The Impact of Internal Audit Function Quality

and Contribution on Audit Delays

Mina Pizzinia
Cox School of Business
Southern Methodist University
Dallas, TX
mpizzini@cox.smu.edu

Shu Lin
Craig School of Business
California State University, Fresno
Fresno, CA
shulin@csufresno.edu

Douglas Ziegenfuss
College of Business and Public Administration
Old Dominion University
Norfolk, VA 23529
dziegenf@odu.edu

September, 2011

We thank the Institute of Internal Auditors for access to the Global Auditing Information
Network (GAIN) database. We thank Barry Brian, Chris Hogan, Jason L. Smith, Mark Vargus,
David Wood, and seminar participants at the University of Tennessee, George Washington
University, University of California – Irvine, Texas Christian University, North Carolina State
University, and the 2011 Audit Section Meeting of the American Accounting Association for
their helpful comments.
a
Corresponding author
 The Impact of Internal Audit Function Quality
and Contribution on Audit Delays

ABSTRACT

This study investigates whether measures of internal audit function (IAF) quality and the
IAF’s contribution to the financial statement audit affect audit delay. We conduct empirical tests
using data from 213 firms that responded to the Institute of Internal Auditor’s Global Auditing
Information Network survey. Results indicate that IAF quality is negatively associated with audit
delay, suggesting that increases in IAF quality reduce external auditor effort. Audit delay is also
significantly shorter when the IAF contributes to the external audit by independently performing
relevant work, but not when IAF personnel directly assist the external auditor. We further
examine factors that affect the auditor’s decision to use IAF work. The likelihood that external
auditors use independently-performed IAF work is increasing in IAF quality and availability, and
decreasing in misstatement risk and external auditor availability. The likelihood that IAF
personnel directly assist external auditors is decreasing in IAF quality and misstatement risk.

Key Words: Audit delay, internal audit, internal audit contribution, reporting timeliness
 The Impact of Internal Audit Function Quality
and Contribution on Audit Delays

1. Introduction

This study investigates the internal audit function’s (IAF’s) role in the financial statement

audit by examining whether measures of IAF quality and the IAF’s contribution to the financial

statement audit affect audit delay. Audit delay, measured as the number of days between a firm’s

fiscal yearend and the audit report date, generally captures the time required to complete

fieldwork (Ashton et al. 1987). The auditing literature has long recognized the importance of

audit delay research because audit delays affect the timeliness with which financial and audit

information is publicly disclosed (Givoly and Palmon 1982). Current interest in audit delay

stems from recent accelerations in reporting deadlines and the implementation of Section 404 of

the Sarbannes-Oxley Act (SOX), which together require auditors to perform more work in less

time (U.S. Congress 2002; Ettredge et al. 2006; Bronson et al. 2011; Lambert et al. 2011).

Specific interest in the IAF arises from the implementation of Sections 302 and 404 of SOX,

which have increased IAF responsibilities surrounding internal control over financial reporting

(ICFR), and Auditing Standard No. 5 (AS 5), which facilitates external auditor reliance on the

IAF (U.S. Congress 2002; PCAOB 2007a; Schneider 2009). The sizeable literature on audit

delay determinants has examined factors associated with firm risk and the audit process, without

consideration of the IAF.

Audit failures of the early 2000s have raised concerns regarding the timeliness and

reliability of accounting reports (Ettredge et al. 2006). Undue reporting delays compromise the

SEC’s ideal of equal access to information among market participants (Hakansson 1977;

Chambers and Penman 1984; Bamber et al. 1993; SEC 2002). Pursuant to Section 409 of SOX, a

1
2002 SEC ruling gradually shortened 10-K reporting deadlines for accelerated filers from 90

days to 60 days over a three-year period (U.S. Congress 2002; SEC 2002).1 At the same time,

Section 404 of SOX significantly expanded attestation requirements and Auditing Standard No.

3 (AS 3) increased audit documentation requirements (PCAOB 2004a). Both preparers and

auditors expressed concern over their ability to accurately compile and effectively audit the

reports within the shorted time frame, especially given the expanded attestation requirements.

Consistent with these concerns, Lambert et al. (2011) and Bronson et al. (2011) suggest that

managers face a tradeoff between the accuracy of accounting information and the timeliness with

which information is reported. In particular, Bronson et al. (2011) document that Section 404 and

AS 3 increased audit delay; yet, firms did not correspondingly alter the timing of preliminary

earnings announcements (PEAs). Consequently, the number of firms that released earnings prior

to the completion of the audit increased from 37 percent of accelerated filers in 2002 to 87

percent in 2005, the first full fiscal year for which Section 404 was effective.2 Bronson et al.

(2011) find that PEAs that precede audit completion are more likely to be subsequently revised

than those issued after completion, suggesting lower earnings reliability.

In response to auditors’ and preparers’ concerns regarding reporting deadlines and to

facilitate efficient Section 404 compliance, the PCAOB enacted AS 5, which instructs external

auditors to give greater attention to entity-level controls in determining the nature and extent of

1
An interim filing deadline of 75 days became effective for accelerated filers for reports released after December
15, 2003, while the 60-day deadline was originally scheduled to become effective on December 15, 2004. In
response to a multitude of opposing comments, the SEC twice postponed the effective date of the 60-day deadline
(SEC 2004, 2005). In 2005, the SEC also limited firms subject to the deadline to “large” accelerated filers. Thus,
there are now two classes of accelerated filers (SEC 2005). The term “accelerated filer” refers to firms with common
equity public float greater than or equal to $75 million, but less than $700 million as of the last business day of the
most recently completed second fiscal quarter. The term “large accelerated filer” refers to firms with common equity
public float of $700 million or more. Only one class of accelerated filer existed during our sample time period;
therefore, we use the term “accelerated filer” to refer to firms with $75 million or more in public float.
2
We thank Scott Bronson for giving us data on audit delays and preliminary earnings announcements for 2000
through 2005.

2
testing and increases the instances in which external auditors can use the work of others

(PCAOB 2007a). The standard thereby implies an expanded role for internal auditing because

the IAF can help management strengthen entity-level controls through consulting and assurance

activities, and the IAF can perform work that external auditors can use to formulate their opinion

(Gramling et al. 2004; Schneider 2009; Institute of Internal Auditors [IIA] 2011).3 Given the

potential tradeoff between the timeliness and reliability of disclosures and the increased

opportunity for the IAF to affect the financial statement audit, it is important to investigate the

IAF’s role in audit report timeliness and factors that influence this role.4

We conduct our tests using data on 213 firms providing detailed responses to the IIA’s

Global Auditing Information Network (GAIN) survey that pertain to the three-year period

immediately prior to the implementation of SOX Section 404. We confine our analysis to the

pre-Section 404 time period because both client firms and their auditors were likely revising their

audit processes to adjust to the new standard immediately after the implementation of Section

404. Based on professional standards and following prior research, we use the GAIN survey data

to develop a single comprehensive measure of IAF quality and multiple measures of the IAF’s

contribution to the financial statement audit (AICPA 1991; Prawitt et al. 2009; IIA 2011; Lin et

al. 2011). Results indicate that a one-standard deviation increase in the IAF quality measure

corresponds to a reduction in audit delay of three-to-four days. Audit delay is also significantly

shorter (three-to-five days) when the IAF contributes to the financial statement by independently

performing relevant work (i.e., independent work), but not when the IAF works under the

direction of the external auditor (i.e., direct assistance). Possible explanations for this result

3
We cite IIA standards and guidance issued after the time period of our sample (2001-2003). However, prior
standards and guidance in place during the time period of our sample similarly discuss consulting and assurance
services as key IAF activities.
4
We use the term “financial statement audit” to refer to both an audit of the financial statements and an audit of
internal control over financial reporting that is integrated with an audit of the financial statements.

3
include the timing of direct assistance (which we assume is more likely to take place at yearend

then is independent work), and the degree of external auditor supervision and monitoring

required when internal auditors serve as direct assistants. Audit delay reductions of three-to-five

days are significant given that accelerated filers released earnings an average of seven days prior

to the audit completion date during our sample period.

We also investigate factors that affect IAF contribution and find that associations

between IAF contribution and its hypothesized determinants (IAF quality, material misstatement

risk, and auditor availability) vary with the method of contribution (independent work or direct

assistance). In particular, IAF quality is positively associated with the likelihood that external

auditors use work independently performed by the IAF and negatively associated with the

likelihood that they use the IAF as direct assistants, suggesting that lower quality internal

auditors require direct supervision. Audit committee effectiveness, a proxy for material

misstatement risk, is positively and significantly associated with both methods of contribution,

indicating that more effective audit committees lower control risk and thereby increase the

opportunity for the external auditor to rely on the IAF’s work. External auditors were

significantly more likely to use independently-performed IAF work in conducting financial

statement audits during the busy season, when external auditing resources were constrained.

Conversely, they were significantly less likely to use independently-performed IAF work in the

11-month period just prior to the implementation of Section 404 compared to the period prior to

Section 302’s implementation. Presumably, Section 302’s implementation and/or Section 404’s

pending implementation constrained IAF availability during this period.

This study makes several important contributions to the auditing literature. First, while

research finds that poor internal control over financial reporting (ICFR) is associated with longer

4
audit delays (Kinney and McDaniel 1993; Ettredge et al. 2006), this is the first study to consider

the effect of the IAF on audit delays. Second, our results suggest that external auditors behave in

accordance with the audit risk model, i.e., they reduce audit effort, as measured by audit delay, in

response to reductions in control risk arising from greater IAF quality. Prior research finds mixed

support for the audit risk model with respect to control risk (O’Keefe et al. 1994; Stein et al.

1994; and Felix et al. 2001; Hogan and Wilkins 2008). Third, this study extends prior research

that investigates the impact of IAF contribution on external audit fees and hours (Stein et al.

1994; Felix et al. 2001 and Prawitt et al. 2010). Audit fees and hours measure only external

auditor effort, while audit delay encompasses both external and internal auditor effort. Fourth,

this study contributes to the literature that examines auditors’ reliance decision by using actual,

archival measures of IAF quality, material misstatement risk, and auditor availability to identify

factors that influence both methods of IAF contribution (independent IAF work and direct

assistance). Finally, we build upon prior studies that use GAIN data to document associations

between IAF quality and both earnings quality and the prevention and detection of material

weaknesses (Prawitt et al. 2009, Lin et al. 2011). Together, these studies suggest that the IAF

affects the quality of reported earnings and both the effectiveness and timeliness of the reporting

process.

This research should be of interest to preparers, auditors, standard-setters, and regulators.

The results suggest that managers can reduce audit delays by increasing IAF quality. Reducing

audit delays from their current levels back to their pre-Section 404 timing could potentially

reverse the decline in the reliability of PEAs reported by Bronson et al. (2011) by reducing the

number of days by which PEAs predate audit completion.5 In 2010, 93 percent of accelerated

filers released earnings early, with the PEA predating audit completion by an average (median)
5
Median audit delays for accelerated filers increased from 43 days in 2002 to 68 days in 2005.

5
of 15.7 (13) days. Moreover, evidence on the benefits of the IAF helps managers and auditors

fully understand the potential risks associated with reducing the IAF during tough economic

times. Such evidence is particularly timely given a 2008 PCAOB practice alert warning auditors

that poor economic conditions may prompt firms to reduce personnel charged with internal

control-related duties (PCAOB 2008). The results should also be of interest to regulators, who

set reporting deadlines, and the PCAOB, who provides professional guidance for using the work

of others in financial statement audits.

Section 2 reviews the audit delay literature and presents hypotheses and Section 3

describes the research design. Results are discussed in Section 4, with concluding remarks in

Section 5.

