Internal Audit Efficiency
Theories of auditing
There are several different theories that may explain the demand for audit services. Some of them are well known in research and some of them are more based on perceptions. Figure 1 illustrates four audit theories according to Hayes et al. (2005). The policeman theory claims that the auditor is responsible for searching, discovering and preventing fraud. In the early 20thcentury this was certainly the case. However, more recently the main focus of auditors has been to provide reasonable assurance and verify the truth and fairness of the financial statements. The detection of fraud is, however, still a hot topic in the debate on the auditor’s responsibilities, and typically after events where financial statement frauds have been revealed, the pressure increases on increasing the responsibilities of auditors in detecting fraud.
According to Hayes et al (2005), there are four theories of auditing:
- The lending credibility theory
- The theory of inspired confidence
- The Policeman theory
- The Agency theory
The lending credibility theory suggests that the primary function of the audit is to add credibility to the financial statements. In this view the service that the auditors are selling to the clients is credibility. Audited financial statements are seen to have elements that increase the financial statement users’ confidence in the figures presented by the management (in the financial statement). The users’ are perceived to gain benefits from the increased credibility, these benefits are typically considered to be that the quality of investment decisions improve when they are based on reliable information.
The theory of inspired confidence (Theory of rational expectations) Limperg (1932) addresses both the demand and the supply for audit services. The demand for audit services is the direct consequence of the participation of third parties (interested parties of a company) in the company. These parties demand accountability
There are several different theories that may explain the demand for audit services. Some of them are well known in research and some of them are more based on perceptions. Figure 1 illustrates four audit theories according to Hayes et al. (2005). The policeman theory claims that the auditor is responsible for searching, discovering and preventing fraud. In the early 20thcentury this was certainly the case. However, more recently the main focus of auditors has been to provide reasonable assurance and verify the truth and fairness of the financial statements. The detection of fraud is, however, still a hot topic in the debate on the auditor’s responsibilities, and typically after events where financial statement frauds have been revealed, the pressure increases on increasing the responsibilities of auditors in detecting fraud.
According to Hayes et al (2005), there are four theories of auditing:
- The lending credibility theory
- The theory of inspired confidence
- The Policeman theory
- The Agency theory
The lending credibility theory suggests that the primary function of the audit is to add credibility to the financial statements. In this view the service that the auditors are selling to the clients is credibility. Audited financial statements are seen to have elements that increase the financial statement users’ confidence in the figures presented by the management (in the financial statement). The users’ are perceived to gain benefits from the increased credibility, these benefits are typically considered to be that the quality of investment decisions improve when they are based on reliable information.
The theory of inspired confidence (Theory of rational expectations) Limperg (1932) addresses both the demand and the supply for audit services. The demand for audit services is the direct consequence of the participation of third parties (interested parties of a company) in the company. These parties demand accountability