Journal of Financial Reporting and Accounting

The Relationship between Adherence of Internal Audit with Standards and Audit Fees
Abdulaziz Alzeban Nedal Sawan
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Abdulaziz Alzeban Nedal Sawan , (2016),"The Relationship between Adherence of Internal Audit with Standards and Audit
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 The Relationship between Adherence of Internal Audit with Standards and Audit Fees

ABSTRACT: This study aim to examine the relationship between external audit fees and
the adherence of internal audit with the International Standards for the Professional
Practice of Internal Auditing (ISPPIA), i.e., whether such adherence has a relation with
lower or higher audit fees. Data were gathered from the annual reports and 229 chief
internal auditors (CIAs) from UK companies listed on the London Stock Exchange. The
result suggests that in fact, higher external audit fee is related with adherence with both
attribute and performance standards. It also finds that there is an association between
audit fees and budget for the internal audit, and with longer tenure of the CIA. These
results are in line with previous research findings that indicate audit fees to be greater
when companies have investment of internal audit, as this signifies greater attention to
corporate governance and a wish to obtain a reliable audit of good quality.
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Keywords: Audit fees; audit quality; internal audit standards; internal audit

1. INTRODUCTION
This paper explores the possibility that in the UK, a direct relationship exists between the
presence of the internal audit function (IAF) and that function’s adherence to the International
Standards for the Professional Practice of Internal Auditing (ISPPIA), and the level of audit fee.
In fact, the literature reports two opposing scenarios. One is that an effective IAF can substitute
to a large extent for the work of external auditors and thus, fees associated with external audit
can be reduced (e.g. Mohamed, 2012; Zulkifflee et al., 2012; Ho and Hutchinson, 2010; Felix et
al., 2001; Carey et al., 2000a). The other is that companies that have an effective IAF, committed
to strong corporate governance, have great audit quality and hence attract higher audit fees (e.g.
Singh et al., 2014; Markelevich and Rosner, 2013; Goodwin-Stewart and Kent, 2006; Francis,
2004; Carey et al., 2000a; Hay and Knechel, 2002). Researchers adopting this latter perspective
note that a higher external audit fee suggests a higher quality of audit, since this higher fee is
taken as a sign that more effective audit investigations are provided than when a lower fee is
charged. It is also observed by O’Sullivan (2000) that a higher fee is associated with the hiring of
more specialised audit staff and the allocation of more hours in order to produce a more
comprehensive audit service. Hence, in this scenario, it is anticipated that adherence with the
internal audit standards which demand greater complexity and disclosure in reporting, is
indicative of higher audit quality, and consequently, of a higher audit fee being charged.

1
 Companies that trade publicly, and financial regulators, perceive the IAF as important since if it
is able to address risks, reduce misstatements, and safeguard against ethical lapses, corporate
governance can be seen to be strong, and thus, investors receive a positive signal. However,
despite the importance attached to the role of the IAF in this respect, there is very little evidence
of precisely how adherence of internal audit with its standards might affect the audit fees
eventually paid, if at all.

It is true that much work has been undertaken on the relationship between the presence of the
IAF and the size of external audit fees (e.g. Singh et al., 2014; Zulkifflee et al., 2012; Singh and
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Newby, 2010; Hay et al., 2008; Goodwin-Stewart and Kent, 2006; Hayland and Verrault, 2003;
Spira and Page, 2003; Hay and Knechel, 2002; Carey et al., 2000b), but no focus on adherence of
internal audit with the ISPPIA is evident. In general, research has concentrated on issues
concerning the objectivity and competence of the IAF as potential influences upon the extent of
external auditors’ reliance on the work produced by the IAF (Zulkifflee et al., 2012;
Krishnamoorthy, 2002; Maletta 1993), and hence on fees which reflect the hours involved, but
the conclusions drawn are arrived at without any statistical testing of how these phenomena
actually affect audit fees, and those conclusions differ.

The primary motivation of this study is, therefore, to examine how the adherence of internal
audit with its standards is related to external audit fees, and to do so via empirical work, since to
date there has been no such research in this direction. In following this line of enquiry, the study
attempts to fill the current void in the literature by exploring empirically, whether internal audit
adherence with the standards is influential upon audit fees. As a second motivation, there is the
need to determine – if a relationship is proven - the direction of association between adherence of
internal audit with the standards and certain of those standards, upon audit fees. Given the lack of
attention to the potential impact of the ISPPIA on audit fees by previous researchers, any insight
provided by the study in this regard will represent a valuable contribution to the literature in
complementing what already exists, and pointing the way to further research opportunities.

