The Effect of Risk Based Auditing on Financial Performance in Commercial State Corporations in Kenya

Abstract

Recent public interest in the management of resources in the public sector has reignited the need for risk based auditing. A risk based audit approach is designed to be used throughout the audit to efficiently and effectively focus the nature, timing and extent of audit procedures to those areas that have the most potential for causing material misstatements in the financial report (Institute of Chartered Accountants of Australia, 2011). According to Bell et al (2005) the basic premise of RBA is that auditors should devote more resources to accounts that are likely to be misstated and fewer resources to those that are less likely to be misstated thereby improving financial performance. The study sought to establish the effect of risk based audit on the financial performance of the commercial state corporations in Kenya. This research was conducted through a descriptive survey research design. The descriptive survey research design was considered appropriate as it enables description of the characteristics of certain groups, estimation of the proportion of people who have certain characteristics and making of predictions. This study used primary and secondary data. The primary data was obtained from the Chief Internal Auditors of the sampled firms while the secondary data was obtained from the annual financial reports of the sampled state corporations in Kenya over a period of 3 years (20112013). The data was collected based on the information about the variables. Quantitative data was analyzed by descriptive analysis while qualitative data was analyzed through content analysis. The study may provide information to policy makers, scholars, academicians and investors on the effect of RBA on the financial performance of public sector in Kenya. From the findings, the study established that risk management, annual risk based audit planning, internal auditing standards and internal auditing capacity significantly affected the financial performance of the state corporations in Kenya over the 3 year period to a great extent. The study concludes that there exists a positive relationship between risk based audit factors and the financial performance of the state corporations in Kenya. The study recommends that the management of the state corporations in Kenya should embrace the ISAs to guide the ethical work of internal auditors, enhance risk management practices and support the internal audit function by providing the necessary resources and fully implementing its recommendations.