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In developing countries, such as Iran, since risk based auditing would be more benefited through
progressive technology and its advantages than the traditional auditing method, auditors need to
welcome risk based auditing as a common, as well as a desirable one. The aim of the current study is to
find out the main barriers experienced due to risk based auditing in Iran. The results show firstly the
individual competency and ability in using statistical methods; secondly, the professional and
legislation references effort in selecting risk based auditing standards; thirdly, the timely financial
information prepared by accountants; and finally, the auditors training via risk based auditing are the
main barriers to the members of Iranian Certified Public Accountants to implementing risk based
auditing in Iran.
INTRODUCTION
Keeping track of the healthiness of any business process and procedures to ensure compliance by the end of the
is one of the most important factors affecting the stability year (Salehi et al., 2010). Since the new audit standards
and efficiency of that business. This check-up usually are applied to audit firms, financial institutions share an
takes place via a set of measures that help to ensure that important role in the audit process as well, and can also
the business is performing well and that potential threats begin to prepare for the new rules. Institutions that assist
are eliminated (Salehi et al., 2010). In early 2006, policy auditors with documentation of internal controls or have
makers were determined to strengthen the quality of an internal audit function to assist with auditors’ testing
audits and introduced new sweeping standards for can work now to ensure a more efficient audit, and thus
comprehensive audit methodologies. Taking the best can help to curb audit fees in the future. Nowadays, the
ideas of Sarbanes-Oxley to the extent where they are economy is presented in all aspects of human life as an
relevant to smaller, nonpublic organizations, the incoming important factor in the progress of the human society. In
new standards significantly alter the way audits have most cases, economic condition is the only evaluation
been performed over the past three decades. The new instrument in evaluating efficiency and operations and in
risk-based auditing (RBA) standards are designed in finally reaching the predetermined objectives of countries.
order for auditors to focus on matters that are most Existence of information in the country’s current
important to the internal control over financial reporting economy, can evaluate the individuals and economic
and apply them to all audits, not just those of financial organizations and societies effectively (Salehi, 2008b).
institutions. The new rules become effective for the Regarding the nature of economic activities, this
calendar year-end 2007 financial statement audits, and information is applicable if they are explained in numbers
the audit firms are currently busy revising their policies and figures and in fixed measurement units. Therefore,
that is why in this case, financial information is used as
an important one. The existence of reliable financial
information is necessary for improving the duration of
*Corresponding author. E-mail: Mahdi_salehi54@yahoo.com. modern society. The need for the existence of indepen-
Tel: +989121425323. dent auditors in this reasoning is overt. Who are the
3924 Afr. J. Bus. Manage.
the competent persons that can honestly determine important steps in these stages are as follow:
reliable financial information in the profession? Is it or is it
not an optimal and complete image of the real fact (Alam, a) Documentation invoices form auditing evidences, and
2009a)? However, if it is asked that what errors could documentation is the basis of auditing. Documentation is
occur in these methods, we will understand, with some used to carry out document assessment and accounting
consideration, that auditing profession which is registrations carefully and it includes calculations control,
independent from the beginning of its occurrence, is financial events classification assessment and adapting
simultaneous with the environment situation changes and financial statements with booklets.
progress of human knowledge that have no remedy in b) The record that is presented to the auditor is studied.
just accepting this revolution. It has applied new tools to c) Cases, such as internal control, financial invoices and
retain and increase efficiency and useful services in the financial statements confirmation are not important.
society. Selecting RBA methodology which is a new
method in auditing profession is one of the more optimal 2. Balance sheet based auditing technology - The
methods used to determine managers and decision important steps in these stages are as follow:
makers’ objectives. Also, professional and auditing
training centers must review professional auditors’ a) Confirmation effort for items which are implied in the
knowledge and skills in the area, in which information concentrated balance sheet, and focusing on the first
technology affected the commercial environment and transactions registration officials and financial events that
market and auditors’ services (Alam and Khalifa, 2009). It have little importance.
must reform the acceptance conditions of its members b) The assumption is that assets and debts present
according to new needs and place an important transaction and financial events and financial transition.
knowledge and skill of information technology parts in c) Economize auditing time towards previous technology.
auditors’ training program before and after continuous d) There are no evidences which present transaction
acceptance and professional training. credit and registered financial events.
e) The auditor is not able to obtain necessary confidence
in relation to lack of mistake cases.
