internal audit assistance and external audit timeliness

Auditing: A Journal of Practice & Theory American Accounting AssociationVol. 34, No. 4 DOI: 10.2308/ajpt-10296November 2012pp. 3–20

Internal Audit Assistance and ExternalAudit Timeliness

Lawrence J. Abbott, Susan Parker, and Gary F. Peters

SUMMARY: Professional standards guide external auditors to consider the effect of the

client’s internal audit work and opportunities to utilize the direct assistance of the internal

audit function when planning and conducting audits. We examine the effect of internal

audit assistance on external audit timeliness via the extent of external audit delay. We

hypothesize and find that internal audit assistance is negatively associated with external

audit delay. We also document moderating relationships between internal audit

assistance and other internal audit environment characteristics, such as the extent of

internal control reliance, coordination with the external auditor, and the investment in

internal audit quality. Overall, our findings have implications for firms and external

auditors who are evaluating the role and use of internal audit functions. Namely, our

findings suggest that internal audit assistance may not only result in audit cost savings,

but also in greater audit efficiencies. These findings are particularly germane given the

challenges faced by external auditors in the form of greater audit requirements, shorter

regulatory filing deadlines, resource constraints, and audit fee pressures.

Keywords: internal audit assistance; audit delay; audit efficiency; internal audit quality;

internal control reliance.

INTRODUCTION

This study examines the association between external audit delay and the internal audit

function’s (IAF’s) financial statement audit assistance. The timeliness of audited financial

reporting has been a longstanding concern for various stakeholders, including shareholders,

managers, and regulators, as well as internal and external auditors (Lambert et al. 2010; Krishnan

and Yang 2009; Bamber et al. 1993; Givoly and Palmon 1982). The recent accelerated filing

requirements of the Sarbanes-Oxley Act (SOX) have exacerbated the pressure on firms and their

auditors to conduct financial statement audits in a timely manner (Bronson et al. 2011; Masli et al.

2010; Ettredge et al. 2006; SEC 2005). These tight reporting deadlines have elevated the

importance of seeking means to increase audit timeliness and reduce audit delay. Although prior

Lawrence J. Abbott is an Associate Professor at the University of Wisconsin–Milwaukee, Susan Parker is anAssociate Professor at Santa Clara University, and Gary F. Peters is an Associate Professor at the Universityof Arkansas.

Editor’s note: Accepted by Jean Bedard (associate editor) under Ken Trotman’s editorship.

Submitted: March 2011Accepted: March 2012

Published Online: November 2012

3

research documents an association between IAF assistance and audit fees, little is known about the

impact of IAF assistance on external audit timeliness (Abbott et al. 2012; Felix et al. 2001). We

argue, and find archival evidence to support, that the IAF can effectively alleviate some of the audit

pressures created by the post-SOX reporting environment by assisting the external auditor with the

financial statement audit.

Audit delay represents the length of time from a company’s fiscal year-end to the date of the

auditor’s report (Ashton et al. 1987). To the extent that the audit process postpones the issuance of

audited financial statements, firms can experience consequences such as negative market reactions

and higher information asymmetry (Bronson et al. 2011; Krishnan and Yang 2009; Bamber et al.

1993; Givoly and Palmon 1982). Consequently, audit delay is one aspect of the financial statement

audit that is under duress as a result of the post-SOX reporting regulations (Lambert et al. 2010;

Ettredge et al. 2006). Thus, there exists a need to better understand the determinants of audit delay,

as well as to understand the potential value of IAF assistance.

In this paper, we posit that IAF-provided financial statement audit assistance can reduce audit

delay in two non-mutually exclusive ways. First, IAF-provided assistance can substantially alleviate

personnel shortages/staffing pressures facing external auditors. Because the IAF is solely devoted to

one client, internal auditors do not have multiple clients—and multiple client deadlines—endemic

to external auditors. As a result, internal auditors have the flexibility to allocate a greater percentage

of their time to their host entity, especially during the external audit ‘‘busy season.’’ This is a

particularly salient issue, as our sample period is fiscal year 2005, a period in which many external

audit firms experienced high turnover, staff shortages, and were operating close to (or above) full

capacity, as exhibited by burgeoning audit delays (Masli et al. 2010; Lambert et al. 2010; Gullapalli

2005). Second, IAFs not only have more client-specific experience, but they may also be more

attuned to a company’s culture, chain of command, and information sources (Abbott et al. 2007).

To address our research questions, we obtain 134 usable survey responses from Fortune 1000

chief audit executives (CAEs) regarding their fiscal year IAF budget. In addition, the CAEs

provided information about IAF budget allocations and other IAF characteristics. We use this

information to develop estimates of the relative extent and impact of IAF-provided financial

statement audit assistance. Consistent with our prediction, we find that the IAF audit assistance is

negatively associated with audit delay. Specifically, our study suggests that when a firm moves

from the 25th percentile to the 75th percentile in terms of the IAF-provided financial statement audit

assistance, audit delays decrease by approximately 2.5 days.

Further analysis documents evidence of moderating relationships between IAF assistance and

other IAF environmental characteristics such as the extent of internal control reliance, coordination

with the external auditor, and the firm’s investments in IAF quality. For example, our evidence

suggests that external auditors are able to use IAF assistance to curb the incremental increases in

audit delay that result from low control reliance audit engagements. We also find that the audit

timeliness benefits of IAF assistance increase with the extent of coordination between the IAF and

external auditors. Finally, we find that increases in IAF quality magnify the negative association

between IAF assistance and audit delay.

