External auditors' reliance on the internal audit function : the Libyan perspective

Abstract

Auditing in Libya is considerably unregulated. There is only minimal regulation on auditing and auditors; there are no auditing standards and there is no requirement to comply with specific auditing standards or guidelines. Therefore, some companies and particularly the bigger audit firms in Libya would refer to the International Standards on Auditing (ISA) and the Statements on Auditing Standards (SAS). Both ISA and SAS allow the external auditors to rely on the efforts of their internal counterparts, subject to considering three key elements of internal audit (IA) quality, which are: competence, objectivity and work performed. This reliance may be more challenging in Libya due to the unstandardized quality of the internal audit function (IAF). Therefore, the objectives of this study are to examine the perception of the external auditors regarding the competence, objectivity and the work performed by the IAF of the Libyan companies; as well as to determine whether the external auditors would rely on the output produced by this function, based on their perception of the three IA quality elements. This study applied the attribution theory to develop the hypotheses to be tested. Out of the 110 self-administered questionnaires, 94 were useable. The results of this study revealed that, based on the perception of the Libyan external auditors, from the three elements of IA quality, work performed was deemed most important, followed by competence, then objectivity. Moreover, in terms of the influence of these three factors on the reliance decision, it was found that objectivity and competence were found to have a significant positive association with reliance by the external auditors. These findings should be useful to Libyan regulators, as well as the companies to consider reducing audit fees by improving on these three IA quality elements. Furthermore, this study extends the literature, specifically in the context of Libya.