Auditing technology definition and its evolution
3. System based auditing technology - Figure 1 shows
It is a technical knowledge used to prepare efficient total performance of system based auditing. The
evidences by the auditor to represent professional idea. important steps in these stages are as follow:
Historical changes in auditing technology: Regarding a) The main feature of this technology relies on internal
auditing technology definition and technology variation controls system as a basis for obtaining the confidence
indexes, according to most of the auditors’ opinion, ability towards the reflected information in accounts.
historical changes procedure in auditing technology is b) Internal control as a new auditing evidence source,
classified as follow: beside content tests, has an important role.
c) Based on internal controls evaluation, the necessary
1. Documentation based auditing technology. confidence level is determined and then the auditing
2. Balance sheet based auditing technology. evidences volume, corresponding to the confidence level,
3. System based auditing technology. is specified.
4. RBA technology.
4. RBA technology - The RBA approach seeks to improve
audit effectiveness and efficiency by shifting the function
Important reasons in auditing technology changes from a policy activity to one that contributes effectively to
managing risk and achieving wider organizational goals.
A) Quantity growth and ever-increasing problems of The approach aims to increase the accountability of
activities which relate to business. government ministries and line agencies by ensuring
B) Improving the defense capability of auditing in transparency, validating key systems of internal control,
qualified references. and committing resources against key risks. Traditional
C) Improving public confidence to auditing reports. audits focus primarily on compliance with rules and
D) Challenge existence arising from customer, procedures, and their recommendations may not give
competitiveness and changes. management enough information about the achievement
of organizational goals. RBA involves high-level risk
In summing up the study of the fourteen fold steps in profiling of the audit portfolio over time; thus, it facilitates
auditing technology changes, the following are derived: strategic use of scarce audit resources, aligns audit
efforts with management objectives, facilitates
1. Documentation based auditing technology - The institutional development, and reduces risk exposure by
Salehi and Khatiri 3925
Determination of
Auditing
objectives
Report
issuing
focusing attention on areas of weakness. In RBA, risk is and weighing the risk factors. The result is a risk-based
measured by assessing the ethical climate, competence engagement plan that guides the deployment of audit
of personnel, size of assets and of operations, materiality, resources to high-risk areas.
and results of previous audits. Direct probability
estimates, normative tables and comparative risk ranking
are typically used to identify risk. Risk factors are then Managing risk
converted from conceptual and subjective data into quan-
titative data. An overall risk score is derived by scoring It means administration and control of auditing risk to
3926 Afr. J. Bus. Manage.
reach the lowest confidence level. planning, and must use his professional judgment,
designed for getting confidence about his acceptable
levels of deduction, to estimate auditing risk and auditing
Management auditing risk’s advantages methods (Alam, 2009b).
The important advantages are as follow: i. Lack of exploration risk due to analytic studies = 40
D1R;
1) Preparing the total strategy of practical and exact ii. Audition acceptable risk = 20IR;
auditing. iii. Materiality level = 10 M;
2) Decrease the final price of services. iv. Lack of exploration risk due to content tests = 60 D2R;
3) Decrease time of auditing operations. v. Control risk = CR.
4) Increase staff professional incentives.
5) Much effort to prepare sufficient evidences for Consequently, confidence level = sum total of material
expressing opinions in related standards framework. explored mistakes or distortions/ important explored
6) Increase credit of issued auditing reports. mistakes or distortions in the account. If the auditing risk
7) Create mechanization for the illegal auditing is equal to 5%, the confidence level will be 95%. In other
operations section. words, the auditor must express 95% confidence level
8) Increase quality and prepare the more effective quality towards financial statements.
control possibility.
9) Increase customer consent.
10) RBA technology causes an increase in audition Research problems and questions
volume.