We formulate hypotheses on the influence of internal audit adherence with the standards on audit
fees and test these via regression model on data collected from 229 CIAs in UK companies listed

2
 on the London Stock Exchange. The results indicate that higher external audit fee is related to
internal audit adherence with its standards, suggesting that adherence with such standards
demands a higher audit quality. Further, the results reveal that higher audit fee is related with the
tenure of the CIA. It reveals that companies that have greater internal monitoring through their
adherence with standards demand higher audit quality, and simultaneously implies that these
companies appreciate the value of both kinds of audit in the attempt to make their corporate
governance more robust.

2. BACKGROUND AND HYPOTHESIS

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As indicated, the findings from studies to date do not agree on the relationship between the size
of the external audit fee and the existence of the IAF, and further, where an IAF exists, between
the size of that fee and the procedures adopted by the IAF, i.e., the ISPPIA. A negative
relationship is found by Felix et al. (2001) in regard to the reliance placed by the external auditor
on the IAF’s assistance, and the audit fee charged. These researchers also explore what
determines the degree of reliance placed upon the IAF, concluding that this is significantly
related to whether or not this function is in evidence, and if so, what level of quality it produces.
In their investigation of this issue in Hong Kong, Ho and Hutchinson (2010) were able to
establish that the contribution made by the IAF could substantially reduce the amount of work
required to be undertaken by the external auditor, and thus result in lower audit fees. Likewise,
Carey et al. (2000a) found that the IAF could substitute for the external audit, and vice-versa;
and Mohamed (2012) also established that the competency of the IAF and its overall contribution
could indeed substitute for external audit, and reduce the external audit fee. In his study of 73
auditors (internal and external) in listed companies in Malaysia, it emerged that lower audit fees
resulted from greater competency of internal audit, as determined by its length of existence. And
exploring the relationship between the competency of the IAF and its contribution to financial
statements, and the audit fee, Zulkifflee et al. (2012) found that the length of time the IAF had
existed within an organisation, the training provided to staff, the experience of internal audit staff
in auditing and accounting, and the extent of their certification, were all related to the size of the
audit fee, thereby lending weight to the substitution view in respect of internal audit quality and
audit fees.

3
 However, it is also shown that external auditors develop an opinion regarding the quality of the
IAF before they are prepared to allow for substitution. For example, Krishnamoorthy (2002), and
Maletta (1993) found a positive relationship between external auditors’ beliefs concerning an
organisation’s status and commitment to competence, and whether they were prepared to accept
the assistance provided by the IAF. And, in their study of Australian publicly-listed companies,
Goodwin-Stewart and Kent (2006) established that the IAF was only relied upon by one third of
the sample of external auditors, suggesting that the majority of opinions formed of the IAF’s
competence were negative. At the same time, Singh and Newby (2010) achieved results
indicating that organisations with active IAFs attract higher audit fees, so whilst it is clear that
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some association does exist between the level of audit fees and the use made by external auditors
of the IAF, it is not always obvious what the precise causes of higher or lower fees are, and the
levels of substitution vary.

2.1 Prior Studies of the ISPPIA

The international standards for the professional practice of internal auditing (ISPPIA) provide
guidance to internal auditors to enable them to discharge their responsibilities effectively, and
thus guarantee that the control, risk management, and governance processes they should be
implementing, are successful (IIA, 2012). Consequently, if these Standards are adhered to, IAF
activities should be similar in all organisations, but as has been found by Abdolmohammadi
(2009), 13.5% of CAEs do not adhere with the Standards, and when such adherence exists, it
fails to adhere with all of their requirements. High levels of adherence were seen to be the result
of the period of being a member of the IIA, certified of internal auditor, and continuous
development and training. Length of organisations’ operation was found by Leung and Cooper
(2009) to be important in this respect, since countries such as Australia, New Zealand, Japan,
Chinese Taiwan, and China, report a high level of adherence with internal audit Standards,
although only Australia was seen to be in full adherence. Leung and Cooper (2009) reported that
IAF is different amongst companies existing in Australia, New Zealand and Japan. Adherence of
internal audit with the standards is reported higher is reported higher in Australia, New Zealand,
Japan, China, and Taiwan. However, full adherence by internal audit with its standards was
reported higher in Australia. However, in providing information concerning the adoption of the
Standards in the US and certain European countries (Belgium, Italy, Netherlands, the UK, and