Academic research concerning the role and benefits of internal auditors is relatively scarce

when compared to the field of external auditing. Overall, our findings have implications for firms

and external auditors who are evaluating the role and use of IAFs. We also believe our findings will

be of interest to regulators and exchanges. For example, the PCAOB has sought to restrict the

amount of IAF assistance in the area of accounts receivable confirmations (PCAOB 2010). If these

restrictions create additional time constraints on external auditors, it may impact the audit process

on at least two dimensions. First, it may force external auditors to move more audit procedures,

such as confirmations, to interim periods which would have been otherwise best addressed at

year-end. Audit standards suggest that reducing the amount of testing performed after year-end

4 Abbott, Parker, and Peters

Auditing: A Journal of Practice & TheoryNovember 2012

increases audit risk (Arens et al. 2010; AICPA 1983). Second, it may impair audit quality by

increasing the time pressure on the external audit engagement team (Lopez and Peters 2012). Time

pressure may decrease audit effectiveness as external auditors begin accepting weaker explanations

or procedures, such as truncating sample selections (Agoglia et al. 2010; Coram et al. 2004;

DeZoort and Lord 1997; McDaniel 1990).

We organize the remainder of the paper as follows. The next section reviews prior literature in

more detail and develops our hypothesis. Succeeding sections discuss sample selection, followed by

research design and results. Our final section concludes.

PRIOR RESEARCH AND HYPOTHESIS

Audit Delay

Audit delay represents the number of days from a company’s fiscal year-end to the date of the

auditor’s report (Ashton et al. 1987). Early research into audit delay focuses on client and auditor

characteristics and their respective impacts on audit delay. These include client size and industry

membership, as well as longer auditor tenure and auditor size. A few papers have explored auditor-specific inputs into audit processes that are associated with audit delay. One element pertinent to our

study involves the availability of personnel. Knechel and Payne (2001) find that the use of less-

experienced staff is associated with longer delays. Similarly, Behn et al. (2006) find that insufficient

personnel resources, both at the client and audit firm, are a hindrance to shortening reporting times.

The issue of personnel sufficiency may have been particularly critical during the period of our

study. Both McGee (2005) and Gullapalli (2005) emphasize time pressures stemming from SOX

implementation and the increase in liability fears among auditors. They also conclude that a

shortage of professionals existed in the auditing field during their sample periods. Lack of personnel

may constitute a significant barrier to adding more external staff to an audit. Moreover, should the

external auditor add staff to a particular engagement, such staff are unlikely to have as much client-

specific and/or industry-specific experience, thus hindering attempts to expedite the audit process

(Lambert et al. 2010).

The issue of personnel sufficiency is likely to be particularly critical at year-end. SAS 55

emphasizes that the auditor must consider the incremental risk created by conducting substantive

tests at the interim period, and the need to obtain appropriate audit assurance at the balance sheet

date. Thus, at least some substantive testing is likely required at year-end, and the amount of testing

is increasing in the risk of the client. Lambert et al. (2010) discuss time pressures present at year-

end in detail and note that when increased risks are present, ‘‘much post-year-end audit work

requires effort and time from the audit client as well as others that the auditor cannot control (e.g.,

customers, creditors, attorneys).’’ Lambert et al. (2010) emphasize the amount of routine, but

necessary, follow-up involved with year-end testing of accounts receivable and the search for

unrecorded liabilities. Such tasks would certainly be among those considered for assignment to the

IAF staff.

Dyer and McHugh (1975) find that ‘‘normal’’ accounting and auditing issues, such as slow

confirmations and year-end adjustments, are more important causes of delay than unusual events

involving disagreements between auditor and client. The top three reasons for inability to complete

the audit by the originally scheduled date in Dyer and McHugh’s (1975) study are client delays in

closing, including year-end adjustments; delays in the production of documents for auditors and

taking of inventories; and procedural delays, such as in confirmation returns. Taken together with

the Behn et al. (2006) and Knechel and Payne (2001) results, these studies suggest that the

combination of an unavoidable demand for at least some substantive testing around year-end, the

nature of that testing, and issues with personnel availability are likely to be important determinants

of audit delay, thus setting the stage for the potential role of IAF assistance. We extend these prior

Internal Audit Assistance and External Audit Timeliness 5


studies by considering a client-specific input into the external audit process, namely IAF assistance,

as a potential mitigating factor of audit delay.

Internal Audit Assistance

Constrained availability of qualified personnel around year-end may be alleviated by reliance

on the client’s internal audit staff for direct assistance. When making the decision to utilize internal

audit assistance, external auditors are guided by SAS 65 (AICPA 1991). SAS 65 allows the external

auditor to rely upon IAF assistance if the external auditor assesses the IAF’s competence and

objectivity to be adequate. The IAF may then provide audit assistance for internal control or

substantive testing, with a requirement that the external auditor supervise, review, evaluate, and test

the work performed by the internal auditor.

Using SAS 65 as a foundation, prior IAF assistance research focuses almost exclusively on the

relation between IAF-provided financial statement audit assistance and reductions in audit fees

(Abbott et al. 2012; Felix et al. 2001). This line of research generally documents a negative

association between audit fees and IAF assistance. However, this line of research has not

considered the impact of direct measures of IAF assistance on audit delay. It is important to note

that the determinants of audit delay are not necessarily the same as the drivers of audit fees. Audit

delay relates to the timing of the completion of audit procedures, not necessarily the total amount of

audit fees, which is a function of total audit hours as well as the differential billing rates assigned to

the audit hours.

The external auditor’s personnel scarcity at year-end suggests that the availability of competent

and objective IAF staff would potentially decrease audit delay. The use of internal auditors offers

several potential advantages, in addition to alleviating the possible lack of qualified staff. First, the

IAF has advantages in terms of familiarity with the client, its vendors and customers, processes, and

data storage (Del Vecchio and Clinton 2003; Rittenberg and Covaleski 2001; Rittenberg et al.

