Risk-Based Internal Audit, Corporate Governance and Financial Performance of Deposit taking Cooperative Societies in Nairobi Metropolis, Kenya

Abstract

Through a risk-based internal audit (RBIA), companies can use internal audit capabilities to improve management and control of risks. It also improves the accountability and accuracy of financial statements. This study focused on the deposit-taking savings and credit cooperatives (DT-SACCOs) in Nairobi Metropolis, Kenya. Some DT-SACCOs today are faced with the challenges of auditing in their operations despite having an audit department in place. A risk-based internal audit helps an organization in the identification of high-risk areas which helps in giving priorities to such areas. This enables the improvement of the financial performance and provision of high-quality reports by the company. This study focused on the effect of risk-based internal audit on the financial performance of DT-SACCOs in Nairobi Metropolis, Kenya. The study used a descriptive research design and was anchored on three theories namely: fraud triangle theory, audit theory, and risk management theory. The research conducted a census of 43 DT-SACCOs in Nairobi Metropolis, Kenya, and collected primary data from respondents consisting of one audit manager per DT-SACCO. Secondary data was also collected to validate data on financial performance. Regression models were used to test hypotheses where risk assignment and risk-based audit planning proved affirmative to having a statistically significance effect on the financial performance of DT-SACCOs. The research established that corporate governance has a controlling effect on the association between risk-based audit and financial performance of DT-SACCOs. This research has contributed to the existing theoretical and empirical literature on risk-based internal audit and will inform the practice by helping the managers understand its importance and incorporate it into their firms. The findings will also encourage the regulatory body (SASRA) to be able to incorporate RBIA as a critical requirement for all DT-SACCOs.