Companies have various options for testing internal controls.In past years, management could test internal controls manually by physically examining documents.Zarb School of Business, to understand how external auditors’ perceptions of and reliance on the internal auditors’ work change when the internal auditors fail to detect a significant deficiency in internal controls.
Companies have various options for testing internal controls.
You can strengthen your company’s internal audit function.
But like any other area of a company, a strong internal audit function requires an investment of resources.
If management understands the importance of strong internal controls and how external auditors relying on the internal audit function can lower audit fees, they can implement internal control testing strategies using technology to detect, prevent, or remedy significant deficiencies in their internal controls.
Once again, management must decide whether it’s worthwhile to implement internal control testing strategies by investing in new technology.
Rapid advances in technology have resulted in new tools or software that can strengthen the internal audit function, but companies may be reluctant to make an investment because it’s difficult to say or quantify how investing in competent and objective internal auditors will benefit the company.
Ultimately, strong internal audit functions benefit companies in a variety of ways: by improving risk assessments, ensuring compliance with regulations, deterring and detecting fraud, and ensuring the proper functioning of internal controls.SOX Section 404 requires that management of large, publicly traded companies, such as accelerated filers, must take responsibility for establishing and maintaining adequate internal controls.Also, external auditors must evaluate and report on the effectiveness of internal controls over financial reporting.Would the use of automated testing strategies improve external auditors’ trust in the internal auditors so they would rely on them more?That’s an important question because companies can save money when external auditors rely more on internal auditors’ work—the external auditors will bill less for testing controls.Pursuing our interest in internal controls, we started talking to current and former external auditors about six years ago.To our surprise, those external auditors seemed to have an aversion to the idea of controls, to testing the controls, and even to computer technology.With any investment decision, management will ask, “Do the benefits outweigh the costs?” When it comes to the internal audit function, answering that question can be a challenge.With external auditors being responsible for investigating and reporting on the effectiveness of internal controls within a company, it could require more work or time for the audit.We conducted an experimental study, sponsored by IMA (Institute of Management Accountants) and supported by a summer research grant from Hofstra University’s Frank G.