1999). Also, the IAF staff may be able to communicate more effectively with client personnel

because of this common understanding, thus improving audit efficiency. The external auditor uses

IAF personnel to primarily replace lower-level audit staff, and the IAF may possess client-specific

knowledge and skills that are superior to those of the inexperienced staff they replace. To this

extent, IAF assistance may alleviate the issue identified by Knechel and Payne (2001), who find that

the use of higher-level staff from the CPA firm is associated with shorter delay, while less-

experienced staff members are associated with longer delays. Finally, turnover is likely to be less

among internal audit staff than in lower levels of the audit team, mitigating the learning curve

facing auditors each year. This leads to our hypothesis:

H1: Higher levels of internal audit-provided assistance with the financial statement audit will

be associated with shorter audit delay.

Although our hypothesis is motivated around the potential benefits of IAF assistance, there

may be instances in which IAF audit assistance has the potential to increase audit delay, assuming

the external auditor has not budgeted for certain unforeseen scenarios. These unanticipated delays

could, for example, be attributable to: (1) a mutual lack of familiarity with workpaper review and

preparation (Asare and McDaniel 1996); and/or (2) differential incentives and risk attitudes

between the IAF and external auditor, pertaining to reporting risks and timeliness (Strand et al.

2010; Behn et al. 2006). For example, in the first scenario, the IAF may complete the work that, in

their opinion, corresponds to the external auditor’s documentation norms. If the IAF has not

correctly understood the external auditor’s requirements, delay could occur when the external

auditor requests an altered format or additional explanations that are more consistent with the

external auditor’s documentation preferences. Under these circumstances, given the differential



billing rates between IAF personnel and external audit personnel, the overall extent of IAF work

could still contribute to a decrease in audit fees, or leave them unchanged. In a second scenario, the

IAF completes the work in a competent manner, but due to unfamiliarity with the preparer, the

external auditor who reviews the workpapers re-performs more (but still not all) of the preparer’s

work (Asare and McDaniel 1996). Such additional reperformance would potentially increase audit

delay. Again, given the differential billing rates between IAF personnel and external audit

personnel, the fee effect of the additional reperformance effort of the external auditor could still be

offset by the extent of lower-cost work originally performed by the IAF. In the third scenario, the

IAF provides the audit assistance, but does so in an untimely fashion. This could be attributable to a

lack of urgency on the part of the IAF’s superiors pertaining to audit timeliness.1 The effect of each

of these scenarios on audit delay would be exacerbated when the external auditor’s personnel

availability is constrained, limiting the external auditor’s ability to compensate for unforeseen IAF

delays. Given the potential for differential effects, we believe it is an empirical question whether

IAF assistance reduces audit delay. We also believe these potential influences increase the

importance of documenting evidence of the benefits of IAF assistance.

DATA AND MODEL SPECIFICATION

Sample Selection

Our survey questionnaire was mailed to the CAEs of Fortune 1000 (in terms of total sales)

companies, after excluding banks, requesting information on IAF activities in fiscal 2005. We sent

the first survey in July 2006, which resulted in a total of 72 usable responses. We conducted a

follow-up mailing in September 2006 and produced 62 additional usable responses, for a final

sample size of 134 observations.2 Our sample appears to be representative of the Fortune 1000

population of firms, except for a slight underrepresentation of the energy and manufacturing sectors,

and an overrepresentation of professional, commercial, and education services.3

We collected data on the amount (in hours) of assistance provided to the external auditors for

(1) the financial statement audit and (2) the SOX section 404 internal audit, as well as the total

number of budgeted hours available to the IAF.4 We also asked questions pertaining to the extent of

internal control reliance, external audit coordination, and IAF financial resources (described in more

detail below). From Audit Analytics, we collected information on the incidence of material

weaknesses and restatements in our sample firms. We also collected the balance sheet date, audit

report date, and the SEC filing date. We obtained other financial characteristics from Compustat.

1 These influences are also consistent with Behn et al. (2006), who cite audit partners’ perceptions about theirclient’s urgency regarding audit timeliness. These authors note that over 22 percent of the partners indicatedchanging the mindset of the client is the biggest client-related personnel impediment to audit timeliness. Behn etal. (2006) cite an audit partner commenting that ‘‘Timely completion is not emphasized/valued by uppermanagement.’’ Although anecdotal, the potential for confounding influences is also consistent with our ownconversations with members of a Big 4 firm who noted that there are times at the client’s request that the firmwill utilize IAF assistance to reduce the overall audit fee, even though the auditors would prefer to use their ownstaff for efficiency reasons. Moreover, Abbott et al. (2011) suggest that there is an economically viable trade-offbetween IAF assistance and external audit hours which provides incentives for clients to pressure for the use ofIAF assistance.

2 Our usable responses do not include two responses in which the respondents said they could not characterize therelation between the IAF and external auditor, two responses of ‘‘none’’ to the controls reliance question, andfive responses that omitted details of the IAF hours by function.

3 We tested for response bias by performing univariate comparisons of assets, industry, leverage, and loss forrespondents versus nonrespondents, and early versus late responders, without significant results.

4 We also requested the same information related to the utilization of outside service providers (OSPs). Our surveyresults indicated that the usage of OSPs for external audit assistance was minimal, and therefore we did notconsider the OSP assistance to external auditors in the current study.



Research Design and Model Specification

We utilized a regression model, similar to those of Ashton et al. (1987), Ettredge et al. (2006),

and others. Our dependent variable (DELAY) is the number of calendar days elapsing between the

balance sheet date and the audit report date.5

DELAY ¼ b0 þ b1IAFAUD%þ b2LOWRELY þ b3COORDIN þ b4IAFRESþ b5IAFAUD%�LOWRELY þ b6IAFAUD%�COORDIN þ b7IAFAUD%�IAFRESþ b8SIZEþ b9FININDþ b10HIGHTECH þ b11LEVERAGEþ b12LOSSþ b13RESTATEþ b14AFEEþ b15EXTRAITEM þ b16NONDECFYEþ b17MATWEAK þ e:

All variables are defined in Table 1.

