Interdependence of the internal audit function and the quality of financial reporting: empirical research in the Republic of Srpska
Interdependence of the internal audit function and the quality of financial reporting: empirical research in the Republic of Srpska

Summary/Abstract: Internal audit arose as a need for modern company management and governance, and its role and importance are increasingly becoming apparent when it comes to control and supervision of business. In this paper, we conducted an empirical study on a sample of 400 reporting entities in the Republic of Srpska for the period 2016-2019 with the aim of examining the interdependence of the internal audit function on the one hand, and the quality of financial reporting on the other. Namely, some previous research has shown that reporting entities that do not have an appointed internal audit function and do not perform internal controls are more susceptible to manipulation of financial statements and earnings management. The results we obtained showed that there is a positive and statistically significant relationship between the existence of the internal audit function and the final opinion of the independent auditor (as a measure of the quality of financial reporting) for the level of statistical significance of 0.05 (rs = .062, p=0.013 which is less than 0.05). In other words, the existence and adequacy of the internal audit function in a company has a statistically significant positive effect on the quality of financial reporting. Also, qualitative empirical research conducted on a sample of 603 respondents showed that 67.2% (405) respondents believe that the existence of effective systems of internal controls and audits in reporting entities, has a positive effect on reducing the practice of creative accounting and falsification of financial statements and thus improving the quality of financial reporting. The findings also indicated the need to improve and raise the quality of both internal and external audit.

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