Academic journal article Auditing: A Journal of Practice & Theory

Voluntary Demand for Internal and External Auditing by Family Businesses

Academic journal article Auditing: A Journal of Practice & Theory

Voluntary Demand for Internal and External Auditing by Family Businesses

Article excerpt

This study examines voluntary demand for internal and external auditing by family businesses, a significant but relatively unexplored segment of the economy. A family business is one with majority family ownership. With the evolving nature of internal audit, the relationship between internal and external auditing is unclear. Auditing standards reflect a complementary relationship where the external auditor's reliance on the work of internal audit may result in a more efficient financial statement audit approach. However, recent developments in the internal audit profession, which place greater emphasis on value-adding activities such as strategic planning and risk management, suggest internal audit may substitute for external audit in providing assurance on information for decision makers.

Our study of 186 family businesses shows that internal audit (59 percent) was more prevalent than external audit (46 percent). This finding is consistent with suggestions from accounting firms that, when assessing client needs, there is a trend toward recommending internal audit services compared with external audit services. We find that outsourcing was the most common method for providing internal audit services to these family-owned businesses (46 percent outsourced to an external accounting firm, 34 percent employed permanent staff members, and 20 percent a combination of both). …

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