IAF Assistance

To test our primary hypothesis, we incorporate IAFAUD% to capture the relative extent of IAF

assistance provided to the external auditor. To calculate IAFAUD%, we use total in-house IAF

hours budgeted for the year and the percentage of those hours applied to different IAF activities. We

include the percentages committed to financial statement audits of subsidiaries and direct assistance

TABLE 1

Variable Descriptions

Variable Name Description

DELAY Number of calendar days from fiscal year-end to date of the auditor’s report.

IAFAUD% Relative extent of internal audit assistance provided to the external audit (INHOURS/

total assets [in millions]).

LOWRELY Coded 1 in instances of low to medium reliance on controls, 0 else.

COORDIN Internal auditor assessment of relationship with external auditors (1 ¼ coexistence, 2 ¼coordination, 3 ¼ integration, 4 ¼ partnering).

IAFRES Average hourly IAF resource expenditure. Equals total in-house IA budget divided by

total in-house IA hours.

ASSETS Total assets measured in millions.

FININD The client’s industry, coded 1 in cases where company is in the financial services

industry, 0 else.

HIGHTECH The client’s industry, coded 1 in cases where company is in the high-tech industry (SIC

codes 35xx–36xx, 72xx–73xx).

LEVERAGE Ratio of total long-term debt to total assets.

LOSS Coded 1 in cases where client reports negative earnings for 2005, 0 else.

RESTATE Coded 1 if client restated its 2005 quarterly or annual reports, 0 else.

AUDITFEE Reported 2005 audit fee per proxy statement.

AFEE Scaled total audit fee. 2005 audit fee per proxy statement divided by total assets.

EXTRAITEM Coded 1 if client reports an extraordinary item and/or discontinued operations section in

the 2005 income statement, 0 else.

NONDECFYE Coded 1 if client has a non-December 31 year-end, 0 else.

MATWEAK Coded 1 if company reported a material internal control weakness during fiscal years

2004–2005, 0 else.

5 During the period of our survey, the SEC required audited 10-Ks to be filed within 75 days of the fiscal year-end.



to the external auditor to calculate the total hours provided for IAF assistance (INHOURS).

IAFAUD% equals the number of hours of audit assistance provided divided by the firm’s total

assets. This provides a relative measure of the extent of internal audit contribution to the external

audit.6 Following our primary hypothesis, we predict a negative relation between IAFAUD% and

audit delay. Given that our primary hypothesis relates to the extent of IAF assistance provided to

the external audit, we also control for other attributes of the IAF environment. We then extend the

analysis by considering the potential interactive effects between IAF assistance and the IAF

environment (described below).

IAF Environment

Internal control reliance. When considering the risk of material misstatements on the nature,

timing, and extent of audit evidence, regulatory standards prescribe the consideration of the

effectiveness of the internal control environment. Audit environments associated with effective

controls may allow an auditor to increase his/her reliance on internal controls to reduce the extent of

substantive testing, particularly testing performed at year-end.7 Thus, we expect an environment

described as one with lower reliance on internal controls to be associated with more audit

procedures and increased delays in audit reports. Based upon survey responses, LOWRELY is coded

1 in instances of low to medium reliance on controls, and 0 if control reliance is high. While lower

levels of control reliance may cause an increase in audit delay due to increases in substantive

testing, particularly at year-end, we test whether IAF assistance moderates these delays due to

internal auditors’ greater knowledge of the client’s accounting environment. We predict a negative

relation when LOWRELY is interacted with IAFAUD%, showing that IAF assistance can offset the

effects of low reliance on internal controls.

Internal audit coordination. In addition to direct IAF assistance, internal and external

auditing standards prescribe the consideration of coordinated efforts between the internal auditor

and external auditor (AICPA 1991). The importance of coordinated activities (including enhanced

communication and planning) in an attempt to gain audit efficiencies is also argued among audit

pundits and prior research (Keizer 2009; Felix et al. 2001). For example, in obtaining their own

understanding of internal control, the external auditor may use documentation prepared separately

by the internal auditor to assess the design and placement of internal controls. In addition, the

results of internal auditors’ own testing procedures may provide planning information about the

nature, timing, and extent of control and substantive testing the external auditor would otherwise

need to perform. Following Felix et al. (2001), we also control for the level of coordination and the

nature of the IAF/external auditor relationship (COORDIN). Based upon survey responses,

COORDIN is ordinal in nature (1, 2, 3, 4), where the more coordinated or integrated the IAF’s

activities with the external auditor, the greater the numerical score. On the low end of the scale, the

relationship was characterized as coexistence (‘‘1’’), rising to partnering (‘‘4’’) on the high end. The

middle points were labeled coordination (‘‘2’’) and integration (‘‘3’’). We are able to extend the

findings of Felix et al. (2001) by evaluating the impact of this construct on an alternative measure of

audit efficiency, namely audit timeliness via the audit delay variable. Based upon prior research, we

expect a negative relation between COORDIN and audit delay.

We also test whether IAF assistance moderates audit delay reductions resulting from internal

audit coordination. We argue that the extent of audit efficiencies resulting from audit coordination

6 We appreciate the suggestions of the editor for calculating a more straightforward measure of relative IAFassistance.

7 For examples of specific discussions or guidance, see Section AU 314.75 of SAS No. 109 (AICPA 2006a) andAU 318.60 of SAS No. 110 (AICPA 2006b).



will vary with the amount of ‘‘direct assistance’’ provided by the IAF.8 To wit, if the IAF provides

greater (lesser) amounts of financial statement audit assistance, the impact of coordination is

increased (lessened). We predict that higher levels of COORDIN decrease loss of efficiency due to

unfamiliarity and misunderstandings, and will magnify the ability of IAF assistance to reduce audit

delay. Thus, we predict a negative coefficient when COORDIN is interacted with IAFAUD%.

