Management's Assessment of Internal Controls, External Consultants, and Audit Efficiency : Evidence of New Factors in Client-Auditor Interactions

We investigate how the involvement of an external consultant in management's assessment of internal control affects external auditors' planning decisions. We find that when management integrity is low, such involvement results in auditors recommending a higher reliance on internal controls and lower budgeted hours than in the absence of such involvement. Surprisingly, when management integrity is high, the involvement of external consultants results in higher budgeted hours. Based on our results, we conclude that external auditors perceive the involvement of external consultants as a legitimate managerial intent to accurately assess the state of internal control rather than hide its deficiencies. However, in case of high integrity management the involvement of external consultants might be seen by auditors as inconsistent with prior evidence on the quality of internal control and thus might signal the existence of the additional risk factors of material weaknesses