It is now widely accepted that there is much to be gained
from attempting to understand accounting in its social
Auditing acceptability risk in historical changes context (Cooper and Sherer, 1984). Yet, auditing
procedure in auditing technology research has remained relatively immune to the influence
of this type of theoritizing, particularly in terms of
Auditing acceptability risk exists in all forms of auditing, empirical analysis of contemporary audit practice. Much
but base on management risk of auditing technology, the of the post-Enron analysis has focused on scandalous
most control auditing form is imposed on auditing and emotive elements of this case, the technical com-
acceptability risk. So, auditing is able to access the plexities of accounting rules and practices, the excesses
lowest necessary confidence level in the identified risks and abuses of corporate America, assessing whether
framework. An auditor must be able to determine the such scandal(s) could happen in the UK or elsewhere,
necessary confidence level inevitably. That is, in any and proposing (and implementing) a range of reforms to
manner, the auditor's opinion is based on relative improve corporate governance and deal with issues of
confidence and not his opinion certainly. auditor liability. The day-to-day professional and working
environment of corporate external auditors and the
impact that the Enron case has had upon them and their
Need for new methodology (technology) evaluation methods/practices has not attracted much attention.
Further, the industry development in countries such as
One of the matters that must be considered in applying Iran, ever increasing importance of major managers and
each new technology is fitness of it or request with the information valuation, especially accounting information
new technology. The need for each new technology must must be considered. Additionally, the auditors must
be previously evaluated. Management risk of auditing progress and increase their reports application, but
technology is not an exception of this general aforemen- according to the figure, unfortunately there are no
tioned rule; that is why, we suggest that each auditing systematic studies in relation to auditing progress rate
institute must evaluate itself before deciding about and its development of probable barriers in active econo-
auditing a new technology. The need to evaluate a new mic units of Iran (Salehi, 2008a). Therefore, limitation and
technology is specified by its establishment barriers exploitation and auditing methods are not determined to
elimination methods. As such, necessary actions prepare information for stockholders and other users.
priorities are prepared and applied to a new technology. What is the operation rate of different auditing methods in
Different models are presented about the manner of need Iran’s economic units and lack of probable operation
to new technology. Regarding the auditing task, the reasons? Is there any disorder in Iran’s auditing
model which is presented to evaluate management risk of development process? Are other operational systems
auditing technology may be suitable (Alam, 2009b). functional and is their growth effective? These questions
The auditor must obtain such knowledge of accounting and similar ones lead to the preparation of this research
systems and internal control, which is efficient for audition which is "based on the risk of auditing barriers in firms, in
Salehi and Khatiri 3927
which the auditors of the firms are members of Iran and improves the risk assessment process, looking at
official accountants". areas based on risk instead of focusing on controls
(McNamee, 1997). By focusing on high risk areas, the
auditor must also understand that “some activities might
Importance of the study never be deemed important enough to receive internal
audit attention” (Parkinson, 2004) because they are
In the world, in which human infinite needs are against considered in low risk areas.
finite economic resources, appearance and failure of RBA also requires that auditors completely understand
each phenomenon is due to real and reasonable needs their clients, their clients’ industry, the nature of their
of human society. Auditing institute is not an exception of business and the environment that they operate in.
this rule in professional services field. Firms and institutes “Without a thorough understanding, the auditor may fail to
survival in market economic environment observe correctly identify the critical business process and
continuous commercial barriers elimination and market corresponding internal controls that he should evaluate
integration. Management risk of auditing which is the (Hunton et al., 2004).
