The relationship between internal and external auditors of local authorities in England and Malaysia.

This study examines the relationship between internal and external auditors, with
particular emphasis on the co-operation between internal and external auditors,
and the reliance of external auditors on the internal audit work, in local
authorities. Previous studies indicate that some work has been undertaken to
determine the factors that affecting external auditors' reliance on internal
auditors' work. However, studies on the relationship between internal and
external auditors, in terms of their co-operation,. and the impact of such a
relationship on the external audit fees are still limited. In addition, all of the
previous studies were conducted in the private sector context and so far nothing
is known about the relationship between internal and external auditors in the
public sector. Thus, the aim of this study is to fill this g~p by examining the
relationship between two corporate governance mechanisms, namely, internal
audit and external audit, and the factors that affect external auditors' reliance on
internal auditors' work in two different countries, England and Malaysia.
A mixed method approach, using both quantitative and qualitative methods, has
been adopted in this study. Two different surveys of internal and external
auditors concerned with their perceptions of the relationship between internal and
external auditors were carried out in England and Malaysia. A total of 387
questionnaires were mailed to the Heads of Internal Audit in each of the English
local authorities. Another 142 questionnaires were mailed to all the appointed
auditors of the local authorities. Similarly, two different questionnaires were used
for the Malaysian data collection. A total of 28 questionnaires were mailed to the
Head of the Internal Audit Department and another 11 questionnaires were sent
to the Directors of National Audit Department (external auditors) of local
authorities.
The survey findings indicate that the internal and external auditors in Malaysia
perceived that they have a moderate level of co-operation between them, while
the internal and external auditors in England perceived their level of co-operation
as high. The external auditors in England were able to place reliance on the
internal audit work. However, in Malaysia there was no reliance on internal
. auditors' work by the external auditors, because the internal auditors did not
perform work relevant to financial statement audits. The size of the internal audit
department, the internal auditors' knowledge of the local authority, and top
management support of the internal auditors' work were the significant factors
perceived by the internal and external auditors of local authorities in England as
affecting the level of external auditors' reliance on internal auditors' work.
This study contributes to the extant literature by providing evidence using
primary data from English and Malaysian local authorities. From a practical
perspective this study could provide feedback to the relevant government
departments and audit bodies on the need for policies that support and enhance
the relationship between internal and external auditors.