend to reduce planned audit hours if the internal auditors have a
high level of competence-work performance. In addition, the study found that external
auditors did not alter their tests in response to changes in the degree of internal auditor
objectivity.
Stein et al. (1994) examined the impact of internal audit contribution, among other
variables, on external audit fees. Contrary to expectations, this variable was not a
significant determinant of external audit fees.
In Australia, Gerrard et al. (1994) studied the effect of the internal audit function
and auditee industry differences on external audit fees. Data were gathered from
300 publicly listed companies in Australia during the 1980s. A linear regression was
used to model audit fees. Results of the study indicated that size, complexity of audited
companies and industry differences are significant variables in explaining variation in
audit fees. Furthermore, the study found that internal audit function had no significant
relationship with audit fees.
Gramling (1999) investigated the influence of fee pressure on external auditors
reliance on internal audit work. A total of 188 cases were distributed to audit managers
of one Big Five firm. Each case contains a set of information cues describing the
quality attributes of the internal audit department. The results of the study indicated
that audit managers encountering clients who impose a high level of fee pressure, rely on
the internal audit work to a greater extent than do audit managers encountering clients
who emphasize a concern for audit quality.
Felix et al. (2001) examined the impact of the contribution of internal auditors on the
external audit work in respect of audit fees and the factors that influence this
contribution. Two questionnaires were designed in order to achieve the objectives of the
study. The first was sent to audited companies, while the other was sent to external
auditors. The results of the study indicated that the contribution of internal audit
in external audit work is a significant determinant of audit fees, with a negative
relationship. It was also found that availability and quality of internal audit are
significant factors in determining the level of contribution made by internal audit to the
external audit work.
Krishnamoorthy (2002) investigated how the three factors (objectivity, competence
and work performance of internal auditors) addressed by SAS 9 and 65 interact in
determining the strength of internal auditing function. The study employed analytical
methods based on Bayesian probability to model external auditors evaluation of the
internal audit function. The results of the study revealed that the importance of the three
factors varied with the type of evidence (convergent or divergent) observed and is
contingent on the interrelationships among the three factors.
 Al-Twaijry et al. (2004) examined the level of coordination between directors Reliance on
of internal audit departments and partners and managers of external audit firms in internal auditors
Saudi Arabia. Using questionnaires and interviews, the results of the study indicated
that external auditors are not satisfied with the current practice of internal auditing, and
expressed concern about the independence, scope of work and the small size of many
internal audit departments. On the other hand, internal auditors described the level of
cooperation between internal and external auditors as limited. The results also showed 513
that the extent to which external auditors rely on the work of the internal auditor varied
with the quality of internal audit department. Finally, external auditors considered
objectivity, competence and work experience of internal auditors as important factors
affecting their reliance decision.
Felix et al. (2005) investigated how the provision of significant non-audit services and
client pressure to use the work of internal audit influence external auditors use of
internal auditors work. The findings of the study revealed that when significant
non-audit services are provided, client pressure significantly increases the extent of
external auditor reliance. On the other hand, when significant non-audit services are not
provided to a client, the internal audit quality and the level of internal-external auditor
coordination positively affect external auditors reliance decision.
Gramling and Vandervelde (2006) used group affiliation theory to suggest that
external auditors may be biased in their evaluations of internal audit quality when the
service is performed by another public accounting firm. They conducted an
experimental study with both internal and external auditors and found no difference
in either groups assessments of competence, work performance and overall quality of
work based on the sourcing arrangement. However, the external auditor respondents
assessed internal audit objectivity to be higher when the provider was another
accounting firm. This finding contrasted with the internal auditor respondents who
assessed objectivity to be higher when internal audit was provided in-house.
Goodwin-Stewart and Kent (2006) found that the investment in internal auditing is
associated with higher external audit fees. This result suggests that firms that engage
in greater internal monitoring through the use of internal audit also demand higher
quality external auditing (Goodwin-Stewart and Kent, 2006, p. 388).
Glover et al. (2008) examined the effect of sourcing arrangements on the external
auditors reliance decision in the presence of varying levels of inherent risk and task
objectivity. Based on an experimental case which was completed by 127 external
auditors, their results indicated that external auditors are about equally likely to rely on
in-house vs outsourced internal auditors work when inherent risk is low, but are
significantly more likely to rely on the work of outsourced rather than in-house internal
auditors when inherent risk is high. Furthermore, they found that when inherent risk is
high, external auditors rely more on work performed by internal auditors for objective
tasks than subjective tasks but not when inherent risk is low.
In a more recent study, Munro and Stewart (2009) investigated the impact of internal
audit sourcing arrangement and internal audits consulting on external auditors
reliance on the work of internal audit. Based on an experimental design, the results of the
study indicated that external auditors are more likely to use internal audit to evaluate
internal financial control than for substantive testing of account balances. An exception
is that external auditors make greater use of internal auditors as assistants for
substantive testing when internal audit is provided in-house.
MAJ 3. Research design and methodology
25,6 As mentioned earlier in this paper, the objectives of the study are twofold. The first
objective investigates the perceptions of a sample of external auditors as to the
importance given by them to a number of factors which may influence their reliance on
internal auditor during their external audit. This is done through a questionnaire
distributed to a sample of external auditors (discussed shortly). The second objective
514 examines the relationship between the degree of external auditors reliance on internal
auditors and audit fees. This is done by conducting a cross-sectional multiple regression
analysis. The following sections discuss the methodology employed by the study to
achieve these objectives.

