The Influence of External Auditor's Working Style, Communication Barriers and Enterprise Risk Management toward Reliance on Internal Auditor's Work

The extent to which external auditors rely on the work of internal auditors is an important judgment. Audit methodology reform of Business Risk Audit (BRA) and Section 404 of the Sarbanes-Oxley Act (SOX) requires external auditors to give an opinion that there is a comprehensive, efficient and effective control framework clearly documented and consistently applied to prevent material misstatement in financial statements. Recently, the Public Company Accounting Oversight Board (PCAOB) has recommended that external auditors “rely more on the work of others” to reduce the greater-than-expected costs associated with compliance with Section 404 of the SOX. External auditors’ reliance on internal auditors have been researched for almost three decades, but the main focus of many studies has been on objectivity, work performance and competence of the internal audit function. This current study is therefore different. Its main objective are to explore the effects of external auditors’ working styles, perceived communication barriers and moderating effects of client's risk management on the reliance of internal audit work. In order to obtain the necessary information and opinion, questionnaires were distributed to 250 audit firms in the Wilayah Persekutuan Malaysia and only 109 responses were received. The results showed that two factors, which are external audit working style and communication barriers, had a significant relationship with external audit reliance on the internal audit work. The relationship was found to be stronger with the moderating effect of clients’ enterprise risk management (ERM). In addition, consistent with expectations, auditors’ rank (manager versus senior) did influence the reliance judgment.