An Analytical Model for External Auditor Evaluation of the Internal Audit Function Using Belief Functions

The purpose of this paper is to advance research in internal audit (IA) evaluation by developing an IA assessment model that considers interrelationships among specific factors used by external auditors to evaluate the strength of the IA function. The model is based on three factors identified by auditing expression of the model using the belief function framework. By using this framework we overcome limitations of prior research regarding the modelling of interrelationships among factors and regarding difficulties in application. The results of our analysis revealed that modelling the " And " relationship is essential for assessing the strength of the IA function. As far as interrelationships are concerned, the analysis showed that when the three factors have a strong or a perfect relationship, the strength of the IA function remains high even if there is positive or negative evidence about one of the factors. This result holds as long as there are high levels of beliefs about the other two factors. Further, we demonstrate how the quality of corporate governance affects the evaluation of the IA function and how a cost benefit analysis can be applied to this framework to help determine the amount of external audit work to be carried out for compliance with the Sarbanes-Oxley Act of 2002 (SOX) and the Public Company Accounting Oversight Board (PCAOB) standards. Our analysis revealed that the extent of external audit work to be carried out by the external auditor depends on the strength of the IA function and the amount of litigation and regulatory costs likely to be faced by the external auditor.