The Impact of Enterprise Resource Planning (ERP) System on the Cost and Price of Auditing⎯Auditor’s Perspective

Journal of Modern Accounting and Auditing, ISSN 1548-6583
April 2013, Vol. 9, No. 4, 497-504
The Impact of Enterprise Resource Planning (ERP) System on
the Cost and Price of Auditing⎯Auditor’s Perspective
Murat Azaltun, İrem Batibay, İlker Calayoğlu, Hüseyin Mert, Hakan Taştan
Okan University, Istanbul, Turkey
Technology plays a key role in today’s business environment. Many companies greatly rely on computers and
software to provide accurate information to effectively manage their business processes. It is becoming increasingly
necessary for all businesses to incorporate information technology solutions to operate successfully. One way for
many corporations to adopt information technology (IT) on a large scale is by installing enterprise resource
planning (ERP) systems to accomplish their business transactions and data-processing needs. ERP systems are
software packages that enable the integration of business processes throughout an organization. This study aims to
determine the effect of the ERP system on the cost of auditing period compared with traditional computerized
(non-ERP) systems. According to cost analysis, the study also points out the changes in audit price. The
methodology used in this research is survey-based data collection. The questionnaires are sent to auditors who are
working with companies with ERP systems. The answers are processed and analyzed using Statistical Package for
Social Sciences (SPSS) 20. The data are performed using the statistical test to determine the effect of ERP usage on
the cost of auditing process and pricing policy of auditors. The findings of this study are: (1) Companies with ERP
systems are reducing their auditing costs; and (2) Auditing companies are not implying a low rate of price to their
customers using ERP.
Keywords: enterprise resource planning (ERP), audit cost, audit price
Databases and online systems have dramatically changed the way businesses transact and keep the records.
The database-supported online systems enable entrepreneurs to conduct their businesses electronically, leading
to greater efficiency in information processing and production and sales operations. With databases and online
real-time processing systems, business can retrieve, classify, and report activities far more quickly (Amer,
Bailey, & De, 1987; Orman, 2001; Date, 1995; Alles, Kogan, & Vasarhelyi, 2002). Unlike in the past where
reports were produced several months after events and transactions took place, businesses today can provide
financial statements and other activity reports instantaneously, enhancing their usefulness to investors and
stakeholders (Soral & Jain, 2011).
Murat Azaltun, Ph.D., assistant professor, Department of Accounting and Financial Management, Okan University. Email:
İrem Batibay, Ph.D. candidate, Department of Accounting and Financial Management, Okan University.
İlker Calayoğlu, Ph.D. candidate, Department of Accounting and Financial Management, Okan University.
Hüseyin Mert, Ph.D., assistant professor, Department of Accounting and Tax Application, Okan University.
Hakan Taştan, Ph.D., Department of Accounting and Financial Management, Okan University.
While databases and online real-time processing systems provide several advantages, they also introduce
control and security concerns about a client’s transaction-processing system.
Quality of information is very important to auditors. Before they express an opinion about a client’s
financial reports, auditors must ensure that the information generated through a client’s system is reliable
(Elliott, 1997; Alles et al., 2002).
This requires that the auditors evaluate the adequacy of the controls surrounding a client’s
information-processing systems and test them for errors and inconsistencies. In a conventional audit, auditors
perform such an evaluation and testing only after a client’s reporting period has ended and when the audit of
financial reports begins. Even then, auditors do not examine 100% of a client’s system and select only a sample
of transactions and examine them for errors and inconsistencies. Such a limited examination, while being
adequate for evaluating simpler processing systems, is not sufficient to evaluate complex processing systems.