The questionnaire
A questionnaire is used to investigate the perception of external auditors as for the
importance given by them to a number of factors that are expected to affect their reliance
on internal auditors in the conduct of their external audit work. Toward this end, an
extensive investigation of the literature relevant to the current study was undertaken
(Brown, 1983; Schneider, 1985; Margheim, 1986; Reckers and Lee, 1997; Felix et al., 2001;
Al-Twaijry et al., 2004). This preliminary search produced a list of factors that are
believed to represent the strength of internal auditing. These factors are also based on
competence, objectivity and work performance of internal auditor identified by SAS 65
as factors reflecting internal audit strength. In order to ensure the suitability of the
questionnaire in terms of wording, factors included and coverage of topics, the
questionnaire was reviewed and discussed with four external auditors. Consequently,
their notes and remarks were taken into consideration in the final version of the
questionnaire.
The questionnaire is divided into three parts. The first part is designed to obtain
information about the respondents of the questionnaire (e.g. academic qualification,
years of experience in external auditing). The second part consists of 19 factors, which
are believed to affect external auditors reliance on internal auditors in the conduct of
their external audit work. A five-point Likert scale was used to indicate the relative
importance of each item. The scale ranges from very important to not important at
all. The final part of the questionnaire was designed to find out the views of external
auditors concerning the relationship between their reliance on internal auditors and
audit fees.

Sample of external auditors

Hundred copies of the questionnaire were distributed to external auditors by the
researchers. For a better response rate, the external auditor was given one week to
complete the questionnaire. In addition, two days before the end of the given week,
a telephone call to the auditor, as a reminder, was made. Out of the 100 questionnaires,
76 questionnaires were returned of which 69 were usable and seven were excluded due to
missed data. This represents a 69 percent response rate.

External auditors reliance on internal auditor and audit fees

The regression model. To examine the relationship between the reliance of external
auditor on internal auditor and audit fees, the following multiple regression model was
developed:
 FEES b0 b1 TA b2 CAP b3 DR b4 INV=TA b5 AR=TA b6 REL e Reliance on
internal auditors
where:
bi the regression coefficient, i 0, 1 . . . , 6.
FEES external audit fees paid by a client company.
515
TA total assets.
CAP paid in capital.
DR debt ratio computed as total liabilities divided by total assets.
INV/TA inventory to total assets.
AR/TA account receivables to total assets.
REL the degree of external auditor reliance on internal auditor.
e error term.

