Exploring The Role of Internal Audit Characteristics and Report on Quality in Shaping External Auditors’ Reliance: Evidence From Saudi Arabia

  • Authors

    • Thamer M. Al-Wadai Graduate School of Management, Post Graduate Centre, Management and Science University (MSU), University Drive, Off Persiaran Olahraga, Section 13, 40100, Selangor, Malaysia
    • Ahmed Alsenosy Graduate School of Management, Post Graduate Centre, Management and Science University (MSU), University Drive, Off Persiaran Olahraga, Section 13, 40100, Selangor, Malaysia
    • Aza Azlina Md Kassim Associate Professor at Management and Science University. Management and Science University Universiti Utara Malaysia. Shah Alam, Section 13, 40100, Selangor, Malaysia
    https://doi.org/10.14419/cz5m5j85

    Received date: May 26, 2025

    Accepted date: June 23, 2025

    Published date: June 26, 2025

  • Internal Audit Function, External Auditors’ Reliance, Quality of Internal Audit Reports, Work Performance, Competence, Objectivity, Corporate Govern-ance Quality, Internal Control System Effectiveness, Saudi Arabia, Stakeholder Theory

  • Abstract

    The current study aims to understand and examine the influences of work performance (WP), competence (COM), objectivity (OBJ) as well as corporate governance quality (CGQ) and internal control effectiveness (ICSE) on external auditors’ accreditation (REA) in Saudi Arabia. The mediating role in this study is the internal audit report quality (IRQ). Existing studies have not adequately covered the characteristics, importance, and benefits of internal audit, especially in the Saudi context. The current study is based on a logical and clear approach (positivist approach) through specific theories such as stakeholder theory and RBT theory.

    This study is also based on a quantitative approach to understanding the linkage between variables by collecting primary data using a structured questionnaire designed for this purpose. The questionnaires were already distributed via email to the study sample, which consists of audit managers in CPA firms in the Kingdom of Saudi Arabia, to pinpoint relevant facts. To increase response rates, follow-up phone calls were necessary. By targeting all 376 audit firms, the author ensured representativeness and generalizability. For testing the hypothesis, the study relies on collecting questionnaire data. Based on a Structural Equation Model (SEM), the analysis revealed that ICSE, WP, and CGQ are critical determinants of IRQ and REA, with IRQ significantly mediating their effects. Conversely, objectivity and competence did not directly influence IRQ or REA, suggesting that external auditors prioritize tangible performance measures over intangible attributes in the Saudi context. High job performance, effective internal controls, and strong corporate governance are pivotal in enhancing the reports’ quality and fostering reliance. These findings underscore the need for organizations to improve their IAF processes, align internal audit practices with external auditors’ expectations, and leverage high-quality audit reports to build trust and collaboration. The study contributes theoretical insights and practical applications to strengthen the relationship between IAF and REA, particularly in the context of the evolving governance frameworks in Saudi Arabia. 

