Impact of Internal Audit and Audit Committee Characteristics on External Audit Fees: A Case Study of Banks in Bangladesh

This paper examines whether characteristics of an audit committee and the internal audit function (IAF) affect the external audit fee. Despite extensive research on the determinants of external audit fees and quality audit work, there is little empirical evidence on the effect of internal audit contribution on the external audit fee. Using a regressional model, rotated component and correlation matrix based on prior audit fee research, this study provides evidence that internal audit contribution is a significant determinant of the external audit fee and quality audit. Further, a second model that provides evidence on the determinants of internal audit contribution is developed and tested. This second model indicates that external audit work is influenced by internal audit quality, internal audit factors, business size and reputation of the firm, profitability and location of the firm, industry condition and hierarchy of the audit team and the extent of coordination between internal and external auditors. These results are based on a unique data-set comprised of publicly-available data matched with survey responses from internal auditors affiliated with numerous banking institutions in Bangladesh. The reseachers revealed that the higher percentage of contribution by internal auditors having finance or accounting background more time spent aiding the external auditors or performing financial audit task, the lower the unexpected external audit fee. Nonetheless, these results provide evidence that high quality IAFs are associated with lower external audit fee.