The influence of internal audit departments on external municipal audit reports

The purpose of this paper is to examine whether the voluntary implementation of an internal audit department (IAD) by municipalities has any influence on external auditors' opinions.

This study population comprises the 308 Portuguese municipalities, from which the authors extracted a sample of 179. Financial and audit reports were collected from the period under analysis (2014–2017). The sample was then divided into two groups: municipalities that had voluntarily implemented an IAD and those that had not. Internal audit departments were characterized according to their robustness – whether they were more or less robust. First, a descriptive statistical analysis of the dataset was performed to analyze the representativeness of the sample and to extract insights. To address the research questions, ordinal random effect regression models were considered.

Contrary to the authors' expectations, the voluntary implementation of an IAD had no influence on the audit report type. However, when the authors refined the approach to include the robustness of the IAD, it became clear that this variable does influence the report issued by the external auditor.

This paper contributes to the current literature by determining the effects of the robustness of IADs on municipality audit reports. As far as the authors know, this paper is novel. Since auditing plays an important role in the transparency of public financial statements and in promoting equity, this study shows that a robust IAD is an advantage in the pursuit of these goals.