Variables used in the model and their measurements

Dependent variable. The dependent variable used by the study is the external audit fees
paid by the audited company to the external auditor. Audit fees for each company
included in the sample (discussed shortly) were taken from the annual report of the
audited company for 2004.
Experimental variable. The experimental variable of the study is the reliance of the
external auditor on internal auditor in the conduct of his/her external audit. Consistent
with previous studies, this variable was measured for external auditors (Felix et al.,
2001). This was done by conducting interviews with external auditors. The external
auditor was asked to determine as a percentage the degree to which he or she relies on
internal auditors work in the conduct of his/her external audit work for a specific
company (who they actually audited). Therefore, the reliance was expressed as a
percentage, which could range from 0 to 100 percent, where 0 percent indicates that the
internal auditors did not perform any work that was used by the external auditors
during the external audit, and 100 percent indicates that the internal auditors performed
the entire audit.
Control variables. Previous studies provide evidence consistent with the notion that
audit fees vary from one company to another depending on certain company variables
(characteristics). For instance, size of the audited company was hypothesized and found
by several studies to be positively and significantly associated with audit fees (Simunic,
1980; Taylor and Baker, 1981; Gerrard et al., 1994; Felix et al., 2001; McMeeking et al.,
2006). Similarly, the complexity of audited firm and its level of risk were also
hypothesized and found by some studies to be positively and significantly associated
with audit fees (Gerrard et al., 1994; Butterworth and Houghton, 1995; Abu-Nassar, 1999;
Felix et al., 2001). To control the impact of these variables on audit fees, they are
incorporated in the current regression model.
Consistent with previous studies in this regard, size of the audited company was
measured by total assets and paid in capital. Complexity of the audited company
was measured by inventory to total assets and receivables to total assets. Finally, the
risk of the audited company was measured by the ratio of total liabilities to total assets
(the debt ratio).
MAJ Sample of companies
25,6 To be included in the sample, the company must meet certain conditions. First, the
companys annual report for the year 2004 must be available. Second, the company must
have disclosed audit fees in its annual report. Third, the external auditor of the company
must be available and willing to be a part of an interview with the researchers. Finally,
the company must not belong to the banking sector since the capital structure and some
516 ratios for banks are different from those of other sectors (industrial, service and
insurance). These conditions produced a sample of 41 companies for which complete
datasets were available.

4. Results
Characteristics of respondents
As mentioned earlier in the study, the first section of the questionnaire requires
demographic information about the respondents (external auditors). Table I provides a
summary of this information. As seen from the table, of the 69 external auditors who
responded to the questionnaire, 61 respondents or 88.4 percent hold a bachelor degree
and six respondents or 8.7 percent have a masters certificate. It can also be seen from the
table that the majority of responders (56.5 percent) have had experience in external
auditing for more than three years. As for the area of study, the overwhelming majority
of the respondents (88.4 percent) have an academic degree in accounting. In addition,
59.4 percent of the respondents work in auditing firms that have professional association
with international auditing firms.

Factors influencing external auditors reliance on internal auditors

Internal auditors objectivity. Eight factors were used to reflect the objectivity of an
internal auditor. Table II provides the results of the questionnaire concerning the level of
importance given by external auditors to each factor. As can be seen from the table, the
overwhelming majority of the respondents consider factors such as the existence of a
mission statement that makes the responsibilities and objectives of the internal audit

Frequency %

Highest academic degree High school 0 0

Two-year diploma 1 1.4
Bachelor 61 88.4
Master 6 8.7
PhD 1 1.4
Years of experience in external auditing Less than three years 30 43.5
Three-six years 15 21.7
Seven-ten years 9 13
More than ten years 15 21.7
Field of study Accounting 61 88.4
Finance 1 1.4
Business administration 6 8.7
Table I. Public administration 0 0
Demographic distribution Economics 1 1.4
of the respondents Having an association with international auditing firm Yes 41 59.4
(n 69) No 28 40.6
 Very Not
important Important Moderately important Not important
Statement (%) (%) important (%) (%) at all (%) M SD