In complex processing systems, the transaction volume is very high and the transaction-processing systems are
generally integrated across functions, e.g., manufacturing, inventory, and record-keeping. Consequently, a
single error in processing could affect multiple records, and the high transaction volume would make detection
of these errors difficult. Therefore, examining these systems for errors and inconsistencies once during a year or
by limited inspection is unlikely to make the auditor confident about the system reliability. These systems
demand more frequent inspections and necessitate greater monitoring to be effective. They must be monitored
on a continuous basis where the auditor gathers information about a client’s system electronically and through
embedded monitoring tools and evaluates the system reliability at regular intervals during the year (Groomer &
Murthy, 1989; Elliott, 1997; Rezaee, Sharbatoghlie, Elam, & McMickle, 2001).
This study develops an analytical methodology to identify the long-run cost of continuous audit of a large
database. The remainder of the paper is organized as follows. The next section will be a review on literature
about enterprise resource planning (ERP) system and how it affects cost and time of audit. Section 3 describes
the research data methodologies developed by the authors to identify the effect of ERP systems on the cost and
time of continuous auditing. Section 4 also includes numerical examples to illustrate the reliability of data and
cost and time of audit process. Section 5 summarizes the findings.
Literature Review
The following research works show that a number of studies have been done to identify the impact of ERP
on audit process.
Soral and Jain’s (2011) result of the research suggests that the use of the new technologies will raise the
quality of auditing and internal control system in the organizations. They also included that there was a vast
scope in researches conducted about the ERP impact on auditing process and internal control in future.
Brody and Kearns (2008) found that the dependence on information technology (IT) in business had
increased, so they shifted auditor’s dependence on substantial evidence to a stress on controls over accounting
information systems.
Kelechi (2007) found out in his article that ERP systems affected the audit process in an organization. The
result indicated that auditors spent more time on control testing after ERP implementation. In his opinion,
auditors need to be more knowledgeable so as to better utilize ERP functions in auditing.
Brazel and Agoglia (2005) investigated that IT applications, such as the ERP systems, were significantly
changing the ways in which companies operated their businesses and auditors performed their duties.
Morris (2011) suggested, according to the results of his test, that ERP-implementing firms were less likely
to report internal control weaknesses than a matched control sample of non-ERP-implementing firms. He also
found that this difference existed for both general (entity-wide) and individual (account-level) controls.
Bae and Ashcroft (2004) primarily analyzed major technological and accounting issues involved in the
implementation of systems applications and products (SAP) and ERP systems, including information integrity
and audit issues. They also concluded that implementation of the ERP systems brought about changes in audit
Yang and Guan (2004) investigated, in their paper, the evolution of United States IT auditing and internal
control standards in financial statement audits and discussed their significance for the auditing profession. They
also found that the methods and procedures used by auditors for conducting the audits were different in ERP.
Musaji (2002) described, in his book entitled Integrated Auditing of ERP Systems, how to conduct an
integrated ERP audit. This book covers the ERP systems, their life cycles, and their major components, but the
particular attention is paid to the audit role which is the primary focus in succeeding chapters.
Bierstaker, Burnaby, and Thibodeau (2001) investigated the current impact of technology on the audit
process and the future implications of technological trends for the auditing profession in their article.
In this part of review of literature, researchers observed notable changes in audit functions and identified
that the ERP implementation showed a resultant increase in audit function usage. As a result, there is a need to
further study ERP system’s impact on cost and price of audit for a proper understanding.
Research Data and Methodology
Based on a questionnaire survey, the paper attempts to examine the extent of impact of ERP system on
auditing cost and time. The sample is applied to 75 auditors in Turkey. Twelve of the auditors do not have any
information about ERP systems, so they are not included in the survey. The empirical research is conducted
with a survey questionnaire created through previous literature. The questionnaire consists of 20 questions
which mostly deal with the impact of ERP system on cost and risk of auditing. The questionnaires were
especially conducted to analyze the effect of ERP system on auditing cost and time. The reliability test,
Kaiser-Meyer-Olkin (KMO), and Bartlett’s test have been used in this survey to test the compliance of factors
The survey was prepared according to the 5-point Likert scale. Auditors were asked to choose one of the
answers: strongly disagree, disagree, neither agree nor disagree, agree, and strongly agree. The numbers from
“1” to “5” have been given to the answers, where “1” means strongly disagree and “5” means strongly agree.
