External Auditors' Reliance on Internal Audit Findings and Recommendations

Abstract

This study investigates whether implementation of internal audit recommendations and management's acceptance of internal audit findings are associated with the extent of external auditors' reliance on internal audit work. Data were collected from two sources. We obtained 325 survey responses from the heads of internal audit of companies listed on the Bursa Malaysia, along with the annual reports of the surveyed companies for 2022–2023. Using a unified regression framework, the results indicate a significant positive association between the implementation of internal audit recommendations and external auditors' reliance decisions. Management's acceptance of IA findings and audit committee oversight features, particularly private meetings between the head of internal audit and the audit committee, are also positively associated with reliance on internal audit work. These findings have important implications for external auditors, senior managers and regulators, by providing insight into how observable IA outputs and governance mechanisms shape external auditors' reliance decisions. Specifically, greater reliance may enable external auditors to reduce duplicative audit procedures, whereas senior management may be encouraged to strengthen corrective actions by implementing internal audit recommendations.