The Impact of Internal Audit Focus and Modality on External Auditor Reliance and Fraud Risk Assessments

ABSTRACT Using a 2 × 2 experiment with 95 experienced auditors, we examined how internal audit focus (primarily assurance versus primarily consulting) and audit delivery modality (onsite versus remote) affect external auditors' reliance decisions and fraud risk assessments. External auditors' reperformance ratings increase (indicating lower reliance) when the IAF's audit modality is remote. IAFs, who primarily provide assurance and deliver audits onsite, are perceived as more objective. We found that fraud risk assessments remained unchanged under all experimental conditions without any overt fraud cues. Additional fraud risk analysis revealed that external auditors' competence assessments significantly predict their perceived fraud risk assessments. Finally, this study extends the Source Credibility Theory by suggesting that when fraud cues are absent, external auditors process credibility judgments sequentially, with objectivity assessed initially centered on context (the IAF's focus and modality), followed by competence evaluations that ultimately guide fraud risk judgments. JEL Classifications: M40; M42.