Internal Audit Department Characteristics/Activities and Audit Fees: Some Evidence from Hong Kong Firms

Ferdinand Gul
The Hong Kong Polytechnic University
Hong Kong

Sandra Ho
The Hong Kong Polytechnic University
Hong Kong

Marion Hutchinson
Queensland University of Technology
Australia

Abstract:
This study provides preliminary support for the notion that internal audit functions assist in reducing external audit effort and fees. Using data on internal audit characteristics/activities from survey respondents of 53 Hong Kong companies and audit fee model data from their annual reports, the results of this study demonstrate the following. First, firms with a relatively larger internal audit department incur lower external audit fees. Second, lower external audit fees are associated with more internal audit effort spent on activities relating to financial statements, systems development and maintenance, operating efficiency and effectiveness, and fraud investigations. Finally, free access to internal auditors’ working papers reduces external auditors’ fees.