An empirical investigation of internal and external auditor\u27s judgments and decisions concerning detailed audit testing

This study compares various audit judgments and decisions between internal auditors (IAs) and external auditors (EAs). The study found the following four similarities: (1) When an unfavorable change occurred in the operating effectiveness of internal controls, both IAs and EAs significantly increased the extent of their detailed substantive testing. (2) In determining the extent of their detailed substantive tests, generally there was no significant difference between the IAs$\sp\prime$ and the EAs$\sp\prime$ levels of audit risk (AR) or detection risk (DR). (3) For both auditors, (a) there was some weak evidence which showed that their level of DR had a significant impact of the extent of their detailed substantive testing, (b) there was no evidence which showed that tolerable misstatement (TM) or need to control audit costs (AC) had a significant impact on the extent of their detailed substantive testing, and (c) there was strong evidence which showed that the change in their DR level had a significant impact on the change in the extent of their detailed substantive testing. (4) The overall statistical comparisons of the degree of consensus among IAs versus EAs showed an equal level of consensus between the two.^ The study found the following eight differences: (1) When a favorable change occurred in the operating effectiveness of the internal controls, the IAs significantly decreased the extent of their detailed substantive testing but the EAs did not. (2) When an unfavorable change occurred in the analytical procedures signal, the EAs significantly increased the extent of their detailed substantive testing but the IAs did not. (3) When a favorable change occurred in the analytical procedures signal, the EAs significantly decreased the extent of their detailed substantive testing but the IAs did not. (4) In determining their acceptable level of AR, EAs give significantly greater consideration to AC than IAs. (5) The IAs$\sp\prime$ TM amounts were significantly lower than the EAs$\sp\prime$. (6) The relative importance of the change in the level of DR in the determination of the change in the extent of detailed substantive testing was significantly higher for the EAs than the IAs. (7) The quantity of the IAs$\sp\prime$ audit hours was significantly greater than that of the EAs. (8) There was significantly more consensus among EAs than IAs concerning both audit hours and DR levels, but the opposite for TM amounts.