2. Literature Review and Hypothesis Development

2.1. The influence of IAF quality and contribution on audit delay

2.1.1 Background on audit delay

A large literature investigates potential determinants of audit delay. Much of this research

focuses on the content of the disclosures, firm characteristics, and external auditor

characteristics. Firm characteristics investigated include size, industry, fiscal yearend, and

various proxies for complexity (e.g., Givoly and Palmon 1982; Ashton et al. 1989; Newton and

Ashton 1989; Bamber et al. 1993). External auditor characteristics investigated include audit

technology, audit staffing, audit work timing, hourly fees, auditor changes, and designation as a

“Big N” auditor (Ashton et al. 1989; Newton and Ashton 1989; Bamber et al. 1993; Schwartz

and Soo 1996; Knechel and Payne 2001; Leventis et al. 2005; Ettredge et al. 2006).

Only three studies address the strength of a firm’s internal control system, which is a key

determinant of the total amount of work required for the external audit. Ashton et al. (1987)

6
measured internal control quality using external auditors’ subjective ratings; they found that

internal control quality was negatively and significantly associated with audit delay in their

subsample of 381 non-public U.S. firms, but not in their subsample of 107 public firms. Kinney

and McDaniel (1993) used misstatements in the quarterly earnings reports of 85 U.S. firms as a

joint proxy for internal control quality, yearend audit effort, and auditor/client discussions. They

found that audit delay for restating firms was 17 days longer than that of matched firms without

such corrections, and the change in delay from the prior year was eight days longer. Kinney and

McDaniel (1993) conclude that while internal control quality is a contributing factor to audit

delay, not all of the substantial delay can be attributed to quality. Ettredge et al. (2006) measured

the strength of ICFR using material weaknesses reported under Section 404 of SOX and found

that firms reporting a material weakness experienced significantly longer delays (approximately

16 days) than those with effective ICFR. However, in addition to the quality of ICFR, part of this

delay was potentially driven by increased auditor-client negotiations regarding the material

weakness. Together these studies provide useful evidence on the relation between internal

control quality and audit delay. We extend this line of research by considering a critical

determinant of internal control quality, the internal audit function.

The internal audit function (IAF) can influence external audit activities in two ways.

First, the IAF is part of a firm’s control environment and hence affects control risk. SAS 65

specifically mandates that external auditors consider the IAF when assessing a firm’s control

environment (AICPA 1991, Section 322.04). External auditors’ assessment of control risk

determines the nature and amount of substantive audit procedures required to achieve an

acceptable level of overall audit risk (AICPA, 1983). Second, external auditors can rely on work

7
performed by internal auditors, either independently or under their direction, in completing the

financial statement audit (AICPA 1991; PCAOB 2004, 2007a).

2.1.2. IAF quality

Management, and not the IAF, is responsible for maintaining ICFR; however, the IAF

can support management in this endeavor as long as the IAF remains objective (IIA 2004, 3).

The IIA has long advocated that management consult with the IAF on various control related

issues in addition to relying on the IAF to provide assurance services (IIA 2011). In its role as

consultant, the IAF can assess relevant risks and advise management in designing and

implementing controls throughout the reporting process. In its traditional assurance role, the IAF

reviews and tests the effectiveness of controls. IIA guidance pertaining to SOX Section 302

specifically advocates that the IAF conduct assurance activities to support management

assertions as to the adequacy of ICFR under SOX (IIA 2004). If control problems are identified,

internal auditing should assess management’s plans for correcting them and perform follow-up

reviews. Finally, the IAF is charged with ensuring that the results of ongoing internal audit

activities are communicated to appropriate parties, including the audit committee and the

external auditors.

Although practitioners and academics alike have long recognized that the IAF can affect

internal control quality, only recently have researchers begun to provide direct empirical

evidence of this relation. Using firms in the GAIN database, Prawitt et al. (2009) found a

positive relation between a comprehensive measure of IAF quality and earnings quality, as

measured by accruals. Lin et al. (2011) also used the GAIN database to investigate IAF quality.

Their results suggest that certain IAF activities (use of quality assurance techniques, audits of

financial reporting activities, and follow-up monitoring) help prevent material weaknesses in

8
ICFR from occurring, while other activities improve SOX compliance processes. To the extent

that a higher quality IAF results in improved ICFR, and correspondingly lower control risk, it

follows from the audit risk model that external audit effort should be negatively associated with

IAF quality. This premise is consistent with Simunic (1980) who modeled internal auditing and

external auditing as diminishingly substitutable resources in preventing misstatements. The

assumption that less external audit effort results in fewer audit days leads to the following

hypothesis:6

H1: Audit delay is negatively associated with IAF quality.

2.1.3. IAF contribution to the financial statement audit

External auditing standards have consistently acknowledged internal auditing as a

potentially valuable resource in the financial statement audit (SAS 65, AICPA 1991; AS 2,

PCAOB 2004; AS 5, PCAOB 2007a). These standards allow external auditors to rely on relevant

work performed independently by the IAF or under the direction of the external auditors, as long

as the IAF is deemed to be of acceptable quality. Reliance on work performed by the IAF can

improve the efficiency and effectiveness of the external audit (Schneider 2009). According to the

PCAOB (2005, 11), “an auditor who appropriately uses the work of others enhances the overall

efficiency of the audit.” In both of its inspection reports on SOX 404 compliance, the PCAOB

cites external auditors’ failure to use the work of others as a cause of inefficiency (PCAOB 2005,

2007b). As part of a comprehensive effort to make SOX 404 compliance more efficient, the

PCAOB increased the opportunity for external auditors to use the work of others under AS 5 by

6
A lower level of effort will not result in fewer audit days if the external auditors decide to reduce the amount of
resources allocated to the audit on a daily basis rather than maintaining the same effort level per day and reducing
the number of days. Similarly, lower effort levels will not result in fewer audit days if external auditors instead
choose to allocate more time to high-risk areas or expand the scope of the audit. Such allocations would bias our
tests against finding results that support the hypothesis. To address reallocations of external auditor time, we control
for external audit fees in robustness tests.

9
permitting auditors to use the work of others as principal evidence (Fogelman et al. 2007;

PCAOB 2007a; Woodlock 2007).7

Few empirical studies have directly tested relations between external audit effort and the

extent to which the external auditor uses IAF work.8 Using survey data from 108 audits in the

financial services industry, Stein et al. (1994) measured contribution with a dichotomous survey

question and they measured external auditor effort with hours and fees. Contrary to their

predictions, contribution was positively associated with hours and not associated with audit fees.

In a study of 70 firms, Felix et al. (2001) measured contribution using external auditors’

subjective assessments of the percentage of the external audit completed by the IAF. Consistent

with their predictions, they found that external audit fees were decreasing in IAF contribution.

Using GAIN data on 235 firms, Prawitt et al. (2010) measured IAF contribution with the

percentage of IAF available time devoted to providing “external audit assistance,” and “auditing

annual accounts, financial statements and reports.” The audit assistance proxy was significantly

(p < 0.05, one-tailed) and negatively associated with audit fees. The second proxy, which

measures the amount of independently-performed IAF work used in the external audit, was not

significantly associated with audit fees.

The two later studies suggest that when external auditors use work performed by the IAF,

there is a corresponding reduction in external auditor effort required to complete the financial

statement audit, and hence, a reduction in audit fees. Accordingly, we expect that reliance on the

IAF should also reduce the number of days required to complete the audit, as stated in H2.

7
Under AS 2, external auditors were only permitted to use the work of others to supplement evidence they had
obtained firsthand (PCAOB 2004).
8
Several studies have indirectly measured IAF contribution to the external audit using proxies such as internal
control expenditures, internal audit payroll costs, and the number of internal auditors (Chung and Lindsay 1988; Gist
1992; Raman and Wilson 1992; Anderson and Zeghal 1994; Gerrard et al. 1994; Adams et al. 1997; Goodwin-
Stewart and Kent 2006).

10
 H2: Audit delays for firms whose external auditors use work performed by the IAF are
shorter than those for firms whose external auditors do not use IAF work.

2.2. Determinants of IAF contribution

Given the potential for IAF contribution to reduce both audit delays and fees and the

increased opportunity for external auditors to use IAF work under AS 5, it is important to

understand factors affecting external auditors’ decisions to rely on the IAF. Several experiments

have investigated whether, and how, external auditors incorporate different aspects of IAF

quality (competence, objectivity, and fieldwork) into their reliance decision (see Gramling et al.

2004 for a review); however, there is relatively little archival evidence on external auditors’

reliance decision. Auditing standards and prior research suggest that IAF contribution is

determined by IAF quality, material misstatement risk (MMR), and audit resource availability.

2.2.1. IAF Quality

External auditors can only rely on work performed by the IAF if the IAF is deemed to be

of sufficient quality. IAF quality is determined by the competence and objectivity of IAF

personnel, together with the effectiveness of their fieldwork (SAS 65 AICPA 1991; AS 5,

PCAOB 2007a). The more highly competent and objective the IAF, and the more thorough their

fieldwork, the more the external auditor can rely on worked performed by the IAF. Prior

experimental research has found positive relations between IAF quality and auditors’ decisions

to rely on internal auditors’ work (Abdel-khalik et al. 1983, Maletta 1993, and Maletta and Kida

1993). Using survey data, Felix et al. (2001) identified a significantly positive association

between external auditors’ subjective assessments of overall IAF quality and the IAF’s

contribution to the external audit in a sample of 68 firms. We use a more recent and

comprehensive data set to formulate a multi-dimensional objective measure IAF quality based on

experience, training, chief audit executive (CAE) reporting lines, and other objective indicators

11
of IAF quality. Consistent with prior research, we expect that IAF contribution will be increasing

in IAF quality, as stated in H3a.

H3a: The likelihood that external auditors use work performed by the IAF to complete
the financial statement audit is positively associated with IAF quality.

2.2.2. Material misstatement risk

Few academic studies have addressed the impact of risk factors on auditors’ reliance

decisions. Experimental research indicates that risk affects the extent to which different aspects

of IAF quality (objectivity, competence, work performed) influence the reliance decision, and

that auditors employ more complex interactive decision processes to evaluate internal auditors

when inherent risk is greater (Maletta and Kida 1993, Maletta 1993). Felix et al. (2001) found

that as inherent risk increased, auditors moved away from simple decision criteria (such as IAF

availability) and toward more analytical decision functions. Glover et al. (2008) reported that

external auditors’ tendency to rely more on work performed by an outsourced internal auditor as

compared with an in-house internal auditor was increasing in the level of inherent risk. While the

aforementioned studies clearly demonstrate that risk is an important consideration in the reliance

decision, they do not measure the direct impact of risk on the reliance decision.

Material misstatement risk is the product of inherent risk and control risk, i.e., it is the

likelihood that a material misstatement exists and a firm’s control system will not detect the

misstatement. SAS 65 instructs auditors to assess the risk of material misstatement when

deciding whether to rely on the IAF (AICPA 1991). Evidence obtained through an auditor’s

direct personal knowledge is generally more persuasive than information obtained indirectly

(AICPA 1991, Section 322.18) and the responsibility for the opinion rests solely with external

auditor. Accordingly, as the risk of material misstatement increases, the need for the external

auditor to perform his or her own tests of assertions increases (AICPA 1991, Section 322.20).

12
While the external auditor still considers IAF work in high-risk conditions, the IAF’s work alone

cannot reduce audit risk to an acceptable level to eliminate the necessity for external auditors to

perform their own tests. Thus we expect that risk reduces the likelihood that external auditors

will use the work of the IAF, as stated in H3b.

H3b: The likelihood that external auditors use work performed by the IAF to complete
the financial statement audit is negatively associated with material misstatement risk
(MMR).

2.2.3. External and internal auditor availability

The availability of both external and internal auditing resources is an important

consideration in determining the nature and extent of the IAF’s role in the financial statement

audit. When all of the audit firm’s personnel are fully employed, as is generally case during the

“busy” season, firms have a strong economic incentive to rely on the IAF. Using IAF work

during this period potentially enables external auditors to serve more clients and/or reduce

overtime expense.9 In contrast, during slack periods, substituting internal audit work for external

audit work potentially reduces revenues without reducing professional labor costs.

