The Effect of Internal Audit Function Strength on Financial Misstatement Detection and Fraud Prevention

Posted: Feb 23, 2023

• Lucas Wilson
• Luna Brown
• Luna Flores

Abstract

The integrity of financial reporting represents a cornerstone of modern capital markets, with financial misstatements and fraudulent activities posing significant threats to investor confidence and market efficiency. Internal audit functions serve as critical organizational mechanisms designed to safeguard financial reporting quality and prevent fraudulent behavior. However, despite substantial regulatory developments and increased attention to corporate governance following major accounting scandals, financial misstatements continue to occur with concerning frequency. This persistent challenge raises fundamental questions about the effectiveness of internal audit functions and the specific characteristics that distinguish highly effective audit operations from their less successful counterparts. Traditional approaches to evaluating internal audit effectiveness have predominantly focused on compliance with regulatory requirements and basic structural attributes. This research challenges the adequacy of such conventional metrics by proposing a more comprehensive framework for assessing internal audit function strength.