INTERNAL AUDIT AND FINANCIAL RISK OF SUGAR MANUFACTURING FIRMS IN WESTERN KENYA

Abstract

Internal audit is considered one of the significant cornerstones of effective financial risk management in any enterprise. In spite of the significant contribution of internal audit on financial risk, it has gotten little concern for scholarly and practical implications. The study aimed to establish the influence of internal audits on the financial risk of sugar manufacturing firms in western Kenya. The specific objectives were to determine the influence of internal audit independence on the financial risk of sugar manufacturing firms in west Kenya, to assess the influence of management support on the financial risk of sugar manufacturing firms in west Kenya, to establish the influence of internal audit competence on the financial risk of sugar manufacturing firms in western Kenya and to evaluate the influence of internal audit compliance on the financial risk of sugar manufacturing firms in western Kenya. The study employed agency theory, fraud diamond theory, and role conflict theory. The study adopted an interpretivism research philosophy and explanatory research design. The study targeted 200 respondents, including internal auditors, finance officers, and accountants from eight operating sugar manufacturing firms in western Kenya. The study employed proportionate sampling after using the fisher's formula to get the sample size of 132 respondents from the sugar belt. The use of questionnaires collected primary data. Both descriptive and inferential statistics were obtained. Descriptive statistics consisted; of the use of mean, standard error of the mean, and standard deviation. Inferential statistics included the use of a multinomial logistic regression model. The results indicated that internal audit independence had a significant positive influence on financial risk through involvement evidenced by a p-value of 0.012<0.05 and an increase in likelihood of 1.820 times and also through programming given the p-value of 0.046<0.05 and an increase in possibility of 1.653times.Management support had a significant negative influence on financial risk through reports are acted upon by management evidenced with a p-value of 0.004<0.05 and an increase in likelihood of 0.512 times and also a significant positive influence on financial risk through regular in-service training of internal audit staff supported with a p-value of 0.005<0.05 and an increase in likelihood of 1.715 times. Internal audit competence had a significant positive influence on financial risk through the level of experience evidenced with a p-value of 0.014<0.05 and an increase in likelihood of 1.787 times, qualification of internal audit staff evidenced with a p-value of 0.034<0.05 and an increase in likelihood of 1.574times and also through internal audit has adequate technical capacity supported with a p-value of 0.035<0.05 and an increase in possibility of 1.708times. Internal audit compliance had a significant positive influence through the nature and scope of internal audit assignments supported with a p-value of 0.013<0.05 and an increase in likelihood of 1.775 times. The study, therefore, recommended strengthening the internal audit section through internal audit independence, management support, improving skills and experience of audit staff, and audit compliance, as this will significantly reduce financial risk. This study is necessary to managers of both public and private sugar firms and the government by providing more insights on effective financial risk management by enabling effective and efficient internal audits.