Just as resource constraints affect external auditors’ demand for IAF resources, IAF

resource constraints affect client firms’ willingness to contribute IAF personnel to the financial

statement audit. The more time the IAF has available after fulfilling a firm’s internal auditing

requirements, the greater the potential for the IAF to contribute to the external audit. Consistent

with this premise, Felix et al. (2001) found that external auditors’ perceptions of IAF availability

were significantly and positively associated with perceptions of IAF contribution. However, it is

quite possible that client firm managers simultaneously choose the extent to which the IAF will

contribute to the external audit and the amount of IAF resources that will be available to assist

9
We assume that the use of the IAF is not accompanied by a fee decrease that exceeds the marginal revenue earned
by assigning external auditors to other clients or the external audit firm’s marginal cost of performing the work with
its own staff.

13
external auditors, and Felix et al. (2001) did not address simultaneity. Our research design

overcomes this limitation by investigating the impact of an exogenous reduction in IAF

availability arising from the implementation of Section 302 of SOX. The previous discussion on

auditor availability suggests the following hypothesis:

H3c: The likelihood that external auditors use work performed by the IAF to complete
the financial statement audit is negatively associated with the availability of external
audit resources and positively associated with the availability of internal audit resources.

3. Research design

3.1. Data and sample selection

Data for this study come from multiple sources. We use firm-level data collected by the

IIA through their 2003 and 2004 GAIN surveys. The GAIN database consists of chief audit

executives’ (CAEs’) responses to a comprehensive survey designed to measure various aspects

of an organization’s internal audit activities.10 Next, we collect firm financial data from

Compustat and audit fee and restatement data from Audit Analytics.

Our initial sample contained 1,356 responses from 935 GAIN survey respondents

pertaining to fiscal years 2001 through 2004. Since firm names are not reported in the survey

data, we employ a matching algorithm to identify firms based on reported SIC code, total assets,

revenues, and number of employees.11 Next, we eliminate: (1) 687 firms for which data were

unavailable on COMPUSTAT, (2) nine firms with fiscal years ended after November 15, 2004,

the effective date of Section 404, (3) three duplicates, and (4) nine firms with missing GAIN

10
The data were subject to various validation checks, including validation measures built into the questionnaire and
manual procedures and reasonableness tests applied after the data had been collected. The GAIN database covers a
wide range of institutions including publicly traded companies, private companies, educational institutions, divisions
within companies, and governmental institutions. More information can be found at the GAIN web site:
http://www.theiia.org/guidance/benchmarking/gain/.
11
Prawitt et al. (2009) and Lin et al. (2011) also employed this matching algorithm.

14
data. The resulting sample contains 301 firm-year observations from 222 firms.12 We then

remove observations with missing data for audit delay and key control variables. The final

sample contains 286 observations from 213 firms and covers the four-year period immediately

prior to the implementation of Section 404 (Table 1).

With respect to our hypothesized relationships, we view the four years immediately prior

Section 404’s implementation as being relatively untainted by the vast changes the standard

brought to auditing. Section 302 clearly increased managements’ and the IAF’s internal control

responsibilities, but the passage of Section 404 had a much larger impact. In particular, average

audit delays increased by less than one day with the implementation of Section 302 as compared

with an 11.9-day increase corresponding to the implementation of Section 404 (Bronson et al.

2011). Moreover, PCAOB calls for external auditors to make greater use of the work of others

in 2005 and the passage of AS 5 in 2007 potentially lead firms and auditors to begin transitioning

to an audit process in which the IAF played a bigger role. This transition period is not likely to

reflect the optimal level of IAF contribution. Thus we expect that firms were more likely to be at

an efficient level of IAF contribution prior to Section 404 than after Section 404’s

implementation.

3.2. Determinants of audit delay

A cross-sectional regression model based on prior audit delay research is used to test H1

and H2, which predict negative associations between audit delay and both IAF quality and

contribution (Equation 1).

AdjustedDelay = β0 + β1IA Quality + β2IA Contribution (1)

12
We eliminate firms with missing values for IASize, Experience, Education, and Certifications, and set missing
values to zero for Fieldwork QA and Financial Focus. There are no missing values for IA Contribution. In a
robustness check, we eliminated all firm-year observations with missing values for any IAF variables and obtained
similar results.

15
 + µ1Size + µ2Shumway + µ3Leverage + µ4Loss + µ5Extra
+ µ6AuditorSpecialist + µ7AuditorTenure + µ8ControlProb
+ µ9Pre 302 + µ10Post 302&75 + ε

AdjustedDelay is an industry-adjusted measure of audit delay, IA Quality is a single

comprehensive measure of IAF quality developed from multiple GAIN survey items, and IA

Contribution is a dichotomous variable indicating whether or not the auditor uses the work of the

IAF to complete the financial statement audit. All variables are discussed in the next sections and

defined in Appendix A or Table 2.

3.2.1 Dependent variable: audit delay

The dependent variable is constructed by dividing audit delay (the number of days from a

firm’s fiscal yearend to the date of the audit report) by average delay for firms in the same two-

digit SIC code that have a similar market value.13 We multiply the result by 100 and take the

natural log to calculate AdjustedDelay. The main tests use the industry-adjusted measure because

prior research finds that industry is a significant determinant of audit delay and the sample size

constrains the number of control variables that can be included in the model. The variable, Delay

(unadjusted number of days from a firm’s fiscal yearend to the audit report date), is also included

in tests for comparison purposes.

3.2.2. IAF quality measures

Professional standards and prior research suggest that measures of IAF quality

encompass competence, objectivity, fieldwork quality, the extent to which IAF activities are

relevant to the financial reporting process, and investment in internal auditing (AICPA 1991,

Prawitt et al. 2009, IIA 2009, Lin et al. 2011). Following Prawitt et al. (2009) and Lin et al.

13
Virtually all of the firms in the sample (283 of 286 firms) have a market value of at least $75 million. Thus,
industry averages for these firms are computed using firms with a market value of $75 million or more. We use all
firms in an industry to compute the average for the remaining three observations with market values of less than $75
million. Dropping these observations from the analysis does not materially affect our results or conclusions.

16
(2010), we measure each aspect of quality with one or more GAIN survey items and then

combine the measures into a single construct, IA Quality. Descriptive statistics and definitions

detailing the computation of individual quality variables from GAIN survey items are contained

in Appendix A.

The competence of internal auditing personnel is measured using four variables,

Experience, Education, Certification, and Training. Experience is the average number of years of

internal and external auditing experience of the audit staff; Education is the average number of

years of undergraduate and graduate education; Certification is the percentage of professional

staff members with one or more audit certifications; and Training is the average annual hours of

training per staff member. Each variable is standardized to have a mean of zero and a standard

deviation of one, and the four standardized variables are combined to form a single, continuous

measure, Competence, (See Appendix A).

The remaining individual quality measures are constructed from single variables. We

measure IAF objectivity with an indicator variable, Objectivity, that equals one if the chief audit

executive (CAE) functionally reports to the audit committee.14 The quality of fieldwork,

Fieldwork QA, is computed from four survey questions that measure the frequency with which

various QA techniques are used in fieldwork (direct supervision, independent working paper

review, audit client feedback, and peer review by fellow staff members), one survey item

indicating whether the IAF follows up on previously-identified control weaknesses, and one

survey item indicating whether grades or summary opinions are issued by the IAF. We include

14
Prawitt et al. (2009) used this same variable to measure objectivity, while Lin et al. (2010) used the amount of
control-related information the CAE reviews with the audit committee to measure objectivity in relating objectivity
to material weakness disclosures. We do not use Lin et al.’s measure because more meetings between the CAE and
audit committee may be indicative of internal control problems, which would lead to an increase in audit delay. To
validate our objectivity measure, we correlated it with a survey question asking respondents whether the CAE meets
privately with the audit committee and found that for 90 percent of the observations, CAEs that report to the audit
committee also meet privately with the audit committee.

17
the survey items on follow-up and grading because IIA guidance promotes these practices and

Lin et al. (2011) found these practices to be significantly associated with the prevention and

detection of material weaknesses (IIA 2009, 2011).15 Financial Focus is an average of six

survey items that measure the extent to which the IAF audits various activities related to

financial reporting (adequacy of internal accounting controls; accuracy, reliability, and

completeness of financial records; usefulness of financial reporting; impact of changes in

accounting rules or regulations; externally-report interim results; and GAAP compliance.)

Investment in the IAF, IA Size, equals total IAF annual operating costs divided by total assets.

To calculate a comprehensive, continuous measure of IAF quality (IA Quality), we

standardize the five individual quality variables to have a mean of zero and standard deviation of

one.16 To aid interpretation of the regression coefficients, the average of these variables is

standardized and a constant is added to each value so that all values are positive and the standard

deviation of IA Quality is one.

Following Prawitt et al. (2009), we also calculate a comprehensive, ordinal measure of

IAF quality (IA Quality Ord). We dichotomize each of the four individual, continuous quality

variables (Competence, Fieldwork QA, IA Size, and Financial Focus) by assigning a value of one

to the variable if it is above the median of our sample for that variable, and a zero otherwise. IA

Quality Ord is the average of these four variables and Objectivity, and thus takes on six discrete

values between zero and one, inclusive.

3.2.3 IAF contribution measures

15
A grade is a succinct means of documenting and conveying an opinion on the risk posed by area audited and the
IIA provides specific guidance on the practice of grading (IIA 2009). Grading requires the IAF to establish standards
and a methodology to support their assessments. PricewaterhouseCoopers (2006) reports an increase in the
prevalence of grading and generally considers it to be a best practice.
16
To incorporate the dichotomous variable Objectivity into the calculation, this variable is assigned a value of -1,
rather than 0, if the CAE does not report to the audit committee.

18
 The IAF’s contribution to the financial statement is measured with a survey item that asks

respondents whether the IAF coordinates audit services with the external auditors (Lin et al.

2011). Respondents who affirm that coordination takes place are then asked to specify the

method(s) of coordination from the following list (multiple methods per firm are permitted): (1)

loan staff to external auditors, (2) perform complete or partial audit of specific locations,

products or functions, (3) conduct joint planning sessions, and (4) conduct joint risk or control

sessions. Ninety percent of sample firms use some form of coordination. The first two

coordination methods constitute significantly more assistance than conducting joint risk and

planning sessions, and thus are more likely to affect the time required to complete the financial

statement audit. Accordingly, the variable, IA Contribution, equals one if a firm uses one or both

of the first two coordination methods (65 percent of observations), and zero otherwise.

We further investigate whether either of the first two practices (loaning staff or

independently performing audits) individually affects delay by creating separate indicator

variables for them. The variable DirectAssist equals one if the IAF loans staff to the external

auditor, and zero otherwise. Similarly, IndepWork equals one if the IAF coordinates with

external auditor by performing complete or partial audits of specific locations, products or

functions. Sixty firms do both activities, and thus have values of one for both DirectAssist and

IndepWork. Loaning IAF staff to external auditors indicates that the IAF is working under the

direction of the external auditor, while completing audits of specific areas suggests that the IAF

independently performs work to be used by the external auditors. To validate these constructs,

we tested their associations with Financial Focus and % Financial, a survey item that measures

the percentage of IAF time devoted to “auditing annual accounts, financial statements and

reports.” IAF activities that pertain to financial reporting controls are more likely to be relevant

19
to the financial statement audit, and hence, used by the external auditor. Consistent with this

expectation, means for both Financial Focus and % Financial are 28 percent (p < 0.01) and 37

percent higher (p = 0.06), respectively, for IAFs that contribute to the IAF by only performing

work independently (DirectAssist = 0, IndepWork = 1) when compared with firms that only loan

staff to the external auditor (DirectAssist = 1, IndepWork = 0).