Internal audit quality. Regulatory guidance allows external auditors to utilize high-quality

IAF assistance for areas of increasing risk, materiality, and judgment, as well as allowing the

external auditor to reduce the extent of re-testing and review (AICPA 1991). Abbott et al. (2012)

document evidence consistent with greater investments in IAF quality, allowing for greater

substitutions by IAF assistance for an hour of work from a more experienced external audit staffer,

and fewer hours of retesting and review. Following Abbott et al. (2012), we control for the client’s

investment in IAF quality by defining IAFRES as the IAF budget (not including expenditures for

outsourced functions), scaled by total in-house hours. We expect a negative association between

IAFRES and audit delay. We also expect that a firm’s investment in IAF quality will magnify the

relationship between IAF assistance and audit delay.

Client Engagement Controls

We also include a number of client engagement control variables, consistent with prior studies.

Ashton et al. (1987) posit that client size (natural log of total assets) will be positively associated

with audit delay if larger clients take longer to audit. However, the relation may be negative if larger

companies are more concerned with minimizing audit and reporting delay, or if the larger client has

better internal controls, allowing for a quicker audit. Because SIZE is typically negative in prior

studies, we predict a negative relation between SIZE and DELAY (Ettredge et al. 2006; Bamber et

al. 1993; Ashton et al. 1987).

FININD is an indicator variable for companies in the financial services industry.9 Following the

findings of Ashton et al. (1989), we expect these firms to exhibit a negative relation with DELAY.

Similarly, HIGHTECH indicates an observation from a high-tech firm (those in SIC codes 35xx–

36xx and 72xx–73xx). High-tech firms are expected to have more sophisticated accounting systems

that facilitate the audit process (Ettredge et al. 2006). LEVERAGE (ratio of long-term debt to total

assets) is expected to be associated with longer audit delay, as is LOSS (which has the value 1 if the

firm had a loss in 2005). Both conditions are potentially indicative of financial distress, as well as

incentives for financial misstatement, and may be reflected in external auditor risk assessment.

Likewise, we expect RESTATE (coded 1 if the firm restated 2005 annual or quarterly results) and

MATWEAK (coded 1 if the audit opinion reported at least one material weakness in 2005) to be

associated with longer audit delay, due to the increased procedures required for environments

exhibiting greater risk of material misstatement (Ettredge et al. 2006). We expect audit fee

(AUDITFEE) to have a positive association with audit delay. Consistent with Ettredge et al. (2006),

we include the audit fee, scaled by total assets (AFEE).10 We expect the presence of extraordinary

8 As opposed to simply the consideration of ‘‘the effect of the internal auditor’s work,’’ auditing standardsdistinguish ‘‘direct assistance’’ as specific requests of the internal auditors to perform or complete some aspect ofthe external auditor’s work (AICPA 1991). Therefore, coordination has the potential to maximize theeffectiveness of the internal auditors’ contribution to the financial statement audit and increase overall auditefficiency through the minimization of duplicate audit efforts (Felix et al. 2001). Moreover, internal auditorsmay have the necessary firm-specific knowledge about the location for specific evidence, but, absent propercoordination with the external auditor, such efficiencies may be negated.

9 Although we eliminated banks from our original sample, due to their unique regulatory and financial reportingstructures, our sample contains a small number of non-bank financial firms.

10 We also tested variations of the audit fee measure, including the natural log of audit fees and an estimate ofunexpected fees following the estimation method used in Prawitt et al. (2009), with qualitatively similar results.



items or discontinued operations (EXTRAITEM) to result in a longer required audit time, since they

reflect items not arising in routine operations of the company (Ashton et al. 1987). Finally, we

identify clients with December 31 year-ends as ‘‘busy season’’ clients and expect a longer audit

delay, as these companies face a greater degree of competition for an auditor’s time-constrained

resources (Lopez and Peters 2011; Krishnan and Yang 2009; Harris and Duellman 2008; Ashton et

al. 1989). Thus, we predict that our NONDECFYE will have a negative relation with DELAY.11

EMPIRICAL RESULTS

Descriptive Statistics

Table 2 presents descriptive statistics for our 134 firms. The mean (median) audit delay

(DELAY) for a sample firm is 65.69 (59) days. This compares reasonably with a mean post-SOX

delay of 66.94 and 64.97 days in 2005 (Bronson et al. 2011; Krishnan and Yang 2009). In terms of

our survey data, the mean (median) IAF budget allocation for financial statement audit assistance

was $549,752 ($275,018). Scaling by total assets yields a mean (median) IAFAUD% of 0.178

(0.212). Forty-five percent of the chief audit executives described their audit environments as low to

medium reliance on internal controls (LOWRELY). Our mean for COORDIN exhibits a mean of

2.24, which is strikingly similar to the 2.31 reported in Felix et al. (2001). This may suggest that (1)

little has changed in terms of relationship between internal and external auditors, and (2) chief audit

TABLE 2

Descriptive Data

Variable Mean Median 25th Percentile 75th Percentile

DELAY 65.69 59 52 67

IAFAUD% 0.178 0.212 0.103 0.402

LOWRELY 0.45 0.00 1.00 0.00

COORDIN 2.24 2.00 2.00 3.00

IAFRES $100.94/hr. $72.73/hr. $50.00/hr. $115.10/hr.

