Reliance refers to the incorporation of internal audit work into audit evidence during statutory external audits. Inappropriate reliance undermines audit effectiveness and quality while fair reliance enhances audit efficiency. Reliance is complex, implementation problems are common and academic knowledge gaps prevail. Consequently, the research question of this study is formulated as follows:
How can reliance on internal audit work by external auditors be conceptually explained, considering the reciprocal influences of the roles, interpretations, interests and practices of management, the audit committee and internal and external auditors?
Responding to the research question, the major contribution of this study is the substantive theory of balanced reliance, explaining how management, the audit committee and internal and external auditors overcome disconnect between their reciprocal influences on reliance to achieve mutual agreement that reliance is appropriate and fair, balanced, whatever the reliance decision.
The study is based on the classic grounded theory methodology of Glaser and Strauss (1967) and was implemented in three phases:
Phase 1: Theoretical sampling included 32 interviews. Five key data sets (22 initial and three follow-up interviews) represented five diverse South African listed companies. Each data set comprised data from the key audit stakeholder groups of the company, namely, the chief financial officer, audit committee chair, chief audit executive and external audit engagement partner. A further data set of seven interviews involved other knowledgeable audit professionals. Joint data collection, open coding and analysis identified the main concern − the disconnect between the stakeholder groups’ reciprocal influences on reliance − and the core category (achieving mutual agreement that reliance is appropriate and fair (balanced), whatever the reliance decision.
Phase 2: Joint theoretical sampling, selective and theoretical coding and analysis saturated the substantive categories’ properties and relationships.
Phase 3: Theoretical sorting and writing delimited the substantive categories into theoretical constructs, explaining the substantive theory. Comparisons indicated how the substantive theory broadened and transcended extant knowledge.
The substantive theory of balanced reliance developed in this study explains how the stakeholder groups’ willing reciprocal synchronisation resolves disconnect between the stakeholder groups’ roles, interpretations, interests and practices influencing reliance. This, in turn, renders viable their mutual agreement that reliance is appropriate and fair (balanced), whatever the reliance decision. With reciprocal synchronisation as a foundation, a voluntarily formed team mindset is the predominant mediator of habitual integration and fair alignment of internal and external audit work. These co-variant conditions change stakeholder groups’ mutual agreement from being viable to practicable, as the disconnect between internal and external audits is resolved. Stakeholder groups’ participation in facilitative communication and a strong audit committee’s balancing oversight create the context for sustaining stakeholder groups’ mutual agreement that reliance is appropriate and fair (balanced), whatever the reliance decision.