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Internal and External Auditing Relationship Effect on Financial Reporting in KSA

Internal and External Auditing Relationship Effect on Financial Reporting in KSA

Working Title:

The working title for our research thesis is “Internal and External Auditing Relationship Effect on Financial Reporting in KSA”. In this research, we are proposing to conduct detailed research regarding the relations of both, external and internal functions. We are conducting this research in the context of the workings in Kingdom of Saudi Arabia.

General Overview of Area:

Our research thesis is “Internal and External Auditing Relationship Effect on Financial Reporting in KSA”. In this project, we are proposing to conduct detailed research, which is relative to internal and external accounting functions on the different companies. We are conducting this research in the context of the workings in the Kingdom of Saudi Arabia. The function of internal audit is different from that of external audit. While these both functions need to work together and within the assurance framework, the need to have coordination is a requirement. Both functions should be considered as distinct, and separate, to get to its value and expertise. In the planning, this is necessary for auditors to contain the effective assessment.  Whenever they think that specific work in the field of the internal audit work is relevant to their external audit. Moreover, there is a need to integrate the internal audit to the external auditors to depict the accuracy.  However, there are some common problems in their relationship, which are quite important and can affect the financial reporting. For instance, this has been seen that the auditor lacks the control on the environment due to the insufficient involvement. Moreover, the lack of coordination often results in the duplication of efforts from both functions. Specifically, In the Kingdom of Saudi Arabia, the Internal Audit function is evident of being considered as a formality and not as a requirement of internal control. These all factors and effects of these factors on the financial reporting and internal control system will be thoroughly analyzed in this research paper.

Literature:

In this paper, we are going to analyze the relationship of the internal auditor with the external auditor and its effect on the financial reporting in the context of Saudi Arabia. The research before the examining of the relationship between these two functions is conducted, and various articles published in the past on topics related to this area are analyzed. In this context, the literature of the Saudi Arabia is very limited. Therefore, we have to dig deep and even use the data, which were published even before last ten years to get an idea about the previous researches being conducted in this area. There is not much research being done in this area in the context of Saudi Arabian companies. Therefore, we would more have to rely on our research methods and data for the analysis and conclusion of this research. Other than this, the literature that was available online in this specific area realized research on these categories. This is necessary to analysis the both, external and internal audit, as these audits interact with each other. This is a fact that external auditors in Saudi Arabia rely on the internal auditors, which is a big thing to consider. According to the United States research, the quality, competence and focus are the three main pillars to contain the successful audit. In addition, the evaluation process is vital to derive the pertinent outcomes (Suwaidan & Qasim, 2010).

As mentioned, the research revolves around the internal and external audit. Therefore, the decisions of internal auditors are aslo to be analyzed to see the impact on the external audit. Then, there is also evidence of research in the field of the reasons, which enables the coordination of the internal and external auditor. Moreover, another aspect of this relationship is the external audit fees, which are affected by the activities of the internal audit (Suwaidan & Qasim, 2010). In this research paper, the empirical investigation is being conducted by the researchers to investigate the perceptions of the number of factors and their importance given by an external auditor, which can increase their reliance on the internal auditors.  The relationship between the audit fees of both the internal and the external auditor is being analyzed in detail in this paper.

Furthermore, the research related to the impact of the internal functions along with the different financial statements of the company. The research report published in 2011 is the recent work, which shows cases the effect of the quality of different equipments or tools regarding the different financial statements. This is relative to the Saudi Arabian Exchange. The research is being conducted on the companies that are listed in the Saudi Arabia Exchange except for the banks. This research paper has conducted a thorough survey, and through interviews, it has concluded the lack of integration between internal audit and financial reporting can create immense hurdles for the Saudi companies. In recommendations, the researcher has recommended on increasing the initiatives to improve the quality of the internal audit function in Saudi companies. The study illustrates multiple insights regarding the financial reporting and audit along with many barriers.Saudi companies (Al-Shetwi, Ramadili, Chowdury, & Sori, 2011).

Other than this, the internal auditing practices in the Saudi Arabia are thoroughly researched in the context of the multicultural environment that most Saudi companies usually possess. The study focuses on the fact that there is a common perception that various cultures effect the management and interpersonal behavior affecting the performance in a job. The study finds out that the affect of the various cultures present in a company on the interpersonal behavior and management within the context of the job is very little or of no importance. However, the study depicted that there may be numbers other factors other than he cultural variations which may affect the internal audit function. The study also displayed the high standards and professionalism shown in the field of the internal audit within the context of Saudi Arabia (Woodworth & Said, 1996).

These all research journals, their literature used, their research methods employed, and their ultimate findings have been assessed. Moreover, these will be used in our research for analyzing the financial reports, and strategic considerations of both, internal and external audit.  

Key Research Questions:

  1. What is the perception of the internal audit function of the External Auditors in the Saudi Arabia
  2. What is the extent of the integration regarding the external and internal auditors in Saudi Arabian companies?
  3. What are the factors, which affect the decisions of auditors, which compel them to rely to rely on internal auditors?

These research questions are the key questions, which would once answer, deduce the relationship of financial reporting and effective audit considerations in Saudi Arabia.

Methodology:

For researching the results of the three main research questions mentioned above, the methodology, which would be used, is the use of questionnaire and interview questions. The data collection would be done through these methods. The interview research method, as well as the questionnaire research method, will be utilized to get the primary data for the research. Questionnaires would be sending to the internal audit departments of the companies in the Saudi Arabia. For collecting data from the external auditor, the questionnaires would be sent to the external auditors employed by the companies in the Saudi Arabia. Other than this, there would also be efforts employed to conduct some interviews with the internal and external auditors as well through online mediums.

For addressing the first research question, the questionnaire would ask about the perception of the external auditors regarding the objectivity, performance, competence, expertise, and scope of the internal auditing in their company. Their responses will direct towards the result of the first research question.

For finding the results of the second research question, the questionnaire would be designed to ask about the level of corporation among the external and internal auditor. This would be recognized by looking at the number of regular meetings, and access to the working papers of internal auditor for the external auditors by the internal auditors.

 For getting the answer to the third research question, the factors would be mentioned in the questionnaire and the external auditors would be asked to rate the level. This is all about to derive the factors, which create the impact on different audit works. Moreover, another questionnaire would be designed for the internal auditors who would answer to their perception of the factors, which defines the affect of the decision of reliance of the external auditors on their works.

Other than this, for all the three mentioned research questions, interview with the external and internal auditors will also be conducted to get first had knowledge about their relationship and its factors.

Research Planning:

For this research paper, the time required would be quite extensive. As there is, need to design and sent the questionnaires to the respective external and internal auditors in the Saudi companies, firstly we have to find contacts and inform them about the research that we want to conduct in which they can assist us. Depending on their pace of corporation, our questionnaires would be sent to them, for timely answers and data collection. Time for scheduling interviews with the auditors would also be required. Other than this, after once the data would be collected, the analysis of the data and its findings would take not much time.

Bibliography:

Al-Shetwi, M., Ramadili, S. M., Chowdury, T. H., & Sori, Z. M. (2011). Impact of internal audit function (IAF) on financial reporting quality (FRQ): Evidence from Saudi Arabia. African Journal of Business Management , 5 (27), 11189-11198.

Suwaidan, M. S., & Qasim, A. (2010). External auditors’ reliance on internal auditors and its impact on audit fees: An empirical investigation. Managerial Auditing Journal , 25 (6), 509-525.

Woodworth, B. M., & Said, K. E. (1996). Internal auditing in a multicultural environment: the Saudi Arabia experience. Managerial Auditing Journal , 20-27.