THE RELATIONSHIP BETWEEN INTERNAL AUDIT AND EXTERNAL AUDIT FEES IN AUSTRALIA: A REPLICATION STUDY

Harjinder Singh
The University of Western Australia
Australia

Rick Newby
The University of Western Australia
Australia

Abstract:
This examines studies the relationship between a firm’s internal audit function and its external audit fees, building on a previous study by Goodwin-Stewart and Kent (2006, which used data from 2000). Using newly collected 2005 data from publicly available annual reports, our findings support Goodwin-Stewart and Kent’s (2006) result that the existence of an internal audit function in a firm has a significantly positive relationship with audit fees. In fact, the strength of this relationship has increased since 2000, suggesting that the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations 2003 (ASX Corporate Governance Council, 2003) are effective in reflecting internal audit’s “new” interactive role with external audit in strengthening firms overall monitoring/control environment. These findings are robust to the use of different control variables for firm size, complexity and risk previously applied in the internal audit literature. We conclude that the Goodwin-Stewart and Kent (2006) result is reproducible in different conditions, enhancing the credibility of the belief in the broader risk management role that the internal audit function now performs in Australia’s largest public firms.