Results From the Empirical Study
Twenty questionnaires were evaluated in five factors. These factors are effects of using ERP in: (1) reducing
cost and risk of audit; (2) effectiveness of internal control; (3) standardization of business process; (4) duration
of the audit; and (5) confidence on accounting records. Table 1 shows compliance test’s results according to
those factors.
According to Table 1, the total variance explained is 72.844, which can be acknowledged as a significant
amount of data to base the authors’ argument. In order to keep the focus on the main argument, most of the
questions were related to the effect of using ERP in reducing cost and risk of audit. The other questions were to
support the main subject. According to the overall reliability test of p-value 0.001, the Cronbach’s alpha value
was 0.934. Regarding Cronbach’s scale of reliability, results can be considered as highly reliable. Factors,
yielding a decreasing explanatory degree, will have a decrease on the reliability of test results. As
standardization of business process, duration of the audit, and confidence on accounting records stood out as
supporting issues, a limited number of questions were directed. Decreasing values can be observed easily
according to the rates of KMO and Bartlett’s test, indicating the sample size. In general, with an average of
3.99, “I agree” statement can be contended as supported.
Table 1
Results of Factor Analysis
Factor Total variance
KMO and
Bartlett’s test Average
Effect of using ERP in reducing cost and risk of audit 45.465 0.900 0.882 3.808
Effect of using ERP in effectiveness of internal control 9.163 0.883 0.846 4.260
Effect of using ERP in standardization of business process 6.979 0.757 0.667 4.240
Effect of using ERP in duration of the audit 5.887 0.779 0.645 4.169
Effect of using ERP in confidence on accounting records 5.351 0.738 0.500 4.197
Total factor 72.844 0.934 0.805 3.999
The main goal of the ERP is to facilitate information sharing and integration across these varying
functions and to provide automated solutions to a wide range of business processes. The goal of integration is
to use technology to develop process standardization across multiple business units in order to improve
efficiency and generate greater returns on capitals (Kalakota & Robinson, 2001). It is assessed that the greatest
advantages of the implementation of ERP systems in some firms include the standardization of business
processes (Bosilj-Vuksic & Spremic, 2004). Researches show that ERP systems standardize business processes
of companies, and as one can see in Figure 1, 83% of the respondents agree with the question that ERP system
standardizes business processes.
Figure 1. ERP system standardization.
The American Institute of Certified Public Accountants (AICPA) defines internal control as a process
designed to provide reasonable assurance that the company’s objectives in three areas have been achieved: the
reliability of financial reporting, the effectiveness and efficiency of operations, and compliance with laws and
regulations. Eisenhardt (1989) provided the theoretical basis for the use of monitoring mechanisms, such as
agree nor
ERP System Standardizes Business
financial reporting and audits to provide information to the principal about the behavior of the agent. ERP
systems facilitate the monitoring process in two ways. First, they enable fast and accurate reporting of financial
information to the principal, and more importantly, they include features that facilitate implementation and
enforcement of internal controls that are used to ensure the accuracy of financial information being reported.
Figure 2 shows that 86% of the respondents agree with the question that in the case of the same firm size,
companies using ERP have more powerful internal control systems than companies that do not.
Figure 2. Internal control system on ERP.
The quality of information is very important to auditors. Before they express an opinion about a client’s
financial reports, auditors must ensure that the information generated through a client’s system is reliable. The
question in Figure 3 examines that if data received from ERP system have higher reliability. The result of the
research shows that 89% of the respondents accept that data received from ERP system have higher reliability.