ASSETS (in millions) $12,861 $5,497 $2,634 $14,984

FININD 0.09 0.00 0.00 0.00

HIGHTECH 0.19 0.00 0.00 0.00

LEVERAGE 0.25 0.25 0.12 0.35

LOSS 0.09 0.00 0.00 0.00

RESTATE 0.14 0.00 0.00 0.00

AUDITFEE $4,315,523 $2,715,000 $1,561,000 $6,464,000

AFEE 0.0073 0.0059 0.0025 0.0098

EXTRAITEM 0.418 0.00 1.00 0.00

NONDECFYE 0.254 0.00 1.00 0.00

MATWEAK 0.16 0.00 0.00 0.00

Variable Definitions are provided in Table 1.

11 We omit certain control variables used in prior research. We omit auditor type, because all but one of our samplefirms are audited by Big 4 auditors (Ashton et al. 1987). We also omit controls for going concern and qualifiedopinions because these report types are not represented in our sample (Schwartz and Soo 1996; Bamber et al.1993; Ashton et al. 1987). In addition, auditor tenure exhibits very little variation in our sample and therefore wedo not include it in our reported tests (Ettredge et al. 2006; Ashton et al. 1987).



executives and external auditors appear to have similar perceptions of their working relationships

with each other.

As we expected, given the population of very large firms, the mean (median) total assets

(ASSETS) is 12.86 (5.5) in billions. Only 9 percent of our firms are in the financial services industry,

which may explain our lack of results for this variable. Nineteen percent and 9 percent of firms are in

the high-tech industry (HIGHTECH) and financial service industry, respectively. Mean and median

leverage (LEVERAGE) is 25 percent, and 9 percent of our firms have a loss (LOSS) in the sample

year. Fourteen percent of firms in the sample experienced a restatement (RESTATE) of either annual

or quarterly earnings in 2005. Sixteen percent reported a material weakness (MATWEAK). Almost

42 percent of the sample reported an extraordinary item (EXTRAITEM).12 Twenty-five percent of

the sample firms have non-December 31 year-ends (NONDECFYE), suggesting that the majority of

our sample firms are audited during the busy season. Finally, the mean (median) audit fee was $4.3

million ($2.7 million), or 0.7 percent (0.6 percent) of assets (AFEE).

Table 3 shows the correlations between our variables. None of the correlations are high enough

to cause concern, and an analysis of variance inflation factors associated with our regression does

not suggest that multicollinearity is a concern.

Univariate Statistics

Table 4 shows our univariate comparisons. Column A (B) includes the mean values of

characteristics for firms with audit delays greater than (less than or equal to) the median of 59 days.

The univariate differences are consistent with our general expectations. We find that the

proportionate hours (not reported) of IAF assistance provided to the external auditor is smaller for

companies with audit delay greater than the median delay. Compared to those companies with audit

delay less than or equal to the median audit delay (21.6 percent versus 30.5 percent, difference

significant at p-value , .01), the differences are consistent with IAF assistance having a negative

association with the length of audit delay. Moreover, we find that those audit environments

described as ‘‘low to medium reliance on internal controls’’ (LOWRELY) were more often

associated with firms whose audit delays were greater than the median (53.5 percent versus 35.5

percent, difference significant at p-value , 0.01). With respect to COORDIN, we document that

firms with lower audit delay appear to have a higher level of internal audit–external audit

coordination (p-value , 0.10).

Sample firms with shorter delay also have IAFs that provide relatively more financial statement

audit assistance. The mean value of IAFAUD% for firms with delay less than (greater than or equal

to) the median audit delay is 0.208 (0.144). This difference is highly significant with a p-value ,

.01. In terms of our control variables, larger firms, high-tech firms, and firms with non-December

year-ends have significantly shorter audit delay. Highly levered firms, those with extraordinary

items, and loss firms have significantly longer audit delay. Similarly, firms with restatements and

material weaknesses have significantly longer audit delay. Finally, higher audit fees are associated

with significantly longer audit delay.

Multivariate Results

Table 5 reports our regression results. The results support our hypothesis that the provision of

internal audit financial statement audit assistance can result in timelier financial reporting. The

12 Prior research related to audit delays reports wide variation in the incidence of extraordinary items. Ettredge et al.(2006) report only a 4 percent incidence, and Bamber et al. (1993) report 15 percent. However, Ashton et al.(1987) report incidences ranging from approximately 30–34 percent, and Schwartz and Soo (1996) report almost36 percent. We include discontinued items also.



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coefficient for IAFAUD% is negative and highly significant. The impact on audit delay from the

25th to 75th percentile (or from 0.10 to 0.40) on our test variable is 2.57 days. When attempting to

interpret the economic significance of such delay reductions, it is important to note that there is

likely to be a minimum amount of time required for completion of a large company audit, regardless

of the amount of IAF-provided assistance. This is due, in part, to the nature of the year-end close

process. The shortest delay in our study was 40 days, and the 25th and 75th percentiles are

separated by 15 days. Thus, we evaluate the marginal effect of IAF-provided assistance in the

context of the post-year-end audit delay that is subject to reduction, rather than the full engagement

period. A reduction of 2.57 days is 17 percent of the 15-day period that separates firms in the 25th

and 75th percentiles, respectively. Alternatively, from a client perspective, one might also consider

the economic significance of an opinion that took two to three days longer to issue than anticipated,

when companies are under strict filing requirements and market expectations.13

As a main effect, the level of coordination (COORDIN) is marginally negatively significant.