  • References

    1. Almahuzi, A. S. (2020). Factors Impacting the Effectiveness of Internal Audit in the Saudi Arabian Public Sector [Phd, Victoria University]. http://vuir.vu.edu.au/
    2. Al-Matari, E. M., Hazaea, S. A., Senan, N. A. M., Mgammal, M., & Mohamed, A. M. E. (2022). Do the characteristics of internal audit directly affect the performance of Saudi financial sector? Calitatea, 23(190), 97–104.
    3. Alzeban, Abdulaziz, and David Gwilliam. “Factors Affecting the Internal Audit Effectiveness: A Survey of the Saudi Public Sector.” Journal of International Accounting, Auditing and Taxation 23, no. 2 (2014): 74–86. https://doi.org/10.1016/j.intaccaudtax.2014.06.001.
    4. Arena, Marika, and Kim K. Jeppesen. “The Jurisdiction of Internal Auditing and the Quest for Professionalization: The Danish Case.” International Journal of Auditing 14, no. 2 (2010): 111–29. https://doi.org/10.1111/j.1099-1123.2009.00408.x.
    5. Abdulai, I., Salakpi, A., & Nassè, T. B. (2021). Internal audit and quality of financial reporting in the public sector: The case of the University for Development Studies. Finance & Accounting Research Journal, 3(1), 1–23. https://doi.org/10.51594/farj.v3i1.231
    6. Al-Baity, H. H. (2023). The artificial intelligence revolution in digital finance in Saudi Arabia: A comprehensive review and proposed framework. Sustainability, 15(18), 13725. https://doi.org/10.3390/su151813725
    7. Abbott, L. J., Parker, S., & Peters, G. F. (2012). Internal audit assistance and external audit timeliness. Auditing, 31(4), 3–20. https://doi.org/10.2308/ajpt-10296
    8. Abed, I. A., Hussin, N., Haddad, H., Al-Ramahi, N. M., & Ali, M. A. (2022). The moderating effects of corporate social responsibility on the rela-tionship between creative accounting determinants and financial reporting quality. Sustainability, 14(3), Article 3. https://doi.org/10.3390/su14031195
    9. Afridi, F. E. A. (2020). Effect of corporate governance on financial reporting quality: Evidence from listed textile sector firms on the Pakistan Stock Exchange.
    10. Ajao, M. G., & Ejokehuma, J. O. (2021). Ownership structure and financial performance of manufacturing firms in Sub-Saharan Africa. Facta Uni-versitatis, Series: Economics and Organization, 187. https://doi.org/10.22190/FUEO210319013A
    11. Akinto, T. (2021). A systematic review of corporate governance and ownership. International Journal of Research in Business and Social Science, 10(6), 63–72. https://doi.org/10.20525/ijrbs.v10i6.1351
    12. Al-Shaheen, H., & Bai, H. (2020). The reliance of external audit on internal audit: In Chinese audit corporations. Kristianstad University, Sweden.
    13. Al-Sukker, A., Ross, D., Abdel-Qader, W., & Al-Akra, M. (2018). External auditor reliance on the work of the internal audit function in Jordanian listed companies. International Journal of Auditing, 22(2), 317–328. https://doi.org/10.1111/ijau.12122
    14. Al Twaijry, A. A. M., Brierley, J. A., & Gwilliam, D. R. (2003). The development of internal audit in Saudi Arabia: An institutional theory perspec-tive. Critical Perspectives on Accounting, 14(5), 507–531. https://doi.org/10.1016/S1045-2354(02)00158-2
    15. Altwaijry, A. (2017). Internal audit quality evaluation and reliance decision: External auditors’ perception. International Journal of Economics & Management Sciences, 06(05). https://doi.org/10.4172/2162-6359.1000464
    16. Alzeban, A. (2019). An examination of the impact of compliance with internal audit standards on financial reporting quality: Evidence from Saudi Arabia. Journal of Financial Reporting and Accounting, 17(3), 498–518. https://doi.org/10.1108/JFRA-09-2018-0085
    17. Alzeban, A., & Sawan, N. (2013). The role of internal audit function in the public sector context in Saudi Arabia. African Journal of Business Man-agement. https://www.semanticscholar.org/paper/The-role-of-internal-audit-function-in-the-public-Alzeban-Sawan/6ee8762a480b3e7bb6f878280562cd4d12c737d3
    18. Ashfaq, K., Rehman, S. U., Haq, M. U., & Usman, M. (2023). Factors influencing stakeholder’s judgment on internal audit function’s effectiveness and reliance. Journal of Financial Reporting and Accounting, 21(5), 958–973. https://doi.org/10.1108/JFRA-12-2020-0371
    19. Aviaan Accounting. (2023). Audit firms in Riyadh. Top accounting firm in Dubai. https://aviaanaccounting.com/audit-firms-in-riyadh/
    20. Bazhair, A. H., & Alshareef, M. N. (2022). Dynamic relationship between ownership structure and financial performance: A Saudi experience. Co-gent Business & Management, 9(1), 2098636. https://doi.org/10.1080/23311975.2022.2098636
    21. Beyond Governance. (2023, July 4). Governance and the Kingdom of Saudi Arabia. Beyond Governance. https://beyondgovernance.com/governance-and-the-kingdom-of-saudi-arabia/
    22. CFA. (2024). Financial reporting quality. https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/financial-reporting-quality