4
 Ireland), Burnaby et al. (2009) identified significant numbers of cases where the Standards were
not used at all. They achieved this by using the Common Body of Knowledge 2006 database to
show the differences between the five countries mentioned and the US with regard to the level of
adherence by the participants’ IAFs with those Standards. Significant variance was found on a
country-wide basis. In fact, adherence with Standards 1300 and 2600 was seen to be limited. The
US reported the highest amount of full adherence with Standards 1300 (48.6%) and 2600
(59.2%), while the lowest full adherence was found in Italy (28.6% and 34.9% respectively). It is
required by Standard 1300 to have a formal quality internal and external assessments of the
internal audit adherence with the Standards. Yet, it emerged that there is an absence of adherence
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with these standards. Moreover, it was reported in Italy that 65% of participants indicated that
they had never undergone a formal assessment, or that any internal quality assessment that had
been conducted had not been in accordance with Standard 1311. Furthermore, In Ireland and the
UK, the number of participants indicating a similar scenario was much less, at only 30.6%. In
terms of formal quality assessments by external party, a high percentage of 72.4% of the
participants in Italy was balanced by a low of percentage of 31.5% in Ireland and the UK,
indicating that their IAF had never been externally reviewed, or if they had, such review had not
been performed according to Standard 1312. These results suggest a demand for the IAF to have
an action in establishing quality assessment reviews. Reported in South Africa, Marais et al.
(2009) pointed out that almost 95% of the IAFs in the country were undertaken using internal
audit standards. Adherence of internal audit with Standard 1300 is reported as the lowest,
although a higher percentage of IAF were currently being performed in full adherence with this
Standard.

Hence, if audit fees are indeed related to the investment of IAF and competence of the IAF as
argued by many researchers (e.g., Hay and Knechel, 2002; Goodwin-Stewart and Kent, 2006;
Singh and Newby, 2010; Markelevich and Rosner, 2013), it is still not known from prior
research how internal audit adherence with its standards has a relation with the audit fees, which
is the motivation of this study.

5
 2.2 Hypothesis Development
From the discussion it can be understand that the results from the research on this issue to date
have been conflicting. However, a definite association has been found by Felix et al. (2001) in
respect of the relationship between external audit fees and IAF, and there is sufficient evidence
to regard internal audit as at least a partial alternative for external audit (Mohamed, 2012; Ho and
Hutchinson, 2010; Felix et al., 2001). Certainly, Abbott et al. (2012) find significantly negative
relationship between the number of in-house hours devoted to helping the external auditor, and
the amount of fees paid to the external audit. Yet, Stein et al. (1994) and Carey et al. (2000a) are
unable to establish any significant relationship in this respect.
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That said, other researchers have found audit fees to be higher when the IAF makes a
contribution (Singh et al., 2014; Goodwin-Stewart and Kent, 2006; Carey et al., 2000b; Hay and
Knechel, 2002), thereby implying that internal and external audit serve in a complementary
fashion in the business of increasing the overall level of monitoring, and hence, the overall
quality threshold. This interpretation is in line with the conception of the IAF as having a wider
role, involving risk management and corporate governance, than it originally had when its
concentration was purely on control (Carey et al., 2000b; Brody and Lowe, 2000; Leung et al.,
2004). The logical outcome of such enhancement is that its implicit commitment to robust
corporate governance predisposes higher levels of internal auditing, higher levels of adherence
with the ISPPIA, and greater willingness to allocate funds that secure a higher quality external
audit. Moreover, as it is known that greater certification of internal auditors and length of
training are related to auditors’ desire to adhere with the ISPPIA (Abdolmohammadi, 2009), and
to higher quality of audit, and higher external audit fees (Markelevich and Rosner, 2013; Singh
and Newby, 2010; Basioudis et al., 2008; Srinidhi and Gul, 2007; Goodwin-Stewart and Kent,
2006; Yatim et al., 2006; Kinney et al., 2004), it is logical to argue that significantly more
complicated information and disclosure will be provided by internal auditors through their
adherence with the ISPPIA, and that external audit fees will reflect the increased professional
care, diligence, and time required of external auditors. The following hypotheses are thus,
produced:

6
 H1: There is a relationship between audit fees and adherence of internal audit with
attribute Standards.
H2: There is a relationship between external audit fees and adherence of internal audit
with performance Standard.

