AN ASSESSMENT OF THE EFFECTIVENESS OF INTERNAL AUDIT OF FINANCIAL SYSTEMS IN NHIF AND NSSF IN NAKURU COUNTY

BY: REGISTRATION CP12/60343/09 CP12/60361/09 CP12/60565/09 CP12/60555/09 CP12/60419/09 NAME ALEX KAMAU KINYUA BARBARA MBOCHO CYRUS MUHIA NJOROGE NICKSON THEURI WINNIE SILVON ANYANGO

A PROPOSAL SUBMITED TO THE FACULTY OF COMMERCE FOR THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE (ACCOUNTING OPTION) EGERTON UNIVERSITY NAKURU TOWN CAMPUS

DECEMBER, 2011

DECLARATION AND APPROVAL

This proposal is our original work and it has not been submitted for the award of Diploma or Degree in any institution of higher learning. REGISTRATION CP12/60343/09 CP12/60361/09 CP12/60565/09 CP12/60555/09 CP12/60419/09 NAME ALEX KAMAU KINYUA BARBARA MBOCHO CYRUS MUHIA NJOROGE NICKSON THEURI SIGN ............ ............ ............ ............. DATE ............ ........... ............ .............. ...............

WINNIE SILVON ANYANGO...............

APPROVAL This proposal has been submitted for examination with my approval as a university supervisor.

Mr. Kubasu

............... Signature

........... Date

Lecturer, Department of Accounting, Finance and Management Science, Egerton University

ABSTRACT
The study will assess the effectiveness of internal audit of financial systems of NSSF and NHIF in Nakuru County. The first objective will be to establish the operations of the internal audit function. The second objective shall be to find out the returns of various investments undertaken by NSSF and NHIF. The third objective shall be to characterise the attributes of NSSF and NHIF. The fourth will be to establish the managements commitment to implementing the internal auditors report. The study will employ a descriptive survey research design. A census will be conducted and primary data collected using closed-ended questionnaire and secondary data collected from the companys websites. Data shall be analysed using percentages, Mean, Mode and Median. Analysed data will be presented using tables, charts and graphs.

TABLE OF CONTENT
DECLARATION AND APPROVAL ................................................................................................. 1 ABSTRACT .......................................................................................................................................... 2 TABLE OF CONTENT ....................................................................................................................... 3 LIST OF ABBREVIATION ................................................................................................................ 5 CHAPTER ONE: INTRODUCTION................................................................................................. 6 1.1 Background of the study ...................................................................................................... 6 1.2 Statement of the problem ................................................................................................... 7 1.3 Main objective ..................................................................................................................... 7 1.4 Specific objectives ................................................................................................................ 7 1.5 Research Questions ............................................................................................................. 8 1.6 Significance of the study ...................................................................................................... 8 1.7 Scope .................................................................................................................................... 8 1.8 Limitation ............................................................................................................................. 8 CHAPTER TWO: LITERATURE REVIEW .................................................................................... 9 2.1 Introduction .......................................................................................................................... 9 2.2 Historical Background of National Social Security Fund.................................................... 9 2.3 Roles of National Social Security Fund ............................................................................... 9 2.4 Historical Background of National Hospital Insurance Fund .............................................. 9 2.5 Roles of National Hospital Insurance Fund ........................................................................ 10 2.6 Financial system ................................................................................................................. 10 2.7 Internal Audit ..................................................................................................................... 10 2.8 Scope and objectives of an internal audit function ........................................................... 11 2.9 Components of Internal Audit ........................................................................................... 12

2.10 Impact of Information Technology on Internal Audit ...................................................... 14 2.11 The system of internal check ........................................................................................... 15 2.12 Professional standards of internal auditing ..................................................................... 15 2.14 Advantages of internal audit............................................................................................ 17 2.15 Disadvantages of Internal Audits ..................................................................................... 18 2.16 Empirical studies. ............................................................................................................. 18 2.17 Conceptual framework. ................................................................................................... 19 CHAPTER 3: RESEARCH METHODOLOGY .............................................................................. 21 3.1 Introduction ........................................................................................................................ 21 3.2 Research Design................................................................................................................. 21 3.3 Target Population ............................................................................................................... 21 3.4 Census ................................................................................................................................ 21 3.5 Data Collection .................................................................................................................. 21 3.6 Data Analysis ..................................................................................................................... 21 3.7 Data Presentation ............................................................................................................... 22 REFERENCES ............................................................................................................................. 23 APPENDIX 1: LETTER OF INTRODUCTION ............................................................................ 24