Following Prawitt et al. (2010), IAF contribution is also measured with a survey item that

captures the percentage of IAF staff time devoted to “external audit assistance.” A logarithmic

transformation of this survey item, denoted Assist, is used to test the hypotheses because this

item is highly skewed.17 Responses for Assist are missing for 27 percent of our sample, thus IA

Contribution, DirectAssist, and IndepWork are used in the main tests. Untabulated analysis

shows that the mean value of Assist does not significantly differ by the method of contribution

(direct assistance only versus independently-performed work), nor is Assist highly correlated

with Financial Focus (r = 0.006, p = 0.926) or % Financial (-0.088, p = 0.187). This analysis

suggests that respondents did not distinguish between methods of assistance when recording IAF

staff time devoted to external audit assistance.

3.2.4. Control variables

Prior research has identified several factors, in addition to the IAF, that likely affect audit

delay including industry, size, complexity, financial condition, losses, extraordinary items,

auditor characteristics, qualified audit opinions, restatements, and material weaknesses (Ashton

et al. 1987, Ashton et al. 1989, Bamber et al. 1993, Kinney and McDaniel 1993, Schwartz and

Soo 1996; Leventis et al. 2005; and Ettredge et al. 2006). The dependent variable has been

adjusted for industry effects in most of the tests. When using the unadjusted delay measure,

17
Forty-five percent of responses are zero, 37 percent range from one percent to five percent, and the maximum
value is 40 percent. Assist is calculated as the natural log of one plus the survey response.

20
Delay, tests include indicator variables for the financial services (Financial) and utility (Utility)

industries. We control for size and complexity with the natural log of total assets (Size) and

inventory divided by total assets (Inventory). Three measures control for financial condition:

Shumway, the decile rank of the percentage probability of bankruptcy from Shumway’s (2001)

hazard default prediction model, Leverage, debt divide by total assets, and Loss, an indicator

variable identifying firms with negative earnings.18 The indicator variable, Extra, controls for

firms reporting extraordinary items. AuditorTenure (the number of years a firm has had the same

external auditor) and AuditorSpecialist (an indicator variable identifying firms audited by

industry experts) address variations in delay arising from external auditor characteristics. Very

few firms in the sample received going concern opinions (one percent) or disclosed internal

control deficiencies or material weaknesses under Section 302 (two percent), thus these control

problems are grouped with restatements to form a single dichotomous variable, ControlProb,

indicating whether a firm had one of these control-related problems.

We divide our sample into three time periods to control for differences in regulatory

regimes and filing deadlines. Sixty-eight observations come from the time period prior to SOX

Section 302’s implementation and were subject to a 90-day 10-K filing deadline (U.S. Congress

2002). These observations are assigned a value of one for the indicator variable Pre 302. The

remaining 221 observations were subject to Section 302. Of these post-Section 302 observations,

124 observations had 90-day filing deadlines and 84 had 75-day deadlines. The indicator

variables, Post 302&90 and Post 302&75, identify observations that were subject to Section 302

and had 90-day and 75-day deadlines, respectively.19

18
Results are similar if we use the Altman Z-score instead of the Shumway score. We present the Shumway score
because this variable has more available observations.
19
Section 302 became effective for all firms for fiscal year-ends occurring after August 29, 2002. Post 302&90
covers firms with a fiscal year ending after August 29, 2002 through December 15, 2003, the date that the 75-day

21
 Controls for corporate governance and external audit fees are also included in tests. Firms

with stronger governance systems potentially require less audit effort and may also tend to invest

more in IAF quality. Of all Board of Director Committees, the audit committee has the greatest

responsibility for internal control over financial reporting, and thus a significant impact on

control risk. Accordingly, a measure of audit committee quality, AC Effectiveness, is included in

tests of the hypotheses to control for governance. AC Effectiveness is based on a GAIN survey

item and is calculated as the percentage of applicable Blue Ribbon Committee recommendations

that have been implemented by the firm. Following Ettredge et al. (2006), we include AuditFee

(external audit fees scaled by assets) in the model to control for potential risk factors that are not

addressed by other control variables.

3.3 Determinants of IAF contribution

H3 predicts that IAF contribution is determined by IAF quality, the risk of a material

misstatement, and the availability of external and internal audit resources. H3 is tested using the

model specified in Equation 2.

= γ0 + γ1 IA Quality + γ2 AC Effectiveness + ( 2)
γ3ControlProb + γ4NotBusy + γ5Post 302&90 +
γ5Post 302&75 + η1CAE Tenure + η2Financial +
η3Utility + η4Size + η5 Shumway +ε

As with tests of H1 and H2, IA Contribution measures internal auditing’s contribution to the

financial statement, and IA Quality measures IAF quality. Proxies for material misstatement risk

(MMR) and audit resource availability are discussed below.

3.3.1. Material misstatement risk

deadline became effective for accelerated and large accelerated filers. Post 302&75 covers the time period from
December 15, 2003 to November 15, 2004, the date that Section 404 became effective.

22
 AC Effectiveness (percentage of Blue Ribbon Committee recommendations implemented)

and ControlProb (an indicator variable identifying going concern opinions, control deficiencies

under Section 302, and restatements) proxy for MMR. The audit committee is responsible for

overseeing the financial reporting process, and the Blue Ribbon Committee recommendations

were formulated to improve audit committee effectiveness. The recommendations specify audit

committee activities, such as reviewing annual and quarterly statements and monitoring the

relationship with the external auditor, that promote effective oversight. They also identify criteria

designed to ensure that committee members are independent and have the financial acumen to

effectively carry out their responsibilities. Audit committee effectiveness potentially manifests

itself in all elements of the COSO internal control framework, and thus helps to reduce control

risk, which is one of the components of MMR. As previously mentioned, ControlProb primarily

captures restatements.20 Restatements arise from errors in the financial statements that go

undetected, and thus capture both inherent and control risk. While restatements may not be

material, they still reflect factors that affect the likelihood of a material misstatement, such as

executives’ propensity to manage earnings and accounting system reliability and accuracy.

3.3.2. Availability of external and internal audit resources

The variable, NotBusy, proxies for the availability of external auditing resources. NotBusy

is an indicator variable that equals one if a firm’s fiscal yearend does not occur in December or

January (i.e., the busy season), and zero otherwise. Demand for external audit services is much

lower outside of the busy season, thus audit firms should have more personnel available to

perform audits of financial statements with fiscal years that end after January 31st and before

December 1st. The variables Post 302&90 and Post 320&75 measure IAF availability. These

variables divide the time from Section 302’s implementation date (August 29, 2002) to Section
20
Sixty-four of the 68 control problems in our sample are restatements.

23
404’s implementation date (November 15, 2004) into two periods with the date the 75-day

deadline became effective for accelerated filers (December 15, 2003). Section 302 of SOX

substantially increased firms’ internal control attestation requirements, and correspondingly,

firms’ demand for internal audit work without correspondingly increasing external auditors’

workload. Thus, we expect that firms’ internal audit functions had less time available to assist

external auditors with the financial statement audit after Section 302’s implementation than

before the implementation. The omitted time period in tests of H3 is the time prior to Section

302’s implementation.

We control for industry (Financial and Utility), size (Size), financial condition

(Shumway), and the number of years the CAE has been in her position (CAE Tenure). Variation

in industry standards and complexity may affect external auditors’ reliance decision. Similarly,

the Shumway score (Shumway) controls for financial condition, which likely affects both risk

and IAF availability. CAE tenure potentially affects both the quality of the IAF and the IAF’s

relationship with the external auditor.

4. Results

4.1. Descriptive statistics

Table 3 contains descriptive statistics for the sample. Mean (median) audit delay is 42.5

(39) days, which is considerably smaller than the 50.3 days reported in Ettredge et al. (2006) for

their 2003 sample of firms. This likely reflects the differences in size and profitability of the

samples. In particular, our sample firms are larger and exhibit fewer losses than those in Ettredge

et al.’s sample; audit delay tends to be shorter for larger firms and those reporting positive

earnings relative to smaller firms and those reporting losses (e.g., Ashton et al. 1989; Bamber et

al. 1993; Ettredge et al. 2006).

24
 Table 4 provides Pearson correlation coefficients for the independent variables in the

models. None of the correlations for proxies of IAF quality, IAF contribution, or material

misstatement risk exceeds 0.30. Availability measures that identify time periods (Pre 302, Post

302&90, and Post 302&75) are significantly correlated with each other by construction.

4.2. Multivariate results

4.2.1. Determinants of audit delay

Table 5 reports results of ordinary least squares (OLS) regressions of the two audit delay

measures on proxies for IAF quality and contribution and a set of control variables. To control

for lack of independence among observations from the same firm, standard errors are calculated

using a robust variance estimator in the OLS regression and all later analysis.21 The industry-

adjusted measure of audit delay, AdjustedDelay, is the dependent variable in the first four

models, and Delay is the dependent variable in the last two models. F-statistics for all models are

significant (p < 0.01) and adjusted r-squared values range from 18.2 percent for the

AdjustedDelay models to 29.8 percent for the Delay models.

Consistent with H1, both measures of IAF quality are negatively and significantly (p <

0.01, one-tailed) associated with audit delay across all specifications. The coefficients on IA

Quality in the AdjustedDelay models indicate that a one standard deviation increase in IA Quality

corresponds to a delay reduction of approximately three days or 7.7% for the median sample

firm.22 The significant (p < 0.01, one-tailed) coefficient on IA Quality Ord indicates that audit

delays are 11.3 days (29 percent) shorter for firms that are above the median on Competence,

21
The robust variance estimator in is an extension of the standard Huber /White/sandwich estimator of variance and
corrects for clustering of observations by group.
22
An example of this computation for the IA Quality coefficient in the first column of Table 5 (-0.083) follows. The
median value for AdjustedDelay (the natural log of delay divided by the industry average) is 4.416, which
corresponds to 82.7 percent of the industry average or 39 days. Adding -0.083 to 4.416 gives a value of 4.334, which
corresponds to 76.3 percent of the industry average or 36.1 days. Thus a one-standard deviation increase in IA
Quality reduces audit delay for the median firm from 39 days to 36.1 days.

25
Objectivity, Fieldwork QA, Financial Focus, and IA Size (i.e., IA Quality Ord = 1) when

compared with firms that are below the median on all of the individual quality measures. The

coefficients on IA Quality in the Delay models indicate that a one standard deviation increase in

IA Quality corresponds to a reduction in audit delay of 3.5 and 4.1 days, respectively. The size of

these reductions is significant as earnings announcement dates preceded audit completion dates

by an average of 7.4 days for comparable firms during the sample period. A one standard

deviation improvement in IA Quality could cut this difference in half and thereby lower the

likelihood that the earnings number disclosed in a preliminary announcement is incorrect.

Our findings suggest that the quality of the IAF affects control risk, and that external

auditors appropriately assess control risk and accordingly adjust the nature and extent of audit

procedures in a manner consistent with the audit risk model. Prior tests of the audit risk model

provide limited evidence of a negative relationship between control risk and auditor effort. Pre-

SOX studies found no relation between internal control reliance and audit effort, as measured by

audit fees or hours (O’Keefe et al. 1994; Stein et al. 1994; Hackenbrack and Knechel 1997; Felix

et al., 2001). Conversely, Hogan and Wilkins (2008) used data from 2003-2004 and found that

external auditors exerted more effort when they audited firms with weak ICFR, as measured by

internal control deficiencies reported under Section 302 of SOX. The consistency of our findings

with those of Hogan and Wilkins supports their contention that external auditors became more

sensitive to risk after the audit failures of the early 2000s (Hogan and Wilkins 2008, 222). Our

results also have implications for practice because they suggest that managers can potentially

improve reporting timeliness by raising the quality of the IAF.