Existence of a mission statement that makes the responsibilities

and objectives of the internal audit department clear 62.3 30.4 7.2 0 0 4.55 0.631
Existence of a performance evaluation/incentive system that
encourage internal auditors to correct problems 24.6 50.7 20.3 4.3 0 3.956 0.794
Freedom given to internal auditors to access all parts of the
company 71 21.7 7.2 0 0 4.637 0.617
The internal audit department is directly connected to a high
management level 63.8 23.2 11.6 1.4 0 4.492 0.759
Freedom given to internal auditors to communicate with
management 53.6 33.3 11.6 1.4 0 4.391 0.752
The independence of the internal audit department from other
departments in the organization 60.9 24.6 14.5 0 0 4.464 0.739
Freedom given to internal auditors to implement the necessary
internal audit procedures 36.2 52.2 11.6 0 0 4.246 0.651
Existence of an audit committee and the ease of accessing it by
internal auditors without the presence of management 34.8 42 20.3 2.9 0 4.087 0.817
internal auditors

auditor
objectivity on internal
questionnaire concerning
Results of the
Reliance on

517

Table II.
MAJ department clear, the existence of an audit committee, and the independence of internal
25,6 auditor as very important or important in influencing their reliance decision.
In addition, seven out of the eight factors included in this group received an average
response rate greater than four with low standard deviations (SDs), suggesting that
there is a high level of agreement among the respondents concerning the importance of
these factors.
518 Internal auditors competence. Six factors were used to reflect the competence of an
internal auditor. Table III presents the results of the questionnaire concerning the level of
importance given to each factor by external auditors. As seen from the table, 78.3 percent
of the respondents consider having a professional certificate by the internal auditor as
very important and important factor affecting their reliance decision. In addition, the
mean response for this factor is 4.14 with a SD of 0.75, suggesting that there is a high
level of agreement among the respondents about the importance of this factor in the
reliance decision. It can also be seen from the table that the overwhelming majority
(94.2 percent) of the sample of external auditors considers the experience of internal
auditor in the field of internal auditing as very important or important factor in
influencing their reliance decision. Almost similar results are reported for the factors
of internal auditors knowledge of internal auditing standards and procedures, internal
auditor educational levels and background, and adequate continuing professional
development. Surprisingly, the final factor (salaries earned by internal auditors)
received the lowest importance by the respondents. In this regard, it can be argued that if
a company seeks qualified internal auditors with relevant experience in internal
auditing, it must pay attractive salaries.
The above results suggest that external auditors in Jordan highly value the
competence of internal auditors in the decision they make concerning their reliance on
internal auditors in the conduct of their external audit work. These results also implicitly
suggest that it is quite important for an external auditor to have information about the
competent of internal audit staff of a particular company in order to decide the extent to
which he/she relies on them in the conduct of his/her audit work.
Internal auditors work performance. Five factors were used to capture the internal
auditors work performance. Table IV presents the results of the questionnaire
concerning the level of importance given to each factor by external auditors. As seen
from the table, the level of importance given by external auditors to these factors ranges
from 75.4 percent for the use of computerized system by internal auditors, to 88.4 percent
for the existence of an efficient filing system used by the internal auditors. The
importance of these factors can also be seen if we look at the average response received
for each factor, which range from 3.98 to 4.3. These results suggest that the external
auditors consider the internal auditors work quality as reflected in the five factors, to be
an important variable impacting their reliance decision.
To sum up, the results of the questionnaire indicate that external auditors highly
value the competence, objectivity and work quality of internal auditor in their reliance
decision. Finally, by comparing the average means of the statements of each dimension
(objectivity, competence and work performance), it is found that the objectivity
dimension had the highest mean score of 4.353, followed by the competence with 4.188
and the work quality with 4.156.
Impact of auditor reliance on audit fees as perceived by external auditors. As
mentioned earlier, the third part of the questionnaire was designed to find out whether
 Very Not
important Important Moderately important Not important
Statement (%) (%) important (%) (%) at all (%) M SD