In ERP system, all the data are stored together into one common internal source electronically, which
eliminates redundant data entry and integrates the whole process. If any wrong entry occurs in an organization,
auditors can do all checking very fast. As the ERP system automatically updates the data throughout the system,
transactions can be checked by proper control, cross-field checking, and transaction balancing. Auditors can
also retrieve all types of data at different places on a single screen in ERP system, which makes checking fast.
Each audit entry records the occurrence of a single audited event. The record includes information such as who
did the action, which files were affected, what action was attempted, and where and when the action occurred.
Detailed and reachable information about data makes it highly reliable.
As one can see in Figure 4, 90% of the respondents agree with the question that an effective audit program
reduces audit time. The overall result indicates that most of respondents feel that the ERP system automatizes
the whole process correctly. If the auditors have a proper understanding about the ERP system and audit trail,
they can do fast auditing. Further, ERP system automatically performs all updating, reporting, and checking of
transactions in an organization, which also increases the speed of auditing. Almost all respondents totally agree
that auditors spend less time in data retrieving in the ERP system. In ERP system, every transaction of every
function is stored in one common database and used by various modules automatically. Thus, it is concluded
that auditing an ERP-implementing company needs less time to access and retrieve information, because all
data and transactions are recorded in an electronic form in the ERP system.
agree nor
Companies Using ERP Have More
Powerful Internal Control Systems
Figure 3. Reliable data from ERP.
Figure 4. Effective audit program.
IT-based continuous auditing functionality is a strategy for companies to reach sustainable compliance.
Continuous online auditing reduces the time and costs of ongoing audits.
Continuous auditing enables a shift from detective to preventive capabilities (Li, Roge, Rydl, & Hughes,
2007). But Figure 5 shows that only 55% of the respondents agree with the idea that audit costs are reduced in
companies using ERP systems. One of the reasons behind this belief is that at the beginning of using ERP
system, auditors spend more time in understanding the system and business process and assessing control risk.
Overall result has revealed that auditors can do effective, efficient, and fast auditing by using new auditing
tools and procedures instead of the traditional procedures. The overall objective and scope of an audit do not
change in ERP environment. The research result points out that data received from ERP system are reliable and
effective audit can only be done according to the quality of data received. A effective audit program reduces
audit time, and it also reduces audit cost.
There can be many reasons why a company might need to cut costs, one of which is to reduce prices of
products or services. When asking auditors about making discounts on audit prices to companies using ERP (see
Figure 6), 16% of the respondents disagree about the idea and 35% are not sure about it. One of the reasons
agree nor
Data Received From ERP System Have
Higher Reliability
agree nor
Effective Audit Program Reduce Audit
behind this can be the New Turkish Commercial Code’s obligation that every company should have one auditor,
meaning that volume of business is so high that auditors do not need to cut off audit prices.
Figure 5. Audit costs in companies using ERP.
Figure 6. Discount on audit price.
Another reason can be the high workflow of the auditors, meaning that if the price of audit is low, auditors
should work with more companies to have the same income. Also, they have to work even harder to understand
different companies’ business processes. Therefore, the quality of control can decrease, which is not preferred
by auditors.
The audit service of ERP system makes the following possible: recording the events in a network-wide
audit trail, detecting misuses or unauthorized activities, reviewing patterns of access and the access histories of
individuals and objects, discovering attempts to bypass the protection mechanisms, and discovering extended
use of privilege that occurs when a user changes identity.
The result of the research suggests that the use of the new technologies will raise the quality of auditing
agree nor
Agree 35%
Audit Costs Are Reduced in Companies
Using ERP
agree nor
Companies Using ERP Gets Higher
Discount on Audit Price (Compared
With Companies that Do Not)
system in the organizations. There is a vast scope in researches conducted about the ERP system and its impact
on internal controls. In this research, the authors focused more on the effect of ERP system on auditing time,
cost, and price.
Auditors should also be properly trained about the ERP system as well as the accounting. For effective and
efficient auditing in the ERP environment, auditors should obtain an understanding of the systems, business
processes, control environment, risk-response activities, and internal control systems.
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