newest methodology in auditing, have dynamic answers Goodwin-Stewart and Kent (2006) use an agency
for these mentioned problems. The new methodology framework to explore firm characteristics associated with
creates acceptable risk control and administration for the existence of internal audit function from risk manage-
auditors to reach the lowest confidence level and to ment, control and governance perspectives. He argues
collect auditing evidence in the lowest possible extent for that internal auditing is either to be a complementary or
decreasing auditing time and cost (Salehi and Azary, substitution mechanism that aligns with other risk
2008). management and governance mechanisms, and that
survey evidence indicates a significant association
between the use of internal auditing and a commitment to
Review of literature strong risk management and firm size. However, the
results reveal a mixed support for the corporate
The separation of ownership and management functions governance factors. Using an agency cost framework,
and the presence of information asymmetry introduce the Carey et al. (2000) examined demand for both internal
possibility of principal-agent conflicts (Haniffa and and external auditing by family business with two agency
Hudaib, 2006). It also incurs risks to stakeholders in the proxies which are: (1) the proportion of nonfamily
organization (management, shareholders, creditors, etc) management, and (2) the proportion of nonfamily
(Spira and Page, 2003). Those agency conflicts, agency representation on the board of directors. They found that
costs and risks are now managed within the corporate the two agency cost proxies are associated with demand
governance framework through accountability mecha- for external audit, but do not explain the demand for
nisms, such as internal control and audit (Haniffa and internal audit. Carcello et al. (2005) examines factors
Hudaib, 2006; Spira and Page, 2003). Stakeholders now associated with U.S. public companies’ investment in
compete to participate in corporate governance to seek internal auditing, and the result indicates that the total
power in organizations by asserting their own con- internal audit budgets (in-house plus outsourced portions)
ceptions of risk and how it should be managed. However, are related to factors associated with company risk, for
a focus on risk management has become central to this example, company size, complexity and leverage.
competition, since it defines the accountability of the
management of the organization (Spira and Page, 2003).
This is consistent with Hay and Knechels’ (2004) Research objectives
argument that the demand for auditing is a function of the
set of risks faced by individual stakeholders in an Lack of efficient development in auditing depends on
organization and the set of control mechanisms available different factors such as current economy condition,
for mitigating those risks. Therefore, internal auditing's human forces, natural sources, etc. All the mentioned
risk management orientation has given the audit function features are effective in auditing the information system
increased credibility across the enterprise and greater in a formal manner. So, we must consider their changes,
acceptance by management (Beumer, 2006). but these factors, during the time, are considered
RBA is considered as the methodology that the audit constant and their main objective is to study the risk
department utilizes to ensure that risks are being based auditing barriers in firms, in which the auditors of
managed and assures that the residual risk falls within the firms are members of Iran official accountants.
appropriate levels. Basically, risk-based auditing ensures
that the organization is within its acceptable level of risk
after controls are put into place. The board of directors in RESEARCH METHODOLOGY
any organization is ultimately responsible for this The method which is applied in this research is descriptive. It is
acceptable risk level (Griffiths, 2006). descriptive because it describes the obtained information without
What really differentiates RBA is the fact that it extends any changes and studies the relation among variables.
3928 Afr. J. Bus. Manage.
X Y
R(x) R(y) d
Scores in first stage Scores in second stage
153 154 2.00 2.00 0.00
158 160 3.50 4.00 0.25
162 161 6.00 5.50 0.25
149 151 1.00 1.00 0.00
161 161 5.00 5.50 0.25
167 168 7.00 8.00 1.00
158 155 3.50 3.00 0.25
168 166 8.00 7.00 1.00
----------- ------------ ------------ ------------ 3
performance. 2
H3: Lack of using auditors of statistical methods prevents risk based In which N is the society’s volume, n is the sample’s volume, and Z
auditing performance. is the standardized normal variable amounts that are calculated for
0.975 confidence level from its amount table that equals 96. The
H4: Lack of necessary auditing training prevents risk based auditing researcher can make, at most, four mistakes and its value varies
performance. from 0.1 to 0.01 and is considered as 0.1 here.
is the variance of pair quality (risk based auditing), in
Based on the hypotheses, the research variables include
dependent and independent variables, which are as follow: which its maximum 0.5*0.5 = 0.25 is selected for its passiveness:
Gender of participants
Male 48 80.00
Female 12 20.00
Educational background
Bachelor degree 40 66.67
Master degree 20 33.33
H1: Lack of timely preparation of financial statements by H0: Lack of timely preparation of financial statements by
auditors prevents risk based auditing performance. auditors does not prevent RBA performance.
3930 Afr. J. Bus. Manage.
(O j − E j ) 2 Tester function: (O j − E j ) 2
X2 = X2 =
Ej Ej
Hypothesis H1 is accepted and H0 is rejected because the
According to the results of Table 4, hypothesis H1 is 2 2
calculated X is bigger than the exploited X in the table.
