Prairie View A & M University

Department of Accounting, Finance and MIS

College of Business
ACCT 5113: Advanced Auditing Spring 2011

Name: Uzma Siddiqui

The Role of the Internal Audit Function in the Disclosure of Material Weaknesses Shu Lin,
Mina Pizzini, Mark Vargus, Indranil R Bardhan. The Accounting Review. Sarasota: Jan 2011.
Vol. 86, Iss. 1; 287-323

INTRODUCTION

The above article investigates associations between material weakness (MW) disclosures and various
internal audit function (IAF) attributes and activities. The focus in this study is to examine the
relationship between IAF effectiveness and the incidence of material weaknesses, a linkage that has not
been empirically tested in the prior literature. This study identifies certificate, experience education and
training as the key elements in the discussion. According to the writers, competence as the percentage
of IA staff that have professional certifications which is the percentage of professional staff members
with one or more audit certifications; experience, which is the average numbers of years that internal
audit staff members have worked in internal auditing; Education, which captures the average number of
years of education for internal audit staff members and the fourth variable is Training which is the
average annual hours of training per staff member. Among four proxies for IAF competence, only
Education is significantly associated with the probability that a firm reports a material weakness.

STRENGTH

• Scope: The scope of this paper covers 55 references, but they conduct the tests using data on
214 firms that provided detailed responses to the Institute of Internal Auditors IIA’s Global
Auditing Information Network GAIN survey for 2003–2004. The references covered the
research from 2000 to 2010 on the related topic. This scope allows the reader to confidently
compare the different cause and effects of the determinants listed and allows for a clearer
picture. The writers carefully consider the influence of various aspects of IAF quality on the
existence, detection, and disclosure of MWs in developing the hypotheses.

• Arrangement: The article was well written with only four important principal parts which help
the reader to easily understand the reason of the article. The writers organized and structured the
article in a way that reader can understand and illustrate each table related with the literature.

• Method: the writers of this article use the methods of coordination which means they used
multiple methods per firm are permitted and show them in the chart that summarizes
hypothesized associations between the likelihood of a MW disclosure and variables measuring
IAF attributes.

• Relevance: The article provides background information and reviews relevant to literature. The
writers discuss the experimental setting from the references; the findings are relevant for
research that examines the relationship between material weaknesses (MW) disclosures and
 various internal audit functions (IAF) attributes and activities. This research is very much
relevant to the real world problems and especially the management can easily find through this
article that what reasons are behind the problems they are facing and how to improve the
financial reporting process and restore investor's confidence in the financial market.

• Philosophical framework: The writers have identified four main issues and they have done a
good job on relating those issues to the real world practices. This study makes several important
contributions to the literature, prior studies focused on how measures of IAF quality affect the
quality of internal auditor's decisions, without linking IAF quality to an actual outcomes
measure of control effectiveness, such as a material weakness. The literature provides evidence
that external auditors are more to detect material weaknesses when they coordinate their effort
with the IAF. I agree with the writers that no other study has examined that IAF involvement in
external audit increases the effectiveness of external audits.

WEAKNESSES

• Redundancy: I feel that this article has so many repeated information; the reader will feel that
he/ she have already read the text under different heading. The article consists of 48 pages but
looks like it is using the same text again and again which can lose reader's interest.

• Limitation: this study is subject to several limitations, most notably the small size and
homogeneity of their sample, combined with the large number of control variables, lower the
power of their statistical tests. Accordingly they cannot determine whether the lack of
statistically significant hypothesized relations between IAF attributions is due to low statistical
power or competing effects on the existence and detection of control problems. The stepwise
tests mitigate this problem but do not eliminate it. The researcher's ability to generalize findings
to firms limits their research because some firms did not respond to the Global Auditing
Information Network GAIN survey.

• Illustrations: the writers could improve the article by having more illustrations, graphs and more
statistical tables. If there are graphs for each table than it could be much easier for reader to
understand and to have a clearer picture. Some of the tables were not even understandable to
average reader.

RECOMMENDATIONS

The article is written in detailed for specific group of audience such as auditors, management and CPA
students; however it focuses the main issues of the real world. It is well organized literature but the
authors needs to elaborate tables and statistical values with graphs and visual aids instead of repeating
text over and over. My recommendation for this article is that, it could give the better explanation to
ordinary readers if writers explain with the real life examples.
The arguments presented in this article are extremely important and relevant to today’s business
environment, the references used in this article were well researched but there were no examples in this
article to help explaining the issues. So writers should insert some relevant example in order to make
this article more interesting to the reader.
The article is little bit lengthy, although it explains all aspects thoroughly but now a days, not business
people have time to read that much lengthy article. If the writers shorten this article then management
can easily read and find out solution to their problems.