3. RESEARCH METHODS
A survey of UK listed companies was conducted and data gathered via the questionnaire were
complemented by details appearing in annual reports of the responding companies. The
questionnaire survey was sent to certified internal auditors (CIAs), in keeping with the majority
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of other studies into aspects of internal audit (Pelfrey and Peacock, 1995; Scarbrough et al.,
1998; Raghunandan et al., 2001; Carcello et al., 2005; Abbott et al., 2012;). In total, 670
questionnaires were distributed, with the aim of securing information concerning these
companies’ internal audit activities. A total of 131 usable responses was received from the first
survey (August 2014). After that, a follow-up mailing (October 2014) made an additional 98
responses, giving a total of 229, representing a response rate of 34%, which, when compared
with the rates reported by other researchers (Felix et al., 2001; Goodwin-Stewart and Kent, 2006;
Abbott et al., 2012), is reasonable.

Again, in keeping with the recommendations in the research methodology literature (Collis and
Hussey, 2009; Cooper and Schindler, 2008), the items in the survey were developed on the basis
of instruments which had been used successfully in earlier studies. The questionnaire was
constructed so as to gain responses regarding the internal audit department, audit committee
characteristics, attribute standards, and performance standard, to obtain the objectives of the
study.

Variables of the Study and Model Specification

Regression model was used to test the hypothesis. This approach can be seen as an extension to
the traditional model used in respect of audit fees (Abbott et al., 2012, Goodwin-Stewart and
Kent, 2006; Craswell and Francis, 1999), and was chosen in order to accommodate the variables
of interest in this study. As with earlier studies, we adopted the natural log of external audit fees

7
 as our dependent variable. The explanatory variables are the Attribute Standard and Performance
Standard.

Previous research findings led us to anticipate that larger and more complex client organisations
would demand more external audit work, and thus, higher fees. In that case, the expectation is
that external audit fees have positive relationship with the natural log of total assets (SIZE), the
ratio of inventory to total assets (INVENTORY), ratio of receivable to total asset
(RECEIVABLES), square root of the number of subsidiaries (SUBSIDIARIES), independence
of audit committee members (INDEPENDENCE), members of audit committees with the
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knowledge and experience in auditing (EXPERTISE), and frequent meeting of audit committee
(MEETING) (e.g. Abbott et al., 2012, Yasin and Nelson, 2012; Goodwn-Stwart and Kent, 2006;
Abbott et al., 2003; Carcello and Neal 2003; Carcello et al, 2002; Dechow et al., 1996; Chan et
al., 1993). These factors are controlled for in the analysis. Figure 1 present the model of this
study.

Model
As with previous research (e.g. Abbott et al., 2012, Goodwin-Stewart and Kent, 2006; Craswell
and Francis, 1999), regression equation is used to investigate the relationship between the
internal audit adherence with attribute and performance standards, and audit fees:

AUDITFEE = b0 + b1 ATTRIBUTE + b2 PERFORMANCE + b3 SIZE + b4 INVENTORY +

b5 RECEIVABLES + b6 SUBSIDIARIES + b7 INDEPENDENCE +
b8 EXPERTISE+ b9 MEETING + b10 SIZEIAD + ei

Where:
AUDITFEE = Natural log of audit fees.
ATTRIBUTE = Attribute standard of the ISPPIA (1=strongly disagree to 5=
strongly agree).
PERFORMANCE = performance standard of the ISPPIA (1=strongly disagree to 5=
strongly agree).
SIZE = Firm size (natural log of total assets).
INVENTORY = Ratio of inventory to total assets.
RECEIVABLES = Ratio of receivables to total assets.
SUBSIDIARIES = Square root of the number of subsidiaries.
INDEPENDENCE = 1 if audit committee is 100% independent, else 0.