We investigate H2 using multiple measures of internal auditing’s contribution to the

financial statement audit. The primary contribution measure, IA Contribution, is used in Table 5.

26
As predicted by H2, audit delays are significantly (p < 0.05 or p < 0.10, one-tailed) shorter for

firms with IAF’s that contribute to the financial statement audit. The significance level of the IA

Contribution coefficient only drops below five percent when AuditFee is included in the

AdjustedDelay model. The coefficients in the AdjustedDelay models indicate that audit delay is

approximately 3.5 days shorter for the median firm when external auditors use the work of the

IAF. The coefficients on IA Contribution in the Delay models indicate that audit delay is

approximately five days shorter when the IAF contributes to the financial statement audit.

In Table 6, alternative measures of IAF contribution are used to test H2. Recall that IA

Contribution identifies firms that: [1] loan staff to the external auditor and/or [2] independently

perform work that is used by the external auditors. The 188 firms for which IA Contribution

equals one can further be broken down into 23 firms that only loan staff ([1] only), 104 that only

perform work independently ([2] only), and 60 firms that do both ([1] and [2]). The variable

DirectAssist identifies the 83 firms that only loan staff and both loan staff and perform

independent work. Thus, the coefficient on DirectAssist compares these 83 firms to 104 firms

that only perform independent work ([2] only) and 98 firms that do not contribute to the financial

statement audit (IA Contribution = 0). Similarly, the coefficients on IndepWork compare 164

firms that autonomously perform work (104 only work independently and 60 work independently

and loan staff) to 23 firms that only loan staff and 98 firms that do not contribute to the financial

statement audit (IA Contribuiton = 0). The coefficient on DirectAssist is not significant, while

the coefficients on IndepWork are negative and significant at the five percent level (one-tailed)

even when AuditFee is included as a control variable. Coefficients on IndepWork indicate that

audit delays are approximately 3.2 days shorter for firms that use work independently performed

by the IAF as compared with those that do not. In the last two columns of Table 6, contribution

27
is measured with Assist, which reflects the percentage of IAF time devoted to external auditor

assistance. Consistent with H2, Assist is negatively and significantly (p < 0.05, one-tailed)

associated with audit delay in both specifications.

The results indicate that the form of IAF contribution affects audit delay. Only when the

IAF works independently is audit delay significantly shorter. One potential explanation for this

result is the nature of the internal-external auditor relationship. When the IAF provides direct

assistance, an internal auditor is performing work in place of an external audit staff member. In

such cases, the external auditor must supervise the internal auditor, and IAF work is subject to

more scrutiny and testing than work performed by external audit staffers. When the IAF

performs procedures independently, no supervision is required. Another possible explanation is

that much of the independent IAF work is performed throughout the year, rather than at yearend.

Thus, reliance on this work prevents the external auditor from having to perform similar

procedures at yearend, when resources are constrained. Conversely, the practice of loaning staff

likely takes place when the external auditor is onsite at yearend performing the financial

statement audit.

The results provide only mixed support for recent PCAOB guidance expanding external

auditors’ opportunity to rely on the work others, and thus indicate a need for more research

investigating how IAF contribution affects overall audit efficiency. The findings are also relevant

for research that examines the effect of the IAF’s contribution on audit fees and hours (Stein et

al. 1994; Felix et al. 2001; Prawitt et al. 2010). Audit delays provide a useful complimentary

proxy to audit fees because they are not subject to measurement error arising from “low balling,”

cross-subsidization, and other pricing policies (O’Keefe et al. 1994). Furthermore, while direct

assistance may indeed lower audit fees and reduce external audit hours, it does not reduce the

28
number of days required to complete the audit. This suggests that audit delay reflects both

internal and external audit activities, while fees and hours only measure external auditor effort.

The signs and significance levels of most control variables are consistent with prior

research. Industry-adjusted delay is significantly (p < 0.05, p < 0.10, two-tailed) longer for firms

with higher inventory balances. As Bamber et al. (1993), Schwartz and Soo (1996), and Jaggi

and Tsui (1999) report, firms in financial distress (Shumway), experience significantly (p < 0.01,

two-tailed) longer audit delays. Audit delay is negatively associated with auditor tenure (p <

0.01, two-tailed) and positively associated with restatements and other control issues (p < 0.05, p

< 0.10, two-tailed). Interestingly, audit delay is significantly (p < 0.01, p < 0.05, two-tailed)

longer when auditors are industry specialists. This may be attributed to the availability of

industry specialists, as firms in the same industry often have the same fiscal yearend and tend to

release earnings around the same date. The positive coefficients on Post 302&75 indicate that

audit delays were greatest in the 11-month period beginning with the implementation of the 75-

day filing deadline and ending with the implementation of Section 404 (December 15, 2003 to

November 15, 2004). This suggests that increases in yearend audit work in preparation for

Section 404 had a greater effect on audit completion times than the reduction in filing deadlines.

Finally, consistent with the audit risk model, audit delay is significantly lower for firms with

more effective audit committees, as measured by AC Effectiveness.

As expected, audit fees are a large and significant determinant of AdjustedDelay (coef. =

1.8, p < 0.05, two-tailed) and Delay (coef. = 116, p < 0.01, two-tailed). The fact that IAF quality

and contribution are significant, even after controlling for audit fees, indicates that the effects of

IAF contribution are not perfectly priced into audit fees. One potential explanation for this result

is that a significant portion of the audit fee is set prior to the audit, with minimal adjustments

29
made after the audit. Thus, differences between actual hours worked and budgeted hours that

arise during the course of the audit from IAF quality and contribution are not perfectly reflected

in the fee. However, such differences do appear to affect the number of days required to

complete the audit. Furthermore, substituting IAF staff members for external auditors can reduce

fees without reducing the total time (both internal and external auditors’ time) required to

complete the audit.

4.2.2. Determinants of IAF contribution

Various measures of IAF contribution are used to test H3a, H3b, and H3c, which

examine the determinants of contribution (Table 7). The first four columns of Table 7 contain

logistic regressions with dichotomous contribution measures based upon the GAIN survey

question asking respondents to identify the form that internal-external auditor coordination takes

(IA Contribution, DirectAssist, and IndepWork). In obtaining the regression results in Column 4

for IndepWork, we eliminate 60 firms that both provide direct assistance and contribute to the

external audit by working independently. Thus, the coefficient on IndepWork compares firms

whose only means of assisting the external auditor is working independently to those firms that

either provide only direct assistance (23 firms) or provide no assistance at all (97 firms). In the

last column, the dependent variable, Assist, is based on a GAIN survey question that asks

respondents to specify the percentage of time the IAF spends assisting the external auditor. A

tobit regression is used with Assist because 45 percent of responses to the survey question are

zero. Overall, the explanatory power of the models is low, with pseudo-squared values ranging

from 0.043 to 0.088. The chi-square statistic is significant for the logistic (p < 0.05) and tobit (p

< 0.01) models.

30
 The findings show mixed support for H3a, which predicts that IAF contribution is

increasing in the level of IAF quality. IA Quality is positively and significantly (p < 0.05, one-

tailed) associated with contribution only when contribution takes the form of independent IAF

assistance. Contrary to H3a, IA Quality is negatively and significantly (p < 0.05, two-tailed)

associated with IAF contribution when it takes the form of direct assistance. This result suggests

that higher quality internal auditors can independently perform acceptable work, while lower

quality internal auditors can only assist in the financial statement audit when they are closely

supervised by the external auditors.

H3b predicts that IAF contribution is decreasing in the level of material misstatement

risk. As expected, the coefficients on AC Effectiveness, which proxies for control risk, are

positive and significant (p < 0.01, p < 0.05, two-tailed) across all specifications. This result

indicates that more effective audit committees lower control risk and thereby increase the

likelihood that the auditor can rely on the IAF’s work. ControlProb, which reflects both inherent

and control risk, shows only weak support for H3b. In the logistic models, the coefficients on

ControlProb are negative, as predicted, but only marginally significant (p < 0.10, one-tailed) in

predicting whether the IAF provides direct assistance to the external auditor.

Results generally support H3c, but only when the IAF contributes to the financial

statement audit by working independently. The negative and significant (p < 0.05, p < 0.10, one-

tailed) coefficients for NotBusy indicate that external auditors are more likely to use work

independently performed by the IAF for financial statement audits conducted during the busy

season, when external auditing resources are constrained. To evaluate the impact of internal

auditor availability, we use Post 302&90, which identifies the 13.5-month period immediately

beginning with the implementation of Section 302 and ending with the effective date of the 75-

31
day filing deadline (August 29, 2002 - December 15, 2003), and Post 302&75, which identifies

the 11-month period beginning with the effective date of the 75-day deadline and ending with

Section 404’s implementation date (December, 2003 – November 15, 2004). Coefficients for

Post 302&90 are not significant; however, consistent with predictions, coefficients for Post

302&75 are negative and significant (p < 0.05, one-tailed) in the IA Contribution and IndepWork

regressions. The results indicate that a significant decline in the availability of IAF resources for

use in the financial statement audit did not take place until more than a year after the

implementation of Section 302. One explanation for this finding is that a lag occurred between

the date Section 302 was implemented and the date firms began incorporating the IAF into the

assurance process. Another explanation is that managers only began to significantly incorporate

the IAF into assurance processes in preparation for Section 404; therefore, a sharp decline in IAF

availability did not occur until just prior to Section 404’s effective date. Overall, results in Table

7 show that the nature of the IAF’s contribution to the financial statement audit (direct assistance

versus independent work) is quite important in identifying factors that influence contribution.

4.3. Extensions

4.3.1. Robustness test to address endogeneity

As in most cross-sectional studies, it is difficult to completely eliminate the possibility

that the results have been confounded by endogeneity. Endogeneity may arise due to (1)

correlated omitted variables (i.e., there may be one or more unobserved variables, such as

accounting system quality or governance practices, that are correlated with both internal audit

quality and the time it takes to complete the external audit), and (2) simultaneity (i.e., executives

simultaneously choose internal audit quality and the audit completion date). We addressed the

first concern in primary tests contained in Tables 5 and 6 by including ControlProb as a proxy

32
for accounting system quality and AC Effectiveness to control for governance practices.23

Simultaneity presents a problem if managers who choose to install higher quality IAFs also

pressure the external auditor to complete the financial statement audit in a shorter time period,

presumably to announce earnings more quickly. The ability of the client firm’s management to

directly influence the time it takes to compete the financial statement is limited. The external

auditor is responsible for the nature and timing of audit procedures, and is legally liable if audit

work does not support the audit opinion. Still, we address the potential effects of endogeneity

using a two-stage-least squares (2SLS) model. Similar to Prawitt et al. 2009, we model IAF

quality as a function of average quality for the industry, cash flow from operations, the extent to

which internal audit work is outsourced, assets, inventory, and leverage. Measures of industry

quality levels, cash flows, and outsourcing serve as instrumental variables because these

variables are correlated with IAF quality, but are not significant in models predicting audit delay.

Results of both the first and second stages of the 2SLS regression are contained in Table

8. Significant (two-sided) predictors of IA Quality are size (p < 0.01), time period (p < 0.01),

industry quality levels (p < 0.05), and cash flow from operations (p < 0.05). In the second stage,

the predicted value of quality, IA Quality Hat, is negatively and significantly associated (p <

0.05, one-tailed) with audit delay. The sizes of the coefficients on IA Quality Hat are larger than

those in Tables 5 and 6 and the significance levels are lower (0.05 versus 0.01), but still

statistically significant at conventional levels.

4.3.2 Direct and indirect effects of IAF quality on audit delay

Taken together, hypotheses H1, H2, and H3a propose that IAF quality has both direct and

indirect effects on audit delay, as depicted in Figure 1. H1 posits that IAF quality directly

23
Two alternative proxies for governance, the Gompers governance index and the extent of institutional ownership,
were included in robustness tests, but neither measure was significant.