LIST OF ABBREVIATION
NSSF: NHIF: ICS: ISA: CCP: CAATS: IIA:
RBA:

National Social Security Fund National Hospital Insurance Fund Internal Control System International Standards on Auditing Certificate of Contribution Paid Computer Assisted Audit Techniques. Institute of internal audit.
Retirement Benefits Authority.

CHAPTER ONE: INTRODUCTION

1.1 Background of the study
Internal Audit can be defined as a data collection and analysis arm for management. It objectively collects, sifts analyses, evaluates, projects, and reports data on which management make decisions. It acts as a calibrator with which management can assess and tune its performance. Internal Audit (also called Management Review or Management Assurance) goes beyond merely assessing system compliance, by evaluating the efficiency and effectiveness of the systems reviewed and adding constructive advice directed at areas of key concern to management. An important aspect of the organizations monitoring system is the internal audit function. Internal auditors investigate and appraise internal control and the efficiency with which the various units of the organization are performing their assigned function, and report their findings and recommendations to top management. As representatives of top management, the internal auditors are interested in determining whether each branch or department has a clear understanding of its assignment; is adequately staffed; maintains good records; properly safeguards cash, inventories, and other assets; and cooperates harmoniously with other departments. In addition many internal audit departments perform internal consulting activities with their organizations. (Whittington O. 2004) A branch of auditing developed in the twentieth century as a means of monitoring an organizations risks, internal controls, procedures, and management accounting. As

corporations and public sector organizations became increasingly complex in the twentieth century, and as direct personal contacts of managers with the respective operational areas for which they were responsible became more restricted, a greater need developed for the kind of managerial service provided by internal auditors (Brink 1977).

The remit of internal auditing extends beyond the audit of financial statements traditionally associated with external auditing. In 1945 Robert B Milne, one of the founding fathers of the IIA, wrote that although internal auditings roots are in accountancy, its the purpose lies in the area of managements control (quoted in Flescher, 1991). Among other things, internal auditing encompasses fraud detection, safeguarding of assets, legal and regulatory compliance, reviews of management accounting, internal control assessment and

risk reviews. It covers both compliance and consulting and reviews. The Institute of Internal Auditors is the main internal auditing institution and it defines the discipline as follows: an independent, objective, assurance and consulting activity designed to add value and improve an organizations operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. (www.theiia.org)

In recent years, the importance of good corporate governance has received significant public and regulatory attention. A crucial part of an entitys corporate governance is its internal audit function. At the same time, there has been significant public concern about the level of fraud within organizations. The purpose of this study is to assess whether organizations with an internal audit function are more likely to detect and self-report fraud than those without. (University of Melbourne)

1.2 Statement of the problem

In Kenya its a legal requirement for all employees to be covered by NHIF and to be contributing to NSSF. In the recent past, there has been mismanagement of funds contributed by members. While majority of the registered schemes have adhered to most of the relevant regulations published by the RBA, some schemes are poorly administered. this emanates from the fact that some schemes do not adhere to the regulation that govern record keeping. this also ties up with the poor administration of some schemes which lead to poor returns to scheme members. This study aims to bridge the gap by assessing the effectiveness of Internal audit of financial system of NHIF and NSSF.

1.3 Main objective

The main objective of the study will be to assess the effectiveness of the internal audit of financial systems of NSSF and NHIF in Nakuru County.

1.4 Specific objectives

1) To establish the operations of the internal audit function. 2) To find out the returns of various investments undertaken by NHIF and NSSF 3) To characterize the attributes of NHIF and NSSF. 4) To establish the managements commitment to implementing the internal auditors report.

1.5 Research Questions

1. What are the operations of the internal audit function? 2. How much is the returns to the investments undertaken by NHIF and NSSF? 3. What are the attributes of NHIF and NSSF? 4. Is the management committed to implementing the internal auditors report?