This result is consistent with its expected impact on audit delay. However, when we interact

COORDIN and IAFAUD%, we find that the interaction coefficient is significantly negative. Thus,

the overall effect of COORDIN alongside increasing levels of IAFAUD% suggests that although

coordination has marginal benefits for audit timeliness, the benefits are most pronounced as external

TABLE 4

Univariate Results

Variable NameMean for Firmswith Delay . 59

Mean for Firmswith Delay � 59

Differencein Means

Mann-WhitneyStatistic

IAFAUD% 0.144 0.208 �0.064 10.485***

LOWRELY 0.535 0.355 0.180 9.784***

COORDIN 2.121 2.374 �0.456 3.055*

IAFRES $103.14/hr. $98.74/hr. $4.40/hr. 0.824

ASSETS $11,833 $13,894 �$2,061 5.005**

FININD 0.086 0.094 �0.008 0.728

HIGHTECH 0.149 0.239 �0.090 4.889**

LEVERAGE 0.292 0.218 0.074 4.647**

LOSS 0.104 0.075 0.029 4.722**

RESTATE 0.149 0.134 0.015 3.566**

AFEE 0.0084 0.0062 0.0022 8.995**

EXTRAITEM 0.444 0.366 0.078 3.604**

NONDECFYE 0.143 0.352 �0.209 9.222***

MATWEAK 0.194 0.134 0.060 11.011***

Observations 63 71

*, **, *** Significant at p-levels of less than 0.10, 0.05, and 0.01, respectively.Variable Definitions are provided in Table 1.

13 The economic significance of our findings is also complemented by Pizzini et al. (2011), who examine differentmeasures of IAF contribution in the pre-SOX time period. Among other characteristics, Pizzini et al. (2011) usethe Institute of Internal Audit’s GAIN database to incorporate measures of whether the IAF loans staff to theexternal auditor or completes audit work independent of the external audit. The results on their Assist variable aregenerally consistent with our continuous measure of IAF assistance (IAFAUD%).



auditors use increasing amounts of direct assistance from the IAF. In addition, we compared the

effect of COORDIN in those sample firms with delay at the 75th percentile or higher (67 days) to

those with delays at the 25th percentile or less (52 days). The coefficient on the COORDIN variable

for the long delay firms (2.011) was significantly lower than the coefficient for short delay firms

(2.405) at the 1 percent level.14

We also find that internal control environments described as LOWRELY had larger audit delay,

consistent with expected increases in year-end substantive testing. However, when we interact

LOWRELY and IAFAUD%, we find that the interaction coefficient is significantly negative and the

combined impact of IAFAUD% could possibly moderate any increases in audit delay caused by a

lower reliance on internal controls.15 The coefficient estimate for the interactive effects of

TABLE 5

OLS Regression Results

DELAY ¼ b0 þ b1IAFAUD%þ b2LOWRELY þ b3COORDIN þ b4IAFRESþ b5IAFAUD%�LOWRELY þ b6IAFAUD%�COORDIN þ b7IAFAUD%�IAFRESþ b8SIZEþ b9FININDþ b10HIGHTECH þ b11LEVERAGEþ b12LOSSþ b13RESTATEþ b14AFEEþ b15EXTRAITEM þ b16NONDECFYEþ b17MATWEAK þ e:

Variable Name Coefficient Estimate t-statistic

Intercept 30.5522 12.5651

IAFAUD% �8.5962 �3.7994***

LOWRELY 8.7764 5.9927***

COORDIN �1.3825 �1.6701*

IAFRES 0.0532 1.1154

IAFAUD% � LOWRELY �2.9117 �4.2549***

IAFAUD% � COORDIN �1.0165 �3.8981***

IAFAUD% � IAFRES �0.0103 �3.9000***

SIZE �4.006 �7.3093**

FININD 0.1715 0.8886

HIGHTECH �2.4455 �2.9887***

LEVERAGE 7.7765 2.8242***

LOSS 1.6078 1.7288**

RESTATE 3.4776 4.3001***

AFEE 300.0779 3.5559***

EXTRAITEM 5.4368 3.3330***

NONDECFYE �5.2222 �6.2424***

MATWEAK 7.0061 5.2775***

Number of obs. 134

R2 0.3222

*, **, *** Significant at p-levels of less than 0.10, 0.05, and 0.01, respectively.Variable Definitions are provided in Table 1, with the exception of SIZE, which is the natural log of ASSET.

14 We thank an anonymous reviewer for this insight.15 The counteracting effects can be seen by contrasting the combined coefficients of the interaction coefficient of

IAFAUD% 3 LOWRELY with the overall effects of IAFAUD% and LOWRELY, respectively (i.e., [�9.00 þ�3.17] versus [8.68 þ�3.17]). Comparing the combined coefficients suggests that the moderating impact ofinternal audit assistance (IAFAUD%) on audit delays is particularly important when additional substantiveprocedures are required in a LOWRELY environment.



LOWRELY and IAFAUD% is consistent with the importance of using internal audit assistance to

curb expanding audit delay when faced with greater amounts of year-end substantive testing. The

associations exhibited by our remaining control variables are consistent with prior audit delay

research (Krishnan and Yang 2009; Ettredge et al. 2006).

DISCUSSION AND LIMITATIONS

Our study is subject to a number of important limitations. Our survey period coincides with a

period when the supply of qualified accounting professionals was apparently not adequate, given

the implementation of SOX and heightened concern for auditor liability. Fiscal year 2005 was a

year in which many external audit firms experienced high turnover, staff shortages, and operated

close to (or over) full capacity, as exhibited by burgeoning audit delay (Lambert et al. 2010;

Gullapalli 2005). Because our hypothesis depends, in part, on the IAF-provided assistance

supplementing scarce external audit resources, the applicability of our results might be limited to

periods in which the supply of external auditors is constrained, either in localized settings or more

broadly in the economy. However, this time period also reflects a setting amplified by an exogenous

shock that provides a natural experiment setting to test certain effects on audit delay. Such a period

may well occur again, if the U.S. ever moves to mandate the use of IFRS.