33
reduces audit delay by reducing control risk. H3a and H2 predict that IAF quality is positively

associated with the likelihood that external auditors use IAF work, which in turn, is negatively

associated with the number of days required to complete the audit. Results that use IndepWork to

measure contribution are consistent with this premise. Accordingly, we also use a path model to

test relations between IA Quality, IndepWork, and AdjustedDelay. The path model results are

contained in Table 9 and Figure 2. Weighted least squares (WLS) estimation is used so that

direct and indirect effects can be calculated.24 The Comparative-Fit Index (CFI = 0.918) and root

mean square error of approximation (RMSEA = 0.035) indicate that the model is a reasonable fit

for the data.

The path model results are highly consistent with those of prior tests. As shown in the

upper left corner of Table 9, the total effect of IAF quality on audit delay is significant and

negative (coef. = -0.083, p < 0.01, one-tailed). A one standard-deviation increase in quality

corresponds to a delay reduction of 2.9 days for the median firm. The total effect is comprised of

a large, negative, direct effect of approximately 2.5 days (coef. = -0.071, p < 0.05, one-tailed)

and a comparatively small, negative, indirect effect of 0.4 days (coef. = -0.012, p < 0.10, one-

tailed). The indirect effect arises from the product of the significant positive association between

IA Quality and IndepWork (coef. = 0.179, p < 0.05, one-tailed) in the first regression, and the

significant negative relation between IndepWork and AdjustedDelay (coef. = -0.068, p < 0.01,

one-tailed). Overall, the path model results indicate that reductions in audit delay associated with

higher levels of IAF quality are primarily driven by stronger ICFR. Higher levels of IAF quality

24
The logistic regression results predicting IA Contribution contained in Table 7 differ from those prediction IA
Contribution in the path model because WLS is used in the path model. We use WLS so that direct and indirect
effects can be calculated. Maximum likelihood estimation (MLR) of the path model yields the same results for the
prediction of IA Contribution as those in Table 7. However, MLR estimation cannot be used to calculate direct and
indirect effects.

34
also increase the likelihood that auditors use IAF work to complete the audit, which in turn

reduces audit delay; however, the resulting effect on audit delay is relatively small.

In untabulated tests, we also investigated whether the reductions in audit delay associated

with IAF contribution (as measured by IndepWork) are increasing in the quality of the IAF.

Specifically, if audit delay is decreasing in IAF contribution, then a stronger IAF may produce

greater reductions in audit delay relative to a weaker IAF. To test this premise, we modeled audit

delay as a function of IA Quality, IndepWork, and a term capturing the interaction between IA

Quality and IndepWork. However, the coefficient for the interaction term was not significant.

Together with prior tests, this result suggests that there is some IAF quality threshold, above

which it is acceptable to use work independently performed by the IAF. Beyond this threshold,

higher quality does not produce greater reductions in audit delay, possibly because the amount of

work that the IAF can perform independently, regardless of quality level, is limited.

5. Conclusion

This study examines the role that the internal audit function (IAF) plays in the timeliness

of financial reporting by investigating whether measures of IAF quality and the IAF’s

contribution to the financial statement audit are associated with audit delay. Results indicate that

firms with higher quality IAFs experience significantly shorter audit delays: a one standard

deviation increase in our measure of IAF quality is associated with a three-to-four day reduction

in audit delay. Audit delay is also significantly shorter (three-to-five days) when the external

auditor uses work performed independently by the IAF, but not when the IAF works under the

direction of the external auditor. Audit delay reductions of three-to-five days are economically

relevant given that accelerated filers released earnings an average of seven days prior to the audit

completion date during our sample period.

35
 Results also indicate that the extent to which various factors affect IAF contribution

depends upon the nature of the contribution (independent work or direct assistance). In

particular, the likelihood that external auditors use independently-performed IAF work is

increasing in IAF quality and availability, and decreasing in material misstatement risk and

external auditor availability. The likelihood that external auditors use the IAF as direct assistants

is decreasing in IAF quality and material misstatement risk.

As the first study to provide empirical evidence that both IAF quality and the IAF’s

contribution to the financial statement audit affect audit delay, this research makes several

contributions to the literature. In particular, we extend studies that investigate determinants of

audit delay, and thereby identify factors associated with the timeliness, and potentially the

quality, of accounting information. To the extent that a higher quality IAF reduces control risk,

our findings provide support for the audit risk model. The use of audit delays to measure audit

effort compliments prior studies that use audit fees and hours to investigate the relation between

IAF contribution and audit effort (Stein et al. 1994; Felix et al. 2001 and Prawitt et al. 2010). The

results suggest that the nature of the IAF’s contribution to the financial statement audit

(independent work versus direct) is an important factor in understanding how IAF contribution

influences audit efficiency and in external auditors’ decisions to use the work of the IAF. Finally,

this research builds upon prior work that uses the GAIN database to further our understanding of

the IAF’s role throughout the financial reporting process (Prawitt et al. 2009, 2010; Lin et al.

2011).

The findings have important implications for managers who structure the IAF, and for

both managers and external auditors who together determine the extent of the IAF’s contribution

to the financial statement audit. The results show mixed some support for recent PCAOB

36
guidance contending that external auditors can improve audit efficiency by making more

extensive use of work performed by others, and thus indicate a need for more research that

investigates the nature of the IAF’s contribution (PCAOB 2005, 2007a, 2007b). Finally, this

study should be of interest to regulators who set reporting deadlines.

This study is subject to several limitations. Most notably, the small size and homogeneity

of our sample, combined with the large number of control variables, lowers the power of our

statistical tests. In particular, models predicting IAF contribution have low explanatory power.

Furthermore, large firms with relatively sophisticated IAFs tend to participate in the GAIN

survey. This limits our ability to generalize findings to firms that did not respond to the GAIN

survey. Another concern is the possibility that our results are confounded by endogeneity. While

it is difficult to completely eliminate this concern, inclusion of controls for accounting system

reliability and governance practices and results from a two-stage-lease-squares regression

indicate that endogeneity is not likely to be a significant problem. Despite these limitations, this

study contributes to our understanding of the IAF’s role in the financial statement audit.

37
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 Appendix A
Descriptive Statistics and Definitions of Variable Used to Construct
Comprehensive Quality Measures, IA Quality and IA Quality Ord, N = 286
Mean Median Std. Dev. Min. Max.
Experience 8.689 8.000 4.032 0.00 24.00
Education 4.488 4.500 0.456 3.00 6.00
Certification 0.575 0.589 0.258 0.00 1.00
Training 56.063 50.000 27.874 0.00 178.00
Competence 1.677 1.701 0.514 0.00 3.02
Objectivity 0.738 1 0.00 1.00
Financial Focus 7.318 7.000 2.485 1.00 12.00
Fieldwork QA 8.434 9.000 2.328 0.00 12.00
IA Expense 3,582,539 1,836,072 4,889,614 52,735
IA Size 0.0307 0.0215 0.0294 0.0006 0.2285

Experience = Average number of years of auditing experience (internal and external) of the audit
staff (B6a and B6b).
Education = Average of the number of years of undergraduate and graduate education of the audit
staff, based on highest degree achieved. Associate, Bachelor, Master, and Ph.D.
degrees are assumed to take 2, 4, 6, and 8 years of study, respectively (B5).
Certifications = Percentage of professional staff members with one or more audit certifications (B8).
Training = Annual hours of training per internal auditor (B15b).
Competence = A single composite score measuring the competence of the IAF staff. The score is
formed by standardizing Experience, Education, Certifications, and Training so that
each has a mean of zero and a standard deviation of one. These variables are averaged,
and the absolute value of the minimum of this averaged is added to each observation to
create a continuous, positive variable.
Objectivity = An indicator variable that equals one if the CAE reports functionally to the audit
committee (E6b1).
Fieldwork = This variable is the sum of four survey items that measure the extent to which various
QA quality assurance (QA) techniques are used in fieldwork (0 - Never, 1 - Occasionally,
and 2 - Regularly), one survey item indicating whether the IAF follows up on
previously-identified control weaknesses (0 - No, 2 - yes), and one survey item that
indicates whether grades or summary opinions are issued by the IAF (0 -No, 2 - Yes).
The individual QA techniques are: direct supervision; independent working paper
review; audit client feedback; and, peer review by fellow staff members (H4, H11,
H12).
Financial = This variable is the sum of six items that measure the frequency with which audits of
Focus the following financial areas/activities take place (0 – Never, 1 – Occassionally, and 2
– Regularly): adequacy of internal accounting controls; accuracy, reliability and
completeness of financial records; usefulness of financial reporting for management
control and decision making; impact of changes in accounting rules or regulations;
interim quarterly financial results reported externally, and the GAAP compliance
audits (G1, G3e)
IA Expense = Total internal audit department costs divided by assets (B1g).
IA Size = The total annual operating costs of the IAF (B1g) divided by the firm assets,
multiplied by 100.
1
Letters and numbers in parentheses refer to item codes in 2004 GAIN Survey.

42
 Figure 1
Path Model of Hypothesized Relations Between IA Quality, IAF Contribution as measured by IndepWork, and Audit Delay

Control Variables
Size, Inventory,
Shumway, Leverage,
Loss, Extra,
ControProbl, Pre 302,
Post 302&75, AC
Effectiveness

- H1
IA Quality AdjustedDelay

+ H3a
- H2
IndepWork

Control Variables
AC Effectiveness,
ControlProb, NotBusy, Pre
302, Post 302&75,
Financial, Utility,
Shumway, CAE Tenure

43
 Figure 2
Weighted Least Square Coefficient Estimates and (One-tailed Significance Levels) for Path Model
of Relations Between IAF Quality, IAF Contribution, and Audit Delay

Control Variables
Size, Inventory, Shumway,
Leverage, Loss, Extra,
ControProbl, Pre 302, Post
302&75, AC Effectiveness

-0.071 (0.016)
IA Quality Adjusted Delay

0.179 (0.036) -0.068 (0.014)

IndepWork

Control Variables
AC Effectiveness,
ControlProb, NotBusy, Pre
302, Post 302&75,
Financial, Utility,
Shumway, CAE Tenure

44
 Table 1
Sample Selection

Firm-Year
Observations
(Fiscal Year) Firms
Firm-year observations obtained from GAIN database for survey
years 2003 and 2004 1356 935
After:
Removing those not covered by Compustat and ADRs 331 248
Removing fiscal years after effective data of SOX Section 404 321 239

Eliminating duplicates 318 236

Removing those with missing Experience, Education,

Certification and IASize1 301 222
Removing those with missing Compustat and Audit Analytics
data. 286 213
1
Missing values were set to zero for Training, Objectivity, Fieldwork QA, and Financial Focus. This affected 8
observations. There are no missing values for IA Contribution. In robustness tests, all firm-year observations with
missing values in any IAF variables were eliminated and results were similar.

45
 Table 2
Variable Definitions1

AdjustedDelay = Number of calendar days from the fiscal yearend to the date of the auditor’s report divided
by the average delay for firms in the same two-digit SIC code, multiplied by 100. The
natural log of this value is AdjustedDelay.
Delay = Number of calendar days from the fiscal yearend to the date of the auditor’s report.
IA Quality = A comprehensive, ordinal measure of the IAF quality. To calculate the measure, we
standardize the five individual quality variables (Competence, Objectivity, Fieldwork QA,
Financial Focus, and IA Size) so that each has a mean of zero and standard deviation of
one. The sum of these variables is standardized and a constant is added to each value so
that all values are positive and the standard deviation of IA Quality is one.
IA Quality Ord = A comprehensive, ordinal measure of the IAF quality. To calculate the measure, we
dichotomize each of the four individual, continuous quality variables (Competence,
Fieldwork QA, IA Size, and Financial Focus) by assigning a value of one to the variable if
it is above the median of our sample for that variable, and a zero otherwise. IA Quality Ord
is the average of these four variables dichotomous variables and Objectivity, and thus takes
on six discrete values from zero and one.

