Internal Audit Practices and Financial Reporting Quality of County Governments in Kenya

Abstract

The purpose of the study was to establish the effect of audit quality practices on financial reporting quality of county governments. This study was grounded on agency theory, theory of inspired confidence, policeman theory of auditing and upper echelons theory. The study targeted six Coastal counties of Mombasa, Kilifi, Lamu, Kilifi, Tana River and Taita Taveta county governments which formed the unit of analysis for the study. A sample of 120 respondents was chosen using Slovins formula. Stratified sampling technique was used to divide counties in to departments then simple radom sampling technique was used to apportion sample for each department selected. The study utilized both primary data and secondary data. The study conducted pilot test before data collection to test reliability and validity of data collection instruments. The collected data was analysed, summarized and tabulated by use of SPSS software version 26. Descriptive analysis and inferential statistics were the data analysis techniques used. Data was presented in tables for ease of understanding. The correlation results showed that all the internal audit practices constructs in the study had a moderate positive relationship with financial reporting quality in county governments. Regression results showed that coefficient of determination (r2) was 0.523 which means that the constructs employed explained 52.3 per cent variation in financial reporting quality in county governments. ANOVA results showed that the model was significant in explaining the relationship between the study variables. The study concluded that the county governments' audit function objective is well spelled out to the internal auditors prior to audit process and the broad purpose is communicated to the entire county functions. It was concluded the county audit committee members are trained on auditing. Also the audit committee members have notable experience on auditing. The researcher recommends that the county governments should assure independence of audit team. This could be achieved by providing an independent committee which would handle audit team remuneration. The selection of audit team should be through competitive process as this would ensure independence. The study recommends that the counties should establish investigative audit team to shadow conventional audit team which should be autonomous from county leadership.