Our findings are also subject to the potential limitations of survey data. CAE perceptions may

have been influenced due to Section 404 controls testing being conducted by both external and

internal auditors.16 However, we note that IAFAUD% is based upon a weighting scheme that is

strictly IAF specific. IAFAUD% is based solely on IAF budget and budget allocations. In addition,

our dependent variable, audit delay, is measured based upon the difference between two publicly

available dates. We also recognize that while other characteristics might be perceptual in nature,

there is some consistency with prior research. For example, the mean value of COORDIN (2.24) is

very similar to the mean value found for COORDIN (2.31) in Felix et al. (2001).17 Felix et al.

(2001) gathered their data from the mid-1990s. Thus, while we cannot definitively know the degree

to which SOX biased the survey responses, we note that our mean values are very similar to a

survey sent prior to SOX. In a separate unreported analysis, we did not find any significant

differences in our internal audit variables between firms that paid relatively more to their external

auditors for Section 404 fees and those that paid relatively less. The lack of univariate differences

for our perception-based variables (COORDIN and LOWRELY) between groups paying relatively

more (less) for Section 404 fees reinforces our prior results and reduces some of the remaining

concerns.

Our results are also vulnerable to other unknown response bias, and dependent on accurate

reporting by the survey respondents. However, our findings complement and extend prior and

ongoing research that utilizes survey information about the inner workings and design of internal

audit functions (Lin et al. 2011; Prawitt et al. 2009; Abbott et al. 2010, 2007; Carcello et al. 2005;

Felix et al. 2001). We performed additional univariate tests for differences in observable variables

(assets, industry membership, etc.) between responders and non-responders. We found no

significant difference. We also performed a similar set of tests between first and second responders,

16 Our results are likely to be conservatively biased since the internal control audit requirements of SOX Section404 and PCAOB Audit Standard No. 2 had also created unintended reservations among external auditorsconcerning the use of IAF assistance (PCAOB 2007), despite the fact that neither SOX nor the PCAOB explicitlyprecluded the use of IAF assistance. We are grateful to an anonymous reviewer for highlighting this potentiallimitation.

17 We also note that our findings are subject to the responses of the chief audit executives. Our results could differdepending on the external auditor’s perceptions concerning the extent of coordination between the IAF and theexternal audit firm.



and also failed to document any statistically significant differences between the two subsamples for

any of our control, test, or dependent variables.

We also acknowledge that the use and impact of interim procedures represents a common

limitation of prior and current audit delay research. Anecdotally, we have observed in conversations

with Big 4 firms that the IAF is also used to roll forward, at year-end, the interim procedures that

were completed by the IAF. Although we cannot observe the specific distribution of procedures

across the year, we are comfortable in arguing that IAF assistance is used both for interim and

year-end procedures. This represents a fruitful avenue for future research.

In addition to the reduction in delays, untabulated tests of the impact of IAF assistance (as

measured in hours) on external audit fees also suggest that commitments of IAF resources to

external auditor assistance also represent cost-effective trade-offs, on average. We note that the

above finding is also consistent with the findings of Abbott et al. (2012), which suggest an

economically viable trade-off between IAF assistance and external audit hours. Despite the

potential audit efficiency benefits, we acknowledge that firms must also consider the impact of IAF

assistance on audit quality in order to avoid potential compromises of external audit quality. In

untabulated results, we examined the impact of our IAFAUD% variable on the absolute value of

abnormal accruals. We found a negative and marginal relation (consistent with quality

improvements), but at less than conventionally significant levels (two-sided p , 0.12) (consistent

with Davidson et al. 2005).18 We believe the impact of IAF attributes on audit quality represents an

ongoing important issue for practice and research.

CONCLUSION

We examine whether the extent of internal auditor-provided assistance with the financial

statement audit is associated with shorter audit delay. We find that our measure of internal audit

assistance, which is derived from data on the internal audit function’s overall allocation of

activities, is negatively associated with the audit report delay. We also find that these benefits are

particularly important in environments characterized by low internal control reliance. In addition,

we find that although increasing degrees of coordination between the IAF function and the external

auditor can reduce audit delay, the benefits are more pronounced when external auditors combine

increases in IAF assistance with increases in the level of coordination between the two groups.

Finally, we note that audit delay reductions from internal audit assistance are more pronounced

when the firm makes greater investments in internal audit quality. Thus we provide evidence

consistent with IAF assistance improving audit timelines, as well as the internal audit environment

characteristics that moderate these relationships.

Our findings should be of interest to regulators concerned with the timeliness (and therefore the

usefulness) of financial reporting, and also to audit committees and internal and external audit

professionals who make decisions regarding the deployment of internal audit resources. For

example, in response to the burgeoning audit requirements and pressures on external auditors, the

PCAOB included an emphasis in Auditing Standard No. 5 on the potential value of utilizing IAF

assistance (PCAOB 2007). Some of this emphasis came from a perceived reluctance of external

auditors to use IAF assistance in the post-SOX environment. The PCAOB saw it necessary to

remove any unintended perceptions concerning restrictions on the use of IAF by ‘‘encouraging the

use of others (including, but not limited to internal audit) to a greater extent’’ as a part of the

integrated audit, and reaffirming the potential positive impact that IAF assistance can have on the

external audit process (PCAOB 2007).

18 We thank an anonymous reviewer for suggesting the discussion of the cost effectiveness and potential qualitybenefits associated with IAF assistance.



We encourage future research that incorporates the decision to rely on IAF assistance and how

it impacts the effectiveness of the audit process or the choice of audit procedures. Additional

research is also warranted regarding other elements of the IAF that may impact both audit delay and

earnings announcement timing, such as the contribution of controls monitoring undertaken

throughout the year or year-end SOX controls testing.

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