IA Contribution = An indicator variable that equals 1 if the IAF loans staff to external auditors or performs
work for external auditors, and 0 otherwise (F9b).
DirectAssist = An indicator variable that equals 1 if the IAF loans staff to the external auditors, and 0
otherwise (F9b1).
IndepWork = An indicator variable that equals 1 if the IAF performs a complete or partial audits of
specific locations, products or functions in coordinating services with the external auditor,
and 0 otherwise (F9b2).
Assist = Ln(1 + Percentage of audit staff time devoted to external audit assistance) (F5f).
Size = Natural log of total assets.
Inventory = Inventory divided by total assets.
Shumway = The probability of bankruptcy as predicted by Shumway's (2001) default hazard model.
Leverage = Total debt divided by total assets.
Loss = An indicator variable that equals 1 if the firm reported a loss for the current year, and 0
otherwise.
Extra = An indicator variable that equals 1 if the firm reported an extraordinary item in the current
year, and 0 otherwise.
AuditorSpecialist = An indicator variable that equals 1 if the auditor is an industry specialist, and 0 otherwise.
An industry specialist collects the largest percentage of audit fees in the industry.
AuditorTenure = Number of years the external auditor has been a firm’s auditor.
ControlProb = An indicator variable that equals 1 if the firm received a going concern opinion, reported a
material weakness under Section 302, or restated earnings, and 0 otherwise.
Pre 302 = An indicator variable that equals 1 if the fiscal yearend occurs prior to the implementation
of Section 302, and 0 otherwise.
1
Letters and numbers in parentheses refer to item codes in 2004 GAIN Survey.

46
 Table 2 (continued)1

Post 302&90 An indicator variable that equals 1 if the fiscal yearend falls after the implementation of
Section 302 (August 28, 2002) and prior to the implementation of the 75-day filing
deadline (December 15, 2003), and 0 otherwise.
Post 302&75 = An indicator variable that equals 1 if the fiscal yearend occurs after the 75-day filing
deadline became effective (December 15, 2003), and 0 otherwise.
AC Effectiveness = Percentage of Blue-Ribbon Committee recommendations for audit committees
implemented by firm. Recommendations are as follows: all members meet the new
independence criteria; the audit committee have at least three independent (no relations
with organization) outside directors; all members possess core skills including finance
literacy; the committee’s charter is reassessed annually; the proxy report states that
committee fulfills its charter; the committee is accountable for auditor relations; outside
directors disclose all consulting engagements; auditors discuss adequacy of company
accounting; 10K’s MD&A discloses financial statement reviews and discussions; auditors
review quarterly reports and 10-Q before release (C16).
AuditFee = Audit fees paid to external auditors divided by total assets and multiplied by 100.
NotBusy = And indicator variable that equals 1 if a firm’s fiscal yearend falls in December or January,
and 0 otherwise.
CAE Tenure = The number of years the current external auditor has audited the firm’s financial
statements.
Financial = An indicator variable that equals one if the firm is the banking or insurance industries (SIC
codes 6000-6499).
Utility = An indicator variable that equals one if the firm is in the electric, gas, or sanitary service
industry (SIC codes: 4900-4999).
IndustryQuality = Average level of IA quality for all firms in a GAIN industry.
CFO = Cash flow from operations in millions.
Contract = Extent to which general auditing and information technology auditing are outsourced to
third parties measured on a scale from 0 to 8. This variable is formed from the sum of two
questions, each asking respondents to indicate percentage of general audit services (IT audit
services) that were outsourced on a five-point scale (0, some, > 25%, > 50%, 100%) (A8,
A9).
IA Quality Hat = Predicted values from a regression that models IA Quality as a function of Size, Leverage,
Inventory, Pre 302, Post 302&75, IndustryQuality, CFO, Contract.
1
Letters and numbers in parentheses refer to item codes in 2004 GAIN Survey.

47
 Table 3 Descriptive Statistics1
(N = 286)2

Mean Median Std. Dev. Min Max

AdjustedDelay 4.407 4.416 0.452 2.961 6.193
Delay 42.514 39.000 20.583 9.000 212.000
IA Quality 3.031 3.055 1.015 0.000 6.375
IA Quality Ord 0.520 0.600 0.216 0.000 1.000
IA Contribution 65.7%
DirectAssist 29.0%
IndepWork 57.7%
Assist 0.903 0.693 0.937 0.000 3.714
Size 22.856 22.908 1.585 18.710 27.641
Inventory 0.068 0.030 0.088 0.000 0.627
Shumway 0.292 0.085 1.346 0.001 21.126
Leverage 0.676 0.692 0.175 0.149 1.135
Loss 17.5%
Extra 37.4%
AuditorSpecialist 37.8%
AuditorTenure 15.762 15.000 10.674 1.000 31.000
ControlProb 23.8%
Pre 302 23.8%
Post 302&90 44.1%
Post 302&75 32.2%
AC Effectiveness 0.976 1.000 0.086 0.100 1.000
AuditFee 0.035 0.024 0.038 0.000 0.292
NotBusy 17.1%
CAE Tenure 1.525 1.386 0.721 0.000 3.367
Financial 13.6%
Utility 22.0%
Industry Qual 3.226 3.156 0.185 2.821 3.482
CFO 1,789.790 597.256 4,300.318 -24,091.000 31,195.000
Contract 1.755 2.000 1.525 6.000
1
See Table 2 for variable definitions.
2
N = 205 for Assist and N = 285 for CAE Tenure.

48
 Table 4
Pearson Correlations1
N = 2862
Adjusted IA IA Auditor
Delay Delay Quality Contribution Size Inventory Shumway Leverage Loss Extra Specialist
AdjustedDelay 1
Delay 0.891 1
IA Quality -0.077 -0.091 1
IA Contribution -0.178 -0.121 0.018 1
Size -0.008 -0.061 -0.116 -0.069 1
Inventory 0.020 0.119 0.037 0.071 -0.200 1
Shumway 0.330 0.232 0.018 -0.107 -0.085 0.038 1
Leverage 0.143 0.172 -0.020 0.026 0.326 -0.128 0.228 1
Loss 0.162 0.129 0.062 -0.056 -0.063 0.055 0.262 0.043 1
Extra 0.167 0.118 0.026 -0.036 0.297 -0.077 0.091 0.247 0.177 1
AuditorSpecialist 0.141 0.097 0.065 0.031 0.218 -0.024 -0.072 0.161 -0.112 0.083 1
AuditorTenure -0.235 -0.220 -0.077 -0.031 0.175 0.062 -0.040 -0.066 -0.017 -0.042 0.010
ControlProb 0.124 0.091 0.053 -0.081 0.054 -0.086 0.001 0.034 0.046 0.162 -0.045
Pre 302 -0.177 -0.116 -0.197 0.040 -0.201 0.064 -0.025 -0.042 0.002 -0.058 -0.079
Post 302&90 0.070 0.046 -0.016 0.017 0.015 -0.042 0.088 0.032 0.074 0.013 0.064
Post 302&75 0.087 0.057 0.196 -0.055 0.168 -0.015 -0.072 0.004 -0.081 0.040 0.004
AC Effectiveness -0.145 -0.120 0.074 0.169 0.029 0.004 -0.298 -0.009 0.031 0.037 0.131
AuditFee 0.131 0.136 0.214 0.001 -0.573 0.282 0.030 -0.282 0.105 -0.081 -0.128
NotBusy -0.069 -0.007 0.058 -0.063 -0.245 0.171 -0.037 -0.164 -0.038 -0.141 -0.086
CAE Tenure -0.153 -0.217 0.051 0.100 -0.004 -0.174 0.071 -0.020 0.024 0.007 -0.033
1
Correlations in bold and italics correspond to two-tailed significance levels of 0.01 and 0.05, respectively.
2
N = 285 for correlations with CAE Tenure.
3
See Table 2 for variable definitions.

49
 Table 4 (continued)

Control Post Post AC CAE

AuditorTenure Prob Pre 302 302&90 302&75 Effectiveness AuditFee NotBusy Tenure
AuditorTenure 1
ControlProb 0.053 1
Pre 302 0.052 -0.158 1
Post 302&90 -0.048 0.249 -0.496 1
Prost 302&75 0.004 -0.121 -0.385 -0.611 1
AC Effectiveness -0.089 0.049 0.002 -0.074 0.077 1
AuditFee -0.035 0.008 -0.016 -0.008 0.023 0.020 1
NotBusy -0.034 -0.123 0.247 -0.030 -0.194 0.039 0.217 1
CAE Tenure 0.064 -0.081 -0.046 0.035 0.005 -0.056 -0.143 -0.012 1

50
 Table 5
OLS Regression of Audit Delay Measures (AdjustedDelay and Delay) on
IAF Quality Measures (IA Quality, IA Quality Ord), IA Contribution, and Control Variables
(N = 286 observations, 213 firms)

Adjusted Adjusted Adjusted Adjusted

Delay Delay Delay Delay Delay Delay
Expected Coefficient2 Coefficient Coefficient Coefficient Coefficient Coefficient
Variables1 Sign (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic)
Constant - 5.369 *** (5.89)*** 5.728*** 5.275*** 97.071 *** 59.038 *
(9.01) (8.74) (9.04) (6.93) (3.48) (1.94)
IA Quality - -0.083 *** -0.081*** -0.091*** -3.550 *** -4.060 ***
(-3.06) (-3.04) (-3.51) (-3.36) (-4.09)
IA Quality Ord - -0.348***
(-2.86)
IA Contribution - -0.105 ** -0.091** -0.094** -0.081* -5.015 ** -4.808 **
(-1.96) (-1.68) (-1.73) (-1.53) (-2.03) (-2.05)
Control variables
Size -0.041 -0.041 -0.038 -0.015 -0.956 0.623
(-1.48) (-1.50) (-1.41) (-0.49) (-0.97) (0.59)
Inventory 0.771 ** 0.779** 0.756** 0.626* 14.605 9.458
(2.41) (2.44) (2.25) (1.95) (1.17) (0.79)
Shumway 0.052 *** 0.041*** 0.042*** 0.042*** 3.802 *** 3.921 ***
(5.28) (3.15) (3.32) (3.41) (5.45) (6.30)
Leverage 0.359 0.366* 0.381* 0.410* 6.678 6.959
(1.64) (1.67) (1.72) (1.93) (0.71) (0.77)
Loss 0.088 0.105 0.109 0.100 5.059 * 4.584 *
(1.32) (1.61) (1.65) (1.60) (1.75) (1.67)
Extra 0.059 0.061 0.047 0.047 3.086 2.064
(1.10) (1.13) (0.88) (0.88) (1.31) (0.91)
1
See Table 2 for variable definitions.
***, **, * indicate that coefficient is significant at the 0.01, 0.05, and 0.10 levels, respectively (one-tailed tests when coefficient has sign prediction, two-tailed otherwise).
51
 Table 5, continued

