EFFECT OF INTERNAL AUDIT FUNCTION ON FINANCIAL PERFORMANCE IN COUNTY GOVERNMENT OF LAMU, KENYA

Abstract

Internal control practices have been established to influence financial performance of County Government, though County Government has been facing a myriad of challenges in terms of financial performance. The drive of this study was to establish Internal Control Practices that Influence County Government of Lamu to streamline their operations and perform efficiently and effectively for the benefit of the general interest. Therefore the general objective of the study was to determine the internal control practices and financial performance of County Government of Lamu. Specifically, the study endeavored to establish the effect of audit function, risk management, financial reporting and cash management on financial performance of County Governments of Lamu. The study was based on the following theories: The Agency theory, Attribution theory and procedural justice theory. The researcher adopted a descriptive research design. The target populations of the study were 30 employees drawn from 5 departments in the Ministry of Finance, Budget and planning in the County Governments of Lamu. A modified Likert scale questionnaire was used to collect data.  A pilot study was carried out to refine the instruments. The pilot and consistency of the questionnaire were further assessed using Crobach’s alpha. Data collected was analyzed using SPSS version 23 for Windows. Frequency counts, percentages, means, standard deviation and the information generated was presented in form of tables. Multiple linear regression analysis was conducted in order to establish the relationship between dependent variable (financial performance), and the independent variables (audit function, risk management financial reporting and cash management) on financial performance of County Governments of Lamu. The study found out that County Government of Lamu had a functional internal audit unit or department which carried out audit on a timely basis and whose findings were reported directly to top management. The study established that the County Government of Lamu did not have a well-documented policy on risk management and that management did not encourage reporting of events in order to identify risks. It also established that the capacity to perform risk assessment was not adequate. The study established that employees from top management level in Finance Planning Ministry of County Government of Lamu did not assist in making cash flow projections and executing finance and accounting functions and that they were not in a position to ensure budgetary controls. Based on the findings of the study, it was concluded that there is a positive relationship between internal audit function, Risk management, financial reporting and Cash management have a positive relationship with the Performance of County Governments of Lamu. The study recommended that the internal audit unit needs to play a major role in fraud detection and prevention by strengthening the internal control system. County Government of Lamu should promulgate well documented policies on risk management. They also need to encourage reporting of events in order to identify risks. They should also increase their capacity to perform risk assessment. County Government of Lamu should involve employees from top management level in Finance Planning Ministry to assist in making cash flow projections and executing finance and accounting functions and budgetary controls. 

Key Words: Internal Audit Function, Financial, Performance, County Governments, Lamu Kenya

CITATION: Abubakar, M. A., & Omwenga, J. Q. (2021). Effect of internal audit function on financial performance in county government of Lamu, Kenya. The Strategic Journal of Business & Change Management, 8 (3), 814 – 820.