Internal Controls vs. External Audit: Optimal Complementarity for Loss Minimization

• Author(s): Daniela Cristina Abreu Jové de Araújo
• Paper ID: 1710479
• Page: 979-981
• Published Date: 19-09-2025
• Published In: Iconic Research And Engineering Journals
• Publisher: IRE Journals
• e-ISSN: 2456-8880
• Volume/Issue: Volume 9 Issue 3 September-2025

Abstract

This paper examines the optimal complementarity between internal controls and external audit in minimizing organizational losses and achieving efficient allocation of control resources. Drawing on economic modeling and empirical findings, it highlights how internal controls serve as preventive mechanisms that reduce the incidence and magnitude of losses, while external audits provide independent validation and assurance to stakeholders. The analysis integrates agency theory and audit economics to demonstrate that neither mechanism alone suffices; rather, the optimal mix emerges when both are calibrated to the firm’s risk profile, control environment, and cost constraints. Empirical evidence from prior studies confirms that robust internal controls not only improve financial reporting quality but also enhance the effectiveness and efficiency of external audits. The findings suggest that organizations minimize total costs—including internal control costs, audit fees, and expected losses—when they balance preventive investments with independent oversight. This approach provides theoretical and practical insights into resource allocation strategies for corporate governance and risk management.

Keywords

Internal Controls; External Audit; Complementarity; Audit Economics; Agency Theory; Loss Minimization; Corporate Governance; Resource Allocation.

Citations

IRE Journals:
Daniela Cristina Abreu Jové de Araújo "Internal Controls vs. External Audit: Optimal Complementarity for Loss Minimization" Iconic Research And Engineering Journals Volume 9 Issue 3 2025 Page 979-981

IEEE:
Daniela Cristina Abreu Jové de Araújo "Internal Controls vs. External Audit: Optimal Complementarity for Loss Minimization" Iconic Research And Engineering Journals, 9(3)