2
accepted and H0 is rejected because the calculated X is So, we accept that non-usage of statistical methods, by
2
bigger than the exploited X in the table. On the other auditors in their auditing, causes prevention in RBA
hand, we accept that lack of RBA standards prevents its (Table 5).
execution.
Fourth hypothesis
Third hypothesis
H4: Lack of necessary auditing training prevents RBA
H3: Lack of using auditors of statistical methods prevents performance.
RBA performance.
H0: Lack of necessary auditing training does not prevent
H0: Lack of using auditors of statistical methods does not RBA performance.
prevent RBA performance.
A large number of respondents (82%) believe that lack of
Some of the respondents (47%) explain that few auditors RBA education is very effective on its practical execution,
are familiar with statistical methods and 42% say that this while 38, 47 and 15% of the respondents believe that
familiarity is average. Some respondents (58%) believe auditors’ interest toward learning the risk based auditing
that auditors use an average amount of statistical methods are high, average and low, respectively. Some
methods in their auditing, while 30% said few auditors respondents (70%) believe that lack of training on risk
use an amount of statistical methods in their auditing. based auditing, at university courses, is very effective on
Salehi and Khatiri 3931
H1: Lack of timely preparation of financial statements by auditors prevents risk based auditing
H1 Accepted 0.187 Third
performance.
H2: Lack of sufficient standards prevents risk based auditing performance. H2 Accepted 0.188 Second
H3: Lack of using auditors of statistical methods prevents risk based auditing performance. H3 Accepted 0.301 First
H4: Lack of necessary auditing training prevents risk based auditing performance. H4 Accepted 0.143 Fourth
Ej with the statistical method was really low and the auditors
used these methods in their auditing at average and low
levels. According to respondents’ answers, non-usage of
Here, hypothesis H1 is accepted and H0 is rejected. Lack
computer software can prevent risk based auditing
of necessary auditors’ education with RBA method,
application at high and relatively average levels.
based on most respondents, prevents execution of RBA.
According to respondents’ answers, using statistical
The test results of the survey hypotheses are
methods can reduce application costs and time, and
presented in Table 6. The summary of the hypotheses’
increase reliance of auditors’ audits. With attention to the
test, with significance ranking, is presented in Table 7:
aforementioned reasons, this subject can be very
important with impediment to the lack of risk based
X2 118 / 25 practical execution.
PT = = = 0 / 187 In the second hypothesis, according to respondents’
n ( s − 1)(t − 1) 720 2 × 11 answers, auditors use auditory standards in their audits
3932 Afr. J. Bus. Manage.
increasingly. On the other hand, existence of these stan- attitudes of managers and the senior and common
dards helps us to recognize auditing risk and prepare a supervisors in answering hypothesis 2 questions (Table
suitable background to achieve a rational judgment. 9).
Application of these standards is very effective to
decrease costs and time, so using auditory standards can In the test results, equality of answers is rejected and
remove practical execution impediments increasingly. there is a meaningful difference between different
In preparing financial statements by firms’ accountants, organizational ranks. Here, senior supervisors are more
firstly, we report the accountant’s awareness towards the optimistic also, so 75% of them answer with high and
auditor’s necessary information in an average level. very high. On the other hand, 68 and 64% of managers
Secondly, awareness towards the auditors’ time and supervisors, respectively answer with high and very
limitations in auditioning by auditors is in an average high.
level. Finally, auditors must receive their training towards
risk based auditing, and this matter is very important in H0: There is no meaningful difference between the
the practical execution of risk based audition. attitudes of managers and the attitudes of the senior and
Comparison of the attitudes of managers, senior super- common supervisors in answering hypothesis 3
visors and common supervisors’ under the considered questions.
questions in different hypotheses:
H3: There is a meaningful difference between the
H0: There is no meaningful difference between the attitudes of managers and the attitudes of the senior and
attitudes of managers and the senior and common common supervisors in answering hypothesis 3
supervisors in answering hypothesis 1 questions. questions (Table 10).
H1: There is a meaningful difference between the In the test results, equality of answers is rejected. In other
attitudes of managers and the senior and common words, there are differences between the respondents’
supervisors in answering hypothesis 1 questions (Table answers in hypothesis 3.
