Risk Management, Ethical Environment, Internal Audit Activity and Accounting Control Procedural Quality: A Structural Equation Model

Abstract

This study examines the impact of three organisational factors, namely, the ethical environment, scope of risk management and internal audit activities on accounting control procedural quality. Based on a questionnaire survey of a 64 Australian firms, data are analysed using a structural equation model. The results of the study support (1) a direct and positive relationship between ethical environment and accounting control rocedural quality, and (2) an indirect relationship between the scope of risk management and accounting control procedural quality mediated by the extent of internal audit activity within the organisation. Our findings suggest that accounting control procedural quality may be enhanced by fostering a more ethical environment, and by undertaking more extensive internal audit activities as the scope of risk management increases. This study provides empirical evidence in an area where such evidence is scant and highlights the significant inter-relationships that exists within a network of internal controls comprising ethical environment, risk management, internal audit and accounting-based controls.