8
 EXPERTISE = 1 if audit committee has at least one auditing expert, else 0.
MEETING = Number of audit committee meetings during the year.
SIZEIAD = Size of internal audit department (equal to natural log of total
numbers of internal auditors working in the department divided by
natural log of total asset).

4. RESULTS AND DISCUSSION

Result that is shown in Table 1 reveals the descriptive statistics for the variables in the model. It
shows that the mean of external audit fee is £5,915, with a minimum fees of £4,534 to a
maximum fees of £6,912. Also, the mean score of the independence of audit committee is .56,
(zero to 1). The mean percentage of members of audit committee with the knowledge of auditing
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and accounting is .46. The mean number of internal auditors working in the department is 7.2,
with a maximum number of 37. Further, the results indicate that the mean scores of adherence
with standards are slightly over the mid-point on their scale of one to five. Consistent with
previous studies (e.g. Burnaby et al., 2009) results also show that standards 1300 quality
assurance and improvement program scored the lowest mean at 2.1, indicating low perceptions
of having formal internal and external quality assessment.

INSERT TABLE 1 HERE

Our first step was to regress audit fees on the control variables to establish the validity of our
model, and in this respect, we achieved results (not tabulated) that show an adjusted R2 of .802.
As with other researches, external audit fees emerged as being related to size, inventory to total
asset, receivable divided by total assets, number of subsidiaries, and size of the IAF. Moreover,
consistent with previous studies, results reveal a significant relation between higher audit fee and
frequent meetings of audit committees; in contrast with Goodwin-Stewart and Kent (2006) It is
found that audit fees have a relation with the independent members of audit committee, and a
significant association exists with the audit committee’s expertise, thus implying that
independence and expertise both improve quality audit, and hence, attract higher audit fee.
Further, the correlation for the independent, dependent, and control variables are reported in
Table 2. The result shows that both Attribute and Performance Standards are positively and
significantly related to audit fees p < .01.

9
 INSERT TABLE 2 HERE

The regression result of the model is presented in Table 3. The model is tested for our dependent
variable, audit fees.

INSERT TABLE 3 HERE

The results of the model reveal that it is overall significant at the level of p < .01, with an
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adjusted R2 of .829. As it is predicated that the coefficients on the control variables are
significant at the level of p < .01, consistent with previous studies, it suggests that higher external
audit fee is strongly related to SIZE, RECEIVABLES, SUBSIDIARIES, and SIZEIAD. For our
test variable, the coefficient on ATTRIBUTE has a significant association p < .01 providing a
support to our hypothesis (H1) suggesting that higher audit fee is strongly related to adherence of
internal audit with Attribute Standards. Further, we repeat our analysis by running the regression
against each Attribute Standard1. The untabulated result indicates that audit fee is related with
each Attribute Standard at p < .01.

Moreover, the results of the regression show that the coefficient on PERFORMANCE indicates a
significant association at the level of p < .01 providing a support to our hypothesis (H2)
suggesting that higher audit fee is strongly related to adherence of internal audit with
Performance Standard. Further, we repeat our analysis by running the regression against each
Performance Standard2. The untabulated results reveal that audit fee is associated with each
Performance Standard at p < .01.

Further, we also test whether audit fees are higher when there is an interaction between the two
standards (ATTRIBUTE * PERFORMANCE). It is found that the coefficient on the interaction
between ATTRIBUTE and PERFORMANCE is significant and positive at the level of (p < .01).

1
“1000 Purpose, Authority, and Responsibility; 1100 Independence and Objectivity; 1200 Proficiency and Due
Professional Care; and 1300 Quality Assurance and Improvement Program.”
2
“2000 Managing the Internal Audit Activity; 2100 Nature of Work; 2200 Engagement Planning; 2300 Performing
the Engagement; 2400 Communicating Results; 2500 Monitoring Progress; and 2600 Communicating the
Acceptance of Risks.”

