Effect of financial internal control practices on audit opinions among commercial state corporations in Kenya

Abstract

Effectively executed internal control practices improve the reporting process and create accurate financial reports thus strengthening the management's accountability role among state corporations. However, commercial state corporations have had mixed audit reports (modified or unmodified) from the OAG. In this vein, this research assessed the effect of financial internal control practices on audit opinions among Kenyan commercial state corporations. The specific research objectives included: investigating the effect of control activities on audit opinions on Kenyan commercial state corporations, assessing the effect of monitoring on audit opinions on Kenyan commercial state corporations, establishing risk assessment's effect on audit opinions on Kenyan commercial state corporations, and to find out the moderating effect of accounting standards on the relationship between financial internal controls and audit opinions. The study was premised on Accountability Theory and Policeman theory, an explanatory sequential mixed research design alongside pragmatism philosophy. The study only sampled 46 commercial state corporations with a target population of 1380 employees from the accounting and internal audit departments. Meanwhile, the external auditors were interviewed. This research gathered data from primary sources using a questionnaire and interview guide. The study used statistical software called Statistical Packages for Social Sciences (SPSS) V. 25.0. Descriptive statistics, correlations, and regression were used to examine the data. Diagnostic tests including normality and multicollinearity determined the fitness of the regression model. It was established that control activities, monitoring activities, and risk assessment had a positive significant relationship with audit opinions. This means that an increase in controls monitoring, and risk assessments could lead to the formation of unqualified opinions. Further, accounting standards had a significant effect on the relationship between financial internal control practices and audit opinions. The study concludes that most of the commercial state corporations had internal control activities in place however implementation was lacking. Regarding monitoring activities, the study concludes that commercial state corporations adhered to monitoring activities including internal mechanisms and regular evaluations of financial statements. Concerning risk assessment, the study concludes that it was inadequately embraced across several commercial state corporations thus leading to the provision of qualified, adverse, or disclaimer opinions if not corrected. It concludes that most commercial state corporations failed to receive unqualified opinions from the OAG. It recommended that all commercial state corporations must ensure that risk assessment practices are upheld to ensure that cases of errors and any form of malpractice are sealed. Further, commercial state corporations should incessantly review and evaluate their internal control procedures including methods for conducting internal checks and balances. Again, it recommends that when assigning tasks to employees, management—and in particular, human resource management— should assess each worker's honesty and integrity, particularly for those handling private financial data. It again recommends that; commercial state corporations should make sure that their monitoring plans are focused on achieving unqualified opinions and efficient operations to boost stakeholder confidence.