Iranian Auditor's Perceptions of Inherent Risk

In year 1377, the Auditing organization in Iran issued its Statement of Auditing Standards 40 (SAS 40): "Accounting and Internal Control System and Audit Risk Assessment". The standard identifies inherent risk as one of the three components of audit risk; inherent risk being defined as "the susceptibility of an account balance or class of transactions to material misstatement". If the inherent risk is low, less substantive testing is required, with possible resultant savings in staff time and audit costs. It is thus beneficial for the audit firms and clients to assess adequately the inherent risk element of an audit assignment to ensure that audits are carried out as efficiently and effectively as possible. This research project focuses on inherent risk and using a questionnaire survey investigates 143 auditors’ perception of the importance of certain factors which may determine inherent risk. The finding of the study suggests that variables identified in the literature as being closely associated with inherent risk factors are regarded in a similar fashion by auditors; variable such as bonus schemes tied to management earnings, a high turnover rate in top management personnel, a company reputation for taking unusual business risks and history of material errors are believed to be the major determinants of inherent risk. Finally, the evidence revealed that (1) misunderstanding the significance of the risk factor is due to the disregard of various meaning of the words.(2) Auditors had difficulty in distinguishing between inherent risk and control risk factors.