10
 Additionally, we explore association between audit fee, the budget allocated to the IAF, and CIA
tenure. The results show that these two variables are highly significant (p < .001) indicating that
internal audit budget and CIA tenure provide higher internal audit quality and higher audit fee.
We further examine the sensitivity of our results by including certain demographic variables
(CERTIFICATIONS, TRAINING) within the model, and find that it is overall significant at p <
.01 when incorporating these. This additional analysis provides a support to the results of
Goodwin-Stewart and Kent (2006), who found that higher audit fee is related to the investment
of IAF, and those of Abdolmohammadi (2009) to the effect that certification, and the length of
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training are positively related with adherence of internal audit with its standards. Therefore, it
can be argued that the higher certification and training possessed by IAF staff, the greater their
adherence with standards, and hence, the higher the audit quality, and audit fees.

5. CONCLUSION
Existing researches of the interaction between audit fees, audit committees, and the IAF, have
produced conflicting outcomes, thus leading to inconclusive evidence either way. Our study was,
therefore, prompted by the lack of archival certainty regarding the degree to which adherence of
internal audit with the ISPPIA influences the external audit fee. Certainly, given the increasing
obligations placed upon the IAF to assure audit quality, this investigation is warranted. We
expect that greater internal audit adherence with internal audit standards and the accompanying
need for stronger corporate governance, would engender greater audit quality, and hence, higher
audit fee. Similarly, we also argue that an IAF which has a high budget and consequently, a large
quota of staff, will be also associated with a high audit fee. In fact, this study does demonstrate
that with the particular sample used, the presence of audit committees signal a higher level of
audit fee, an outcome which is in line with audit committees’ demands for better quality auditing
(Goodwin-Stewart and Kent, 2006; Francis, 2004). It also emerges from the investigation that
higher audit fee is related to the independence of the audit committees, the knowledge and
experience of the audit committees, and frequent of audit committee meetings, with the
relationship being that the higher each of these variables is, the higher the audit fee. These
relationships indicate that the audit committee’s commitment to quality apparently provokes a
wish to improve quality of the audit, and thus generates a situation where higher audit fee result

11
 because of the increased volume and complexity of the job performed by external auditors and
the additional hours required of them in this respect. And finally, the study shows that those
companies that do have high audit costs are more likely than those that do not, to demonstrate
more effective internal audit, and higher adherence with the standards.

Our results lend support to those obtained in fieldwork by Abdolmohammadi (2009), who finds
that certification (e.g. certified of internal auditors CIA), and the period of training are positively
related with the adherence of internal audit with its standards, and the studies of Singh and
Newby (2010) and Goodwin-Stewart and Kent (2006) who found higher audit fee to be
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associated with the use of internal auditing. Thus, it can be argued that higher levels of
certification and training among internal audit staff promote greater internal audit adherence with
standards, and result in higher quality audit and higher audit fee. This study is of importance for
managers with responsibility for good corporate governance since it clearly indicates that active
audit committees, large IAFs, and greater adherence with internal audit standards demand higher
quality auditing, and hence attract higher audit fee.

Certain limitations exist in this study, however, and in future research these should be addressed.
Firstly, there is the fact that it focuses on variables such as adherence with internal audit
standards, budget of internal audit, and the size of IAF, and does not consider other variables that
might influence the adherence with the standards, and hence audit fees. Consequently, there are
opportunities for additional research to include the interaction between the IAF and the audit
committees (e.g. the audit committees involvement in the hiring/dismissal of CIAs), and to
measure the impact of such interaction on adherence with the internal audit standards, and thus,
audit fees. Secondly, the research sample was comprised of CIAs, and their perceptions of their
companies’ adherence with the standards may be different from those of auditees, or indeed
external auditors. Opportunities thus exist for an exploration of the perceptions of the same
variables by a different sample. Further, consistent with other research (e.g. Burnaby et al., 2009;
Marais et al., 2009), this study find lower adherence with Standard 1300 that requires formal
internal and external quality assessments. According to the standard, external quality assessment
is required every five years, thus, a future research can be conducted in the future to investigate
whether such adherence with this standards has been enhanced.

12
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 Figure 1: Model of the Study

Internal audit
conformance with the
ISPPIA

• Attribute Standard
• Performance
Standard
Audit Fees

Control Variables
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• Firm size
• Inventory
• Receivables
• Subsidiaries
• AC
independence
• AC expertise
• AC meeting
• Investment of IA

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 Table 1: Descriptive Statistics Audit Fees and Adherence with Internal Audit Standards
_____________________________________________________________________________________________
Variables MAX MIN Mean Std. Dev.