    23. Cohen, Jeffrey R., Ganesh Krishnamoorthy, and Arnold Wright. “The Corporate Governance Mosaic and Financial Reporting Quality.” SSRN Scholarly Paper. Rochester, NY: Social Science Research Network, January 31, 2008. https://papers.ssrn.com/abstract=1086743.
    24. Diem, M. J., Marwah, T., Hanafi, A., & Andriana, I. (2023). The effect of satisfaction on the relationship between employee engagement and per-formance. International Conference Faculty of Economics and Business, 2(1), Article 1.
    25. Elzahaby, M. A. (2021). How firms’ performance mediates the relationship between corporate governance quality and earnings quality? Journal of Accounting in Emerging Economies, 11(2), 278–311. https://doi.org/10.1108/JAEE-09-2018-0100
    26. Fitriati, R. (2020). The analysis of employee performance at Semarang Religious Training Center. IAPA Proceedings Conference, 662–676. https://doi.org/10.30589/proceedings.2020.432
    27. Freeman, R. E. (2010). Strategic management: A stakeholder approach. Cambridge University Press.
    28. Fallatah, R. A. F. (2021). The effect of audit committees on the sustainability of financial inclusion transactions in Saudi banks in the light of the Saudi Vision 2030. Journal of Economic, Administrative and Legal Sciences, 5(13), 90–109. https://doi.org/10.26389/ajsrp.r021120
    29. Gardi, B., Aga, M., & Abdullah, N. N. (2023). Corporate governance and financial reporting quality: The mediation role of IFRS. Sustainability, 15(13), 9869. https://doi.org/10.3390/su15139869
    30. Gaudens, L., Davies, M., & Buisine, S. (2023). What are the drivers of competence management? European Conference on Management Leader-ship and Governance, 19(1), Article 1. https://doi.org/10.34190/ecmlg.19.1.1905
    31. Gerbing, D. W., & Anderson, J. C. (1988). An updated paradigm for scale development incorporating unidimensionality and its assessment. Journal of Marketing Research, 25(2), 186–192. https://doi.org/10.1177/002224378802500207
    32. Grant Thornton. (2023). The role of auditing in promoting transparency and accountability in Saudi Arabia. Grant Thornton Saudi Arabia. https://www.grantthornton.sa/insights/articles-and-publications/role_of_auditing/
    33. Hair, J., Hult, G. T. M., Ringle, C. M., & Sarstedt, M. (2021). A primer on partial least squares structural equation modeling (3rd ed.). SAGE Publi-cations, Inc.
    34. Hamdallah, M. E. A. (2020). The reliance of external auditors on the work performed by internal auditors and its impact on audit: A case of the First Abu Dhabi Bank, UAE. Economics and Management, 17(1), 68–80.
    35. Hanif, A. (2020). The reliance of external auditors on internal auditors. RADS Journal of Business Management, 2(1), Article 1.
    36. IAASB. (2013). ISA 610 (Revised 2013), Using the work of internal auditors. International Auditing and Assurance Standards Board. https://www.iaasb.org/publications/isa-610-revised-2013-using-work-internal-auditors-0
    37. IAASB. (2019). International Standard on Auditing 315 (Revised 2019). International Auditing and Assurance Standards Board.
    38. IAASB. (2021). 2020 handbook of international quality control, auditing, review, other assurance, and related services pronouncements. Interna-tional Federation of Accountants (IFAC).
    39. Idowu, A., Adedipe, O. A., & Aderoju, A. (2022). Internal control system and corporate survival in the Nigerian banking sector: The mediatory role of ethical climate. ACU Journal of Social and Management Sciences, 2(1). https://ajsams.acu.edu.ng/index.php/ajsams/article/view/78
    40. Kaawaase, T. K., Nairuba, C., Akankunda, B., & Bananuka, J. (2021). Corporate governance, internal audit quality, and financial reporting quality of financial institutions. Asian Journal of Accounting Research, 6(3), 348–366. https://doi.org/10.1108/AJAR-11-2020-0117
    41. Kateb, I., & Belgacem, I. (2023). Navigating governance and accounting reforms in Saudi Arabia’s emerging market: Impact of audit quality, board characteristics, and IFRS adoption on financial performance. International Journal of Disclosure and Governance. https://doi.org/10.1057/s41310-023-00193-5
    42. Kaur, R., & Singh, B. (2019). Do CEO characteristics explain firm performance in India? Journal of Strategy and Management, 12(3), 409–426. https://doi.org/10.1108/JSMA-02-2019-0027
    43. Leng, M. W., Sulaiman, N. A., & Jalil, A. A. (2022). The audit committees, internal audit, and external audit quality effects on earnings manage-ment: An analysis of Malaysian government-linked companies. Jurnal Pengurusan, 66. https://doi.org/10.17576/pengurusan-2022-66-05
    44. Mapuli, J. S. (2023). Does internal audit functions' effectiveness influence external auditors’ reliance on internal audit work? African Journal of Ac-counting and Social Science Studies, 4(2), 82–98. https://doi.org/10.4314/ajasss.v4i2.5
    45. Mati, A., & Rehman, S. (2022). Saudi Arabia to grow at fastest pace in a decade. IMF. https://www.imf.org/en/News/Articles/2022/08/09/CF-Saudi-Arabia-to-grow-at-fastest-pace