Adjusted Adjusted Adjusted Adjusted

Delay Delay Delay Delay Delay Delay
Expected Coefficient2 Coefficient Coefficient Coefficient Coefficient Coefficient
Variables1 Sign (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic)
AuditorSpecialist 0.128 ** 0.140 ** 0.129 ** 0.144 *** 8.048 *** 8.053 ***
(2.33) (2.53) (2.35) (2.63) (3.20) (3.39)
AuidtorTenure -0.009 *** -0.009 *** -0.009 *** -0.010 *** -0.482 *** -0.487 ***
(-3.56) (-3.81) (-3.57) (-4.08) (-3.92) (-4.31)
ControlProb 0.115 * 0.125 ** 0.128 ** 0.127 ** 6.387 ** 6.168 **
(1.87) (2.00) (2.04) (2.03) (2.08) (2.14)
Pre 302 -0.101 -0.093 -0.088 -0.084 -4.868 * -3.938
(-1.54) (-1.45) (-1.37) (-1.31) (-1.89) (-1.55)
Post 302&75 0.101 * 0.111 * 0.110 * 0.109 * 5.548 ** 4.816 **
(1.71) (1.88) (1.88) (1.84) (2.32) (2.00)
AC Effectiveness -0.563 * -0.550 * -0.598 * -25.476 * -26.180 *
(-1.84) (-1.88) (-1.97) (-1.77) (-1.83)
AuditFee 1.804 ** 116.480 ***
(2.46) (3.48)
NotBusy 0.048
(0.60)
Financial -4.678 -2.894
(-1.15) (-0.73)
Utility 2.795 4.839
(0.86) (1.54)

F( 13, 212) 9.49 *** 8.02 *** 8.14 *** 9.35 *** 10.07 *** 14.63 ***
Adjusted R2 0.182 0.189 0.184 0.200 0.273 0.298

52
 Table 6
OLS Regression of AdjustedDelay on IA Quality, Alternative Measures of IAF Contribution,
and Control Variables
Expected Coefficient Coefficient Coefficient Coefficient Coefficient
Variables1 sign (t-statistic) (t-statistic) (t-statistic) (t-statistic) (t-statistic)
Constant 5.874 *** 5.878 *** 5.269*** 6.289*** 5.659***
(8.55) (8.71) (6.93) (8.73) (6.96)
IA Quality - -0.083 *** -0.076 *** -0.084*** -0.072*** -0.082***
(-3.10) (-2.77) (-3.15) (-2.50) (-2.91)
DirectAssist - -0.012
(-0.21)
IndepWork - -0.095 ** -0.089**
(-1.85) (-1.75)
Assist - -0.062** -0.065**
(-1.92) (-2.07)
Size -0.039 -0.041 -0.016 -0.056* -0.029
(-1.39) (-1.51) (-0.52) (-1.80) (-0.85)
Inventory 0.748 ** 0.772 ** 0.640** 0.444 0.295
(2.36) (2.43) (2.03) (1.16) (0.77)
Shumway 0.043 *** 0.041 *** 0.042*** 0.055 0.040
(3.19) (3.14) (3.41) (0.88) (0.61)
Leverage 0.347 0.372 * 0.410* 0.112 0.161
(1.54) (1.71) (1.89) (0.42) (0.62)
Loss 0.110 * 0.104 0.096 0.147* 0.139*
(1.69) (1.60) (1.52) (1.85) (1.82)
Extra 0.062 0.055 0.040 0.082 0.054
(1.14) (1.02) (0.74) (1.44) (0.95)
AuditorSpecialist 0.140 ** 0.139 ** 0.140** 0.182*** 0.184***
(2.53) (2.49) (2.54) (2.83) (2.87)
AuidtorTenure -0.009 *** -0.009 *** -0.009*** -0.008*** -0.008***
(-3.75) (-3.76) (-4.05) (-2.81) (-3.08)
ControlProb 0.133 ** 0.126 ** 0.123** 0.161** 0.161**
(2.14) (2.03) (2.00) (2.50) (2.56)
Pre 302 -0.092 -0.088 -0.072 0.031 0.003
(-1.42) (-1.38) (-1.15) (0.22) (0.02)
Post 302&75 0.118 ** 0.111 * 0.103* 0.136** 0.128**
(2.00) (1.90) (1.75) (2.37) (2.22)
AC Effectiveness -0.635 ** -0.573 * -0.592** -0.533* -0.546*
(-2.05) (-1.87) (-1.98) (-1.70) (-1.76)
AuditFee 1.853** 1.833**
(2.50) (2.52)
N (Firms) 286 (213) 286 (213) 286 (213) 205 (149) 205 (149)
F-statistic 7.260 *** 7.81 *** 9.65*** 2.91*** 4.39***
Adjusted R2 0.180 0.191 0.203 0.178 0.192
1
See Table 2 for variable definitions.
***, **, * indicate that coefficient is significant at the 0.01, 0.05, and 0.10 levels, respectively (one-tailed tests when coefficient has
sign prediction, two-tailed otherwise).

53
 Table 7
Logistic and Tobit Regressions of Different IAF Contribution Measures on IA Quality, Proxies for
Material Misstatement Risk and Auditor Availability, and Control Variables1
IA Contribution DirectAssist IndepWork IndepWork Assist
Expected Coefficient Coefficient Coefficient Coefficient Coefficient
Variables2 sign (z-statistic) (z-statistic) (z-statistic) (z-statistic) (t-statistic)
Constant -4.390*** -6.028* -4.381*** -3.974 ** -3.536**
(-2.77) (-1.76) (-2.80) (-2.53) (-2.22)
IA Quality + 0.097 -0.298* 0.322** 0.350** -0.047
(0.64) (-1.92) (2.12) (2.17) (-0.37)
AC Effectiveness + 4.859*** 5.932** 3.767*** 2.889** 3.353**
(3.04) (1.71) (2.43) (1.85) (2.31)
ControlProb - -0.501* -0.466* -0.366 -0.180 0.160
(-1.63) (-1.40) (-1.22) (-0.52) (0.60)
NotBusy - -0.704** 0.333 -0.586* -0.985 ** -0.308
(-1.66) (0.77) (-1.38) (-1.95) (-0.69)
Post 302&90 - -0.063 0.407 -0.331 -0.471 0.321
(-0.17) (1.10) (-0.93) (-1.15) (0.46)
Post 302&75 - -0.609** -0.016 -0.743** -0.756 ** 0.140
(-1.73) (-0.04) (-2.15) (-1.85) (0.20)
Financial 0.881* 0.431 0.540 0.541 1.100***
(1.68) (0.94) (1.16) (1.11) (3.65)
Utility -0.027 0.945** -0.346 -0.710 0.239
(-0.07) (2.36) (-0.91) (-1.50) (0.72)
Shumway -0.464 -0.323 -0.320 -0.325 -0.391*
(-1.63) (-1.20) (-1.23) (-1.17) (-1.72)
CAE Tenure 0.327* -0.110 0.463** 0.488** 0.330*
(1.72) (-0.49) (2.34) (2.13) (1.81)
N (Dep. variable >= 1)3 188 83 165 105 114
N (Dep. variable = 0) 97 202 120 120 90
N (Total) 285 285 285 225 204
Chi-Square Statistic 23.20 18.38 21.20 21.43 2.73
(significance) (0.010) (0.049) (0.020) (0.018) (0.004)
Pseudo R2 0.072 0.065 0.069 0.088 0.043
Log pseudolikelihood -170.28 -160.73 -180.83 -141.65 -270.56
1
Logit regressions are used for the dichotomous dependent variables IA Contribution, DirectAssist, and IndepWork; a tobit regression is
used with the left-censored variable, Assist.
2
See Table 2 for variable definitions.
3
In the logistic regressions in columns 1-4, this is the number of observations for which dependent variable is 1. In the tobit the
regression for Assist, this is the number of uncensored (non-zero) observations.
***, **, * indicate that coefficient is significant at the 0.01, 0.05, and 0.10 levels, respectively (one-tailed tests when coefficient has sign
prediction, two-tailed otherwise).

54
 Table 8
Two-Stage-Least-Square Regression of AdjustedDelay on Predicted Values of IAF Quality (IA Quality
Hat), IAF contribution, and control variables, (N = 286 observations, 213 firms)

First stage results Second stage results

IA Quality AdjustedDelay AdjustedDelay
Coefficient Expected Coefficient Coefficient
Variables1 (t-statistic) Variables Sign (t-statistic) (t-statistic)
Constant 3.339* Constant 7.345*** 7.373 ***
1.87 (5.75) (5.74)
Size -0.154*** IA Quality Hat - -0.346** -0.348 **
(-3.03) (-1.95) (-1.94)
Inventory 1.555 IA Contribution - -0.086*
(1.47) (-1.54)
Leverage 0.019 IndepWork - -0.110 **
(0.05) (-2.13)
Pre 302 -0.425*** Size -0.070* -0.072 *
(-2.69) (-1.89) (-1.93)
Post 302&75 0.293*** Inventory 0.838** 0.837 **
(2.68) (2.53) (2.56)
IndustryQuality 0.969** Shumway 0.041*** 0.041 ***
(2.14) (3.28) (3.24)
CFO 0.000** Leverage 0.435* 0.447 **
(2.24) (1.91) (1.98)
Contract -0.048 Loss 0.074 0.073
(-1.12) (1.11) (1.10)
Extra 0.052 0.046
(0.94) (0.83)
AuditorSpecialist 0.113** 0.112 **
(1.99) (1.98)
AuidtorTenure -0.009*** -0.009 ***
(-3.76) (-3.73)
ControlProb 0.109* 0.109 *
(1.81) (1.83)
Pre 302 -0.208** -0.205 **
(-2.24) (-2.19)
Post 302&75 0.197** 0.199 **
(2.16) (2.20)
AC Effectiveness -0.573** -0.565 **
(-2.03) (-2.01)
F-statistic 4.15*** F-statistic 8.66*** 8.49 ***
Adjusted R2 0.091 Adjusted R2 0.177 0.183
1
See Table 2 for variable definitions.
***, **, * indicate that coefficient is significant at the 0.01, 0.05, and 0.10 levels, respectively (one-tailed tests when coefficient has
sign prediction, two-tailed otherwise).

55
 Table 9
Weighted Lease Squares Estimation of the Direct and Indirect
Effects of IA Quality on AdjustedDelay, N = 285 observations (212 firms)

Direct and indirect effects Model fit

Coefficient/
Sign2 StdYX3 Coefficent Std Error CFI 0.918
Direct - -0.164 -0.071 2.245 ** RMSEA 0.035
Indirect - -0.028 -0.012 -1.541 *
Total - -0.192 -0.083 -2.866 ***

Dependent variable: IndepWork Dependent variable: AdjustedDelay

Expected Coefficient/ Expected Coefficient/
1
Variables Sign StdYX2 Coefficient Std Error Variables 1
Sign StdYX2 Coefficient Std. Error
Constant 1.301 1.491 0.716 Constant 13.638 6.000 12.912***
IA Quality + 0.159 0.179 2.093** IA Quality - -0.164 -0.071 -2.245**
AC Effectiveness + 0.187 2.482 1.618* IndepWork - -0.177 -0.068 -2.466***
ControlProb - -0.094 -0.253 -1.323* Size -0.124 -0.035 -1.972**
NotBusy - -0.156 -0.478 -1.914** Inventory 0.115 0.573 1.978**
Pre 302 + 0.047 0.126 0.588 Shumway 0.103 0.034 0.764
Post 302&75 - -0.097 -0.238 -1.531* Leverage 0.137 0.344 2.097**
Financial 0.122 0.407 1.164 Loss 0.103 0.119 1.402
Utility -0.048 -0.133 -0.165 Extra 0.070 0.064 1.032
Shumway -0.258 -0.219 -0.877 AuditorSpecialist 0.152 0.137 2.555**
CAE Tenure 0.249 0.396 3.187*** AuditorTenure -0.206 -0.008 -3.075***
Pre 302 -0.109 -0.113 -1.498
R-square 0.238 Post 302&75 0.110 0.104 1.657*
AC Effectiveness -0.102 -0.519 -1.458
R-square 0.244
1
See Table 2 for variable definitions.
2
StdYZ is the change in y (dependent variable), in y standard deviations, for a one-standard deviation change in x (predictor variables).
***, **, * indicate significance levels of 0.01, 0.05, and 0.10, respectively, one-tailed for signed variables and two-tailed otherwise.

56