LAUSR

This study aims to analyse and to describe relationship between effectiveness of internal control system (ICS) and  audit  opinion  of the Audit Board (the AB) of the Republic of Indonesia on Local Government Financial Statements (LGFS). In addition, this study also aim s  to explain the consideration of ICS effectiveness in the process of formulating audit opinion. This study use s  an explanatory sequential mixed method. This study use s  a different approach compared to previous research by considering materiality factors in assessing effectiveness of ICS. Sample of this study is fifty four local government in Indonesia. A nalytical tool s  used include content analysis, correlation analysis , mean differen ce  tests, and textual data analysis. Content analysis is performed on fifty four ICS Audit Reports year 2017, correlation analysis utilizes Somer’s d and Kendall’s tau c ,  and mean differen ce  test analysis uses Kruskal Wallis. Meanwhile, textual data analysis is carried out on the results of interviews with nine  auditors from three AB representative offices in Java. Results of this study show that effectiveness of ICS ha s  a strong and positive relationship with audit opinion on LGFS. In addition, average score of ICS effectiveness  is different for each group of LGFS audit opinion. This fact show s  that the AB has considered ICS  effectiveness  in formulating audit opinions. R esults of interview show that pattern of relationship between effectiveness of ICS and audit opinion is indirect. The AB consider s effectiveness of ICS in the phase of determining  audit planning materiality rate and  in the phase of analyzing impact of ICS findings on the fairness of LGFS. Implication of this results is that the government should revise audit regulations by removing ICS effectiveness as one of factors that must be considered in the formulation of audit opinion because ICS effectiveness  and audit opinion are not directly related.