Internal auditors professional certification (e.g. CPA, CMA, CIA) 37.7 40.6 21.7 0 0 4.14 0.75
Internal auditors years of experience in internal auditing 50.7 43.5 5.8 0 0 4.44 0.61
Internal auditors knowledge of internal auditing standards and
procedures 44.9 44.9 8.7 0 1.4 4.31 0.76
Internal auditors educational levels/backgrounds (this provides
good quantitative and communication skills) 52.2 37.7 8.7 1.4 0 4.40 0.71
Adequate continuing professional development (knowledge of
new trends and techniques) 55.1 30.4 13 1.4 0 4.39 0.77
Salary levels earned by internal auditors are competitive 13 37.7 33.3 13 2.9 3.449 0.978
internal auditors

auditor
competence of internal
questionnaire concerning
Results of the
Reliance on

Table III.
519
 25,6

520
MAJ

Table IV.
Results of the

internal auditor
the work performance of
questionnaire concerning
Very Not
important Important Moderately important Not important
Statement (%) (%) important (%) (%) at all (%) M SD

The use of computerized accounting information system by the

internal audit department 23.2 52.2 24.6 0 0 3.98 0.69
Existence of an efficient documentation system by the internal
audit department that meet acceptable standards 31.9 56.5 11.6 0 0 4.2 0.63
Adequacy of internal audit department staffing to support the
needed work levels 29 55.1 15.9 0 0 4.1 0.66
Existence of an annual audit plan that covers various areas
of the firm 46.4 39.1 13 1.4 0 4.3 0.75
Internal auditors checking other internal controls 44.9 39.1 11.6 4.3 0 4.2 0.82
there is a relationship between the extent to which external auditors rely on internal Reliance on
auditors and audit fees (as perceived by external auditors). Surprisingly, the
overwhelming majority of the respondents (94 percent or 65 out of 69) believe that
internal auditors
there is no relationship between the reliance decision made by them and external audit
fees. A possible explanation for this result could be that external auditors believe that the
level of external audit fees paid is not enough to compensate them for the efforts they
exert to do the job. Thus, regardless of the extent to which they (external auditors) rely 521
on internal auditors, the audit fees received is not a subject for any decline or discount.
This explanation is consistent with the results of a study by Abu-Nassar (1999) which
indicated that Jordanian external auditors are not satisfied with the current level of
audit fees.

Results of the regression analysis

The second objective of the study is to empirically examine whether there is a
relationship between the extent of external auditors reliance and actual audit fees paid.
As discussed earlier, the extent of reliance and other independent variables were
incorporated in a regression model. Table V shows the descriptive statistics of the
variables included in the regression analysis. As seen from the table, the extent to which
the external auditors of the sample companies rely on the work of internal audit range
from 0 to 20 percent with a mean of 10.1 percent. This suggests that, on average, the
internal auditors perform about 10 percent of the work used by the external auditors
during the external audit.
Before conducting the analysis, the regression model was checked for the presence of
multicollinearity problem between the independent variables. This happens if two or
more independent variables are highly correlated with each other, which makes it
difficult to determine the individual contribution of each variable to the prediction of the
dependent variable (Barrow, 1988). Anderson et al. (1993) consider an absolute
correlation coefficient high if it exceeds 0.7 for any two of the independent variables.
To assess the extent of this problem with respect to the current regression model,
a correlation matrix incorporating all the independent variables was run (Table VI).
As seen from the table, a high level of correlation exists between the size variables
(TA and capital). As a result, two regression models are used; the first model includes
total assets as a measure of size, while the second model includes capital as a measure
of size.
Table VII (Model 1) shows the results of regressing the independent variables on the
dependent variable, external audit fees. As seen from the table, the regression model is

