The use of internal audit by Australian companies

Abstract

PurposeThe purpose of this study is to explore the voluntary use of internal audit by Australian publicly listed companies and to identify factors that lead listed companies to have an internal audit function.Design/methodology/approachDrawing on the Institute of Internal Auditors' definition of internal auditing, the paper predicts that internal audit use is associated with factors related to risk management, strong internal controls and strong corporate governance. To test the predictions, the study combines data from a survey of listed companies with information from corporate annual reports. The paper also provides descriptive information on the use of internal audit.FindingsThe results indicate that only one‐third of the sample companies use internal audit. While size appears to be the dominant driver, there is also a strong association between internal audit and the level of commitment to risk management. However, the study finds only weak support for an association between the use of internal audit and strong corporate governance.Research limitations/implicationsA limitation of our study is that some of the variables in the model may not be good proxies for the factors being measured. Refinement of the model and the variables used provides an opportunity for future research.Practical implicationsThe limited use of internal audit by Australian companies has important implications for sound corporate governance.Originality/valueThis is the first study that identifies factors associated with the use of internal audit by Australian listed companies.