8): It is apparent from the answers, given by the three
groups (managers, senior supervisors and common
(O j − E j ) 2 supervisors), that managers and senior supervisors have
X2 =
Ej 56% of high and very high answers and 55% of high and
very high answers, which are more agreeable than the
The test result shows a meaningful difference between answers of supervisors with 51%.
respondents’ ideas in different organizational ranks
toward hypothesis 1 questions. Evidently, the senior H0: There is no meaningful difference between the
supervisors, as compared with managers and common attitudes of managers and the attitudes of senior and
supervisors, have a more positive attitude. So, 47% are common supervisors in answering hypothesis 4
ranked with high and very high. Nevertheless, 40% of questions.
managers and 35% of supervisors answer with high and
very high words: H4: There is a meaningful difference between the
attitudes of managers and the attitudes of senior and
H0: There is no meaningful difference between the common supervisors in answering hypothesis 4
supervisors in answering hypothesis 2 questions. questions (Table 11).
H2: There is a meaningful difference between the In this phase, hypothesis H0 is rejected. As such, we
Salehi and Khatiri 3933
conclude that there is a meaningful difference between hypothesis, we can conclude that lack of education for
the different ideas in various organizational ranks. the auditors under the risk based auditing method can
Comparison of the answers show that managers have prevent the practical execution of risk based auditing and
69% of high and very high answers, senior supervisors training of risk based auditing in the official community of
have 75% of high and very high answers and supervisors accountants. Furthermore, its compilation on the senior
have 58% of high and very high answers. Hypothesis 4 expertise course of a university can be effective for the
reveals that there is a meaningful statistical difference execution of risk based auditing method.
between them. An appropriate assessment of risk is the foundation of
a high quality audit. “Risk-based auditing extends and
improves the risk assessment model by shifting the audit
Conclusion vision”. Instead of looking at the business process in a
system of internal control, the internal auditor views the
The emergence and dissemination of new audit business process in an environment of risk. The basic
techniques and methodologies have not received premise of risk-based auditing is that auditors should
attention in academic research, and is merited by their focus more resources on accounts that are likely to be
significance. In the processes of establishing new claims misstated and fewer resources on balances that are less
to knowledge, there is an opportunity to examine the likely to be misstated (Bell et al., 2005; Rittenberg and
professional and social processes, through which such Schwieger, 2005; Knechel, 2007). Proponents of risk-
claims emerge, and the extent to which attempts are based auditing claim that such a strategy leads to more
connected to the extension of professional jurisdiction. In efficient and effective audits (Bell et al., 2005; PCAOB,
so doing, the dynamics that underlie the institutions of the 2007).
profession may be revealed and subjected to tension.
The paper’s title signals three interrelated dimensions of
this technical-professional interface: status, identity and Suggestions
fragmentation.
According to the first hypothesis, we can conclude that Suggestion related to the first hypothesis
lack of timely preparation of financial statements by firms’
accountants prevents the practical execution of risk According to the first hypothesis, it is known that timely
based auditing, and with attention to the increasing trend presentation of financial statements by firms’ accountants
of auditors’ usage from financial statements, firms’ can be effective on the execution of the risk based
accountants must be aware of the needed information auditing method. So, familiarizing of accountants with
and time limitations. According to the second hypothesis, auditors’ objectives and needs can be very effective on
we can conclude that lack of risk based auditory the practical execution of the risk based auditing method.
standards prevents the execution of risk based auditing Therefore, we suggest that auditing authorities with timely
method and these standards help auditors to recognize and correct information act about the aforementioned
the auditing risk and prepare enough circumstances to cases (auditors’ objectives and needs) have a great role
have rational judgment. According to the third hypothesis, to play in the execution of the risk based auditing method.
we can conclude that non-usage of auditors from
statistical methods prevents the execution of risk based
auditing method, and using statistical method to a great Suggestion related to the second hypothesis
extent decreases auditing costs and time and increases
reliability of auditors’ audits. According to the fourth All auditing phases (planning, operational execution and
3934 Afr. J. Bus. Manage.