Auditors ’ Reliance

The purpose of the current study is to examine the degree of reliance external auditors are willing to place on the work of the internal audit function (IAF) when the IAF's objectivity might be compromised. Experienced external auditors (N = 142) participated in a 2 (reporting relationship: audit committee of the board of directors [ACBOD] or chief finance officer [CFO]) by 2 (IAF involvement in the area being audited: low or high) between-participant experiment. The findings indicated that when the IAF reported to the ACBOD, external auditor reliance was lower when the IAF’s involvement was higher; however, when the IAF reported to the CFO, the opposite results obtained. The unusual pattern in the CFO condition can be explained via secondorder belief attribution theory; that is, the external auditors believed that the CFO must have allowed the IAF’s involvement to be low (high) because the CFO had relatively low (high) confidence in the IAF’s competence in the area being audited. The results suggest that the external auditor participants appear to have impounded, at least partially, their second-orderderived beliefs into their own cognitive schema and acted accordingly, as perceptions of decreased objectivity associated with high involvement and the reporting structure were more than offset by high competency beliefs when the IAF reported to the CFO. The study findings hold implications for both theory and practice in the area of external auditor reliance on the work of others.