    46. Montero, A. G., & Le Blanc, D. (2019). The role of external audits in enhancing transparency and accountability for the Sustainable Development Goals.
    47. Noor, Nurul Fitri Mohd, Zuraidah Mohd Sanusi, Zeti Suzila Mat Jusoh, Razana Juhaida Johari, and Nur Fatin Kasbun. “The Mediation Effect of Audit Assessment on Audit Competency and Digital Audit to Audit Work Performance Effectiveness.” International Journal of Religion 5, no. 9 (May 29, 2024): 551–62. https://doi.org/10.61707/xnaxqd85.
    48. Nurunnabi, M., Donker, H., & Jermakowicz, E. K. (2022). The impact of mandatory adoption of IFRS in Saudi Arabia. Journal of International Accounting, Auditing and Taxation, 49, 100509. https://doi.org/10.1016/j.intaccaudtax.2022.100509
    49. Quick, R., & Henrizi, P. (2019). Experimental evidence on external auditor reliance on the internal audit. Review of Managerial Science, 13(5), 1143–1176. https://doi.org/10.1007/s11846-018-0285-0
    50. Rolin, K. H. (2021). Objectivity, trust, and social responsibility. Synthese, 199(1–2), 513–533. https://doi.org/10.1007/s11229-020-02669-1
    51. Salehi, M., Ammar Ajel, R., & Zimon, G. (2023). The relationship between corporate governance and financial reporting transparency. Journal of Financial Reporting and Accounting, 21(5), 1049–1072. https://doi.org/10.1108/JFRA-04-2021-0102
    52. Setiyawati, H., Iskandar, D., & Buana, U. (2020). Importance of internal accountants’ competence in shaping good quality financial reporting in local governments in Indonesia. International Journal of Innovation, Creativity and Change, 11(1), 20–37.
    53. Siahaya, A., & Sandanafu, S. P. (2022). The effect of good governance implementation, government accounting standards, effectiveness of internal control system, and human resource quality on the quality of Regional Task Force financial statements. International Journal of Economics, Busi-ness and Accounting Research (IJEBAR), 6(1), Article 1. https://doi.org/10.29040/ijebar.v6i1.4821
    54. Siregar, F. A. H., Hutagalung, G., & Ginting, R. R. (2021). Analysis of competence, objectivity, and ethics of auditors on the quality of internal audit results with integrity as moderating variables in Medan City Inspectorate. Journal of Economics, Finance and Management Studies, 4(8). https://doi.org/10.47191/jefms/v4-i8-18
    55. Spira, Laura F., and Michael Page. “Risk Management: The Reinvention of Internal Control and the Changing Role of Internal Audit.” Accounting, Auditing & Accountability Journal 16, no. 4 (October 1, 2003): 640–61. https://doi.org/10.1108/09513570310492335.
    56. Suh, I., Masli, A., & Sweeney, J. T. (2021). Do management training grounds reduce internal auditor objectivity and external auditor reliance? The influence of family firms. Journal of Business Ethics, 173(1), 205–227. https://doi.org/10.1007/s10551-020-04507-3
    57. Suwaidan, M., & Qasim, A. (2010). External auditors’ reliance on internal auditors and their impact on audit fees: An empirical investigation. Man-agerial Auditing Journal, 25(6), 509–525. https://doi.org/10.1108/02686901011054845
    58. Thottoli, M. M., Ahmed, E. R., & Thomas, K. V. (2022). Emerging technology and auditing practice: Analysis for future directions. European Journal of Management Studies, 27(1), 99–119. https://doi.org/10.1108/ejms-06-2021-0058
    59. Vamela, D., & Setiyawati, H. (2021). Analysis of the effectiveness of internal control systems and management morality on the tendency of fraud in accounting. In Proceedings of the 1st MICOSS Mercu Buana International Conference on Social Sciences (MICOSS 2020) (pp. 1–15). Jakarta, Indonesia. https://doi.org/10.4108/eai.28-9-2020.2307366
    60. VanStaden, M. (2020). Conceptualized balanced reliance on internal audit work by external auditors. University of Pretoria.
    61. Vu, T. T., Hoang, L. H. T., Do, H. T., Phan, D. T., & Nguyen, T. T. (2020). Influence of components of internal control on the effectiveness of in-ternal control: Evidence from transport construction enterprises in Vietnam. The Journal of Asian Finance, Economics and Business, 7(11), 1087–1095. https://doi.org/10.13106/jafeb.2020.vol7.no11.1087
    62. Wafeq. (2023). Saudi Arabia’s Vision 2030: A transformational shift in accounting practices. https://www.wafeq.com/en/business-hub/for-business/saudi-arabia's-vision-2030:-a-transformational-shift-in-accounting-practices
    63. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180. https://doi.org/10.1002/smj.4250050207
    64. Zhou, M., Li, K., & Chen, Z. (2021). Corporate governance quality and financial leverage: Evidence from China. International Review of Financial Analysis, 73, 101652. https://doi.org/10.1016/j.irfa.2020.101652

  • Downloads

  • How to Cite

    Al-Wadai , T. M. ., Alsenosy , A. ., & Kassim , A. A. M. . (2025). Exploring The Role of Internal Audit Characteristics and Report on Quality in Shaping External Auditors’ Reliance: Evidence From Saudi Arabia. International Journal of Accounting and Economics Studies, 12(2), 270-281. https://doi.org/10.14419/cz5m5j85