Minimum Maximum Mean SD

FEES 1,000 18,000 4,465.85 3,284

TA 987,179 348,923,339 24,166,858 54,665,211.2
CAP 800,000 75,000,000 8,448,213 12,280,398
DR (%) 0.01 0.86 0.3521 0.2113
INVTA (%) 0.00 0.28 0.0579 0.08402
ARTA (%) 0.00 0.48 0.1377 0.1314
REL (%) 0.00 0.2 0.1018 0.06134
Table V.
Note: n 41 Descriptive statistics
MAJ highly significant (F-value 8.386, P 0.000) with an adjusted R 2 of 0.526, which
means that 52 percent of the variations in external audit fees can be explained by the five
25,6 independent variables included in the regression model. As for the individual variables,
the only variable, which was found significant at the 1 percent level, is the size variable
as measured by total assets. The coefficient for this variable is positive indicating a
positive relationship between external audit fees and total assets of the audited
522 company. As for the reliance variable, it was found insignificant, suggesting that there is
no relationship between the reliance of external auditor on internal auditor and external
audit fees. As for other independent variables in the model (AR/TA, INV/TA and DR),
they were also found insignificant.
As for Model 2 which incorporates capital as a measure of size, the model is highly
significant (F-value 7.013, P 0.000) with an adjusted R 2 of 0.526. It was also found
that the only significant variable in this model is the size of the audited company as
measured by capital. The coefficient of this variable is positive. Again, the experimental
variable reliance was found insignificant.

5. Limitations of the study

Similar to other studies, this study has its limitations. The most important limitation is
the limited number of companies (observations) used in the multiple regression analysis.
As discussed earlier in the paper, this is due to both the limited number of companies
listed on the Amman Financial Market and to the limited number of auditors who were
willing to take part in an interview. Therefore, 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.

6. Summary and conclusions

The objectives of this study were:
.
to investigate the perceptions of a sample of Jordanian external auditors to the
importance given by them to a number of factors which may influence their
reliance on internal auditor during their external audit; and
.
to examine the relationship, if any, between the degree of reliance on the internal
audit and external audit fees.
To accomplish these objectives, a questionnaire was designed and distributed to a
sample of Jordanian external auditors. The results of the questionnaire indicate that
external auditors in Jordan consider the objectivity, competence, and work performance

Variables TA CAP DR IN/VTA AR/TA REL

TA 1.000
CAP 0.893 * 1.000
DR 0.216 0.087 1.000
IN/VTA 0.257 0.241 0.13 1.000
AR/TA 0.012 0.064 0.135 0.22 1.000
REL 0.016 0.026 0.298 0.103 0.113 1.000
Table VI.
Correlation matrix Note: Significant at the 0.01 level (two tailed)
 b1 TA b2 CAP b3 DR b4 IN/VTA b5 AR/TA b6 REL F-value Adj. R 2

Model 1 0.000041 * (5.967) 1,671.49 (0.910) 2557.06 ( 0.12) 3,168.36 (1.117) 4,070.505 (1.1084) 8.386 * 0.526
Model 2 0.000172 * (5.539) 3122.23 (1.646) 888.00 ( 0.18) 3,844.09 (1.286) 4,873.509 (1.235) 7.013 * 0.52
Notes: *Significant at 1 percent; t-values are in parenthesis
internal auditors

Summary results of the

regression models for
Reliance on

audit fees
Table VII.
523
MAJ of internal auditors as very important and important factors affecting their reliance
25,6 decision. It was found that objectivity had the highest mean score (4.353), followed by
competence (4.188) and work performance (4.156). In addition, it was found that the
overwhelming majority of external auditors (94 percent) believe that there is no
relationship between the reliance decision and external audit fees. A possible
explanation for this result could be that the external auditors consider that the current
524 level of audit fees is not enough to compensate the efforts they put forth to do the job
and/or the extent to which they rely on internal audit is not that significant to justify any
possible reduction in the external audit fees.
As for the second objective, a multiple regression analysis incorporating the degree
of reliance, among other independent variables, was undertaken. The results of the
regression indicated that size of the audited company (whether measured by total assets
or capital) is the most important variable in explaining variation in audit fees paid by the
sample companies. As for the reliance variable, it was found insignificant, suggesting
that there is no relationship between the reliance of external auditor on internal auditor
and external audit fees.

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Corresponding author
Mishiel Said Suwaidan can be contacted at: msuwaidan@yu.edu.jo

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