The Effect of Internal Auditors' Engagement in Risk Management Consulting on External Auditors' Reliance Decision

We examine external auditors' decisions to use the evidence or direct assistance of internal auditors when those auditors engage in consulting on enterprise risk management. Although such consulting provides value to an organization, it can also put the objectivity and independence of internal auditors at risk. We hypothesize that external auditors' reliance on the internal audit function depends on the effectiveness of the audit committee monitoring the internal auditors' activities. We also hypothesize that external auditors' perception of the objectivity and independence of internal auditors mediates the reliance decision. We analyze these hypotheses using a 2 x 2 between-subjects design with 92 certified external auditors. Confirming the hypotheses, we find that external auditors' reliance on the internal audit function is highest when the latter provides risk management consulting under the supervision of a strong audit committee. It is lower if the internal audit function provides only assurance (under either a weak or strong audit committee) and lowest if it provides consulting under a weak audit committee. The mediation analysis shows that the effect of audit committee effectiveness on the reliance decision is mediated by external auditors' perception of internal auditors' objectivity.