_____________________________________________________________________________________________
AUDITFEE 6.912 4.534 5.915 .465
SIZE 2800 80 1.189 695
INVENTORY .786 .000 .233 .207
RECEIVABLES .871 .000 .315 .211
SUBSIDIARIES 216 .00 13.72 8.91
INDEPENDENCE 1 0 .56 .34
EXPERTISE 1 0 .46 .40
MEETING 11 2 4.4 1.01
SIZEIAD 37 2 7.2 4.20
Purpose, Authority, and Responsibility 5 2 3.1 .63
Independence and Objectivity 5 2 3.2 .77
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Impairment to Independence or Objectivity 5 1 3.2 .86

Proficiency and Due Professional Care 5 2 3.3 .61
Quality Assurance and Improvement Program 4 1 2.1 .74
Managing the Internal Audit Activity 4 1 2.8 .79
Nature of Work 4 2 2.6 .59
Engagement Planning 4 2 2.7 .69
Performing the Engagement 4 1 2.7 .77
Communicating Results 5 2 3.2 .52
Monitoring Progress 4 2 2.5 .57
Communicating the Acceptance of Risks 4 2 2.3 .67
___________________________________________________________________________________

AUDITFEE = Natural log of audit fees.

SIZE = Firm size (natural log of total assets).
INVENTORY = Ratio of inventory to total assets.
RECEIVABLES = Ratio of receivables to total assets.
SUBSIDIARIES = Square root of the number of subsidiaries.
INDEPENDENCE = 1 if audit committee is 100% independent, else 0.
EXPERTISE = 1 if audit committee has at least one auditing expert, else 0.
MEETING = number of audit committee meetings during the year.
SIZEIAD = Size of internal audit department (equals to natural log of the total
number of staff in the IA department divided by the natural log of total
assets).
Standard 1000: Purpose, Authority, and Responsibility
Standard 1100: Independence and Objectivity
Standard 1130: Impairment to independence or objectivity
Standard 1200: Proficiency and Due Professional Care
Standard 1300: Quality Assurance and Improvement Program
Standard 2000: Managing the Internal Audit Activity
Standard 2100: Nature of Work
Standard 2200: Engagement Planning
Standard 2300: Performing the Engagement
Standard 2400: Communicating Results
Standard 2500: Monitoring Progress
Standard 2600: Communicating the Acceptance of Risks

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 Table 2: Correlation for the Variables
_____________________________________________________________________________
1 2 3 4 5 6 7 8 9 10 11
____________________________________________________________________________________________

1 AUDITFEE 1.00
2 ATTRIBUTE .67** 1.00
3 PERFORMANCE .62** .64** 1.00
4 SIZE .78** .54** .58** 1.00
5 INVENTORY .55** .05 .13 .35** 1.00
6 RECEIVABLES .63** .08 .05 .49** .26** 1.00
7 SUBSIDIARIES .65** .52** .58** .73** .22** .19* 1.00
8 INDEPENDENCE .51** .47** .51** .44** .04 .02 .44** 1.00
9 EXPERTISE .31** .45** .41** .21* .16 .07 .32** .32** 1.00
10 MEETING .28** .21* .17 .14 .18 .06 .37** .31** .35** 1.00
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11 SIZEIAD .45** .43** .46** .73** .06 -.09 .67** .57** .51** .36** 1.00

*Correlation is significant at the 0.05 level

**Correlation is significant at the 0.01 level

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 Table 3: Regression Results
______________________________________________________________________________
Variable
Expected β. t Sig. Collinearity Statistics
Sign. Tolerance VIF
______________________________________________________________________________

ATTRIBUTE + .186 2.837 .006 .425 2.352

PERFORMANCE + .287 3.214 .002 .411 2.430
SIZE + .325 4.698 .000 .410 2.440
INVENTORY + .118 2.495 .014 .881 1.136
RECEIVABLES + .177 2.782 .007 .878 1.139
SUBSIDIARIES + .131 2.821 .006 .486 2.059
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INDEPENDENCE + .154 2.588 .011 .467 2.141

EXPERTISE + .136 2.476 .015 .436 2.296
MEETING + .140 2.156 .034 .650 1.538
SIZEIAD + .181 2.694 .008 .555 1.803

Adjusted R2 = .829
F = 52.042
P < .01
______________________________________________________________________________

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