1.6 Significance of the study

Cash is an integral resource of every institution hence creating a need for its proper management because it is prone to mismanagement. Therefore there is need to employ effective internal audit. The study will evaluate the internal audit over the financial system in place and how effective they are. The results of this study, if implemented, will help the NHIF and NSSF institutions and any other organization to improve on the management of cash.

1.7 Scope
The scope of the study is on internal audit over financial systems among NHIF and NSSF within Nakuru County. The evaluation will be carried out on cash from these two institutions and how the proceedings there after are invested in because they are among the risky areas which are prone to misappropriations.

1.8 Limitation
The study will be limited by finances since its insufficiency will hindered its progress. More so, time will be limited in conducting the research since the time allocated was approximately three months. Furthermore, information relating to cash is considered highly confidential thus the study will be limited only to the information provided.

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction
This chapter will cover the history of NSSF and NHIF, roles of these government institutions, what is internal audit, what is a financial system, objectives of internal audit, components of internal audit, methods of internal audit, the need for internal audit, impact of information technology on internal audit, advantages and disadvantages of internal audit, the system of internal check, professional standards of internal auditing empirical studies and the conceptual framework.

2.2 Historical Background of National Social Security Fund

The National Social Security Fund (NSSF) was established in 1965 by the act of parliament under cap 258 laws of Kenya. The purpose of the fund was to serve as the first pillar of social security for all Kenyan workers (www.nssf.or.ke/nssf-background, 29/9/2011.).

2.3 Roles of National Social Security Fund

The fund plays a role of securing a future for its members since it assures a lump sum and a monthly payment that goes towards alleviating poverty. This has gone a long way in improving the living standard of the retirees. Also the institution has developed several estates therefore assisting the governments goal of providing affordable housing to Kenyans. The development of these estates has reduced the general cost of living enabling all individuals to access the basic needs (Said, 2007).

Through the members contribution the funds have mobilised savings, this money is reinvested into the economy while part of the contribution is used to buy government treasury bills and bonds and thus enabling the government to meet its financial obligations .Finally NSSF creates employment indirectly to Kenyans by away of utilizing the services of Kenyans companies e.g. stationery, information technology, training and security. (Chitembwe, 2007)

2.4 Historical Background of National Hospital Insurance Fund

The National Hospital Insurance Fund (NHIF) was established in 1966 under cap 255 of laws of Kenya to be run by an advisory council appointed by the Minister for Health. It catered for the salaried employees earning Ksh.1000 and above per month, making a monthly contribution of Ksh.20. Amendments was made in 1972 to incorporate self-employees at a

monthly contribution of Kshs. 60. Also in 1998, cap 255 was replaced by NHIF Act No.9 of 1998 which transformed the fund to a state corporation managed by an all inclusive board representing various stakeholders and interest groups. (www.nhif.or.ke/healthinsurance/, 29/9/2011)

2.5 Roles of National Hospital Insurance Fund

National Hospital Insurance Fund (NHIF) provides comprehensive medical cover in certain hospitals across the country. The inpatient cover provided by NHIF is up to Ksh.396, 000 per annum for the contributor, spouse and children. Claims are then submitted by hospitals directly to NHIF after the contributors have been discharged from the hospitals. The claims are examined by the Fund to ensure validity before payment. A claim can however be rejected and the hospital informed accordingly to incorporate either the missing documents or to address the abnormalities identified (www.nhif.or.ke, 29/9/2011).

Formal sector employees' contributions are deducted and remitted to the Fund by their employers. This is done by Cheque or through e-banking. The employer gets a Certificate of Contributions Paid (CCP) book and official receipt from NHIF. For members under the voluntary category, they pay Kshs.160 per month (Kshs.1920) per annum. For those in formal employment, contributions are made as per their income

(www.nhif.or.ke/healthinsurance/, 29/9/2011).

2.6 Financial system

The firm's financial system is the set of implemented procedures that track the financial activities of the company. On a regional scale, the financial system is the system that enables lenders and borrowers to exchange funds. The global financial system is basically a broader regional system that encompasses all financial institutions, borrowers and lenders within the global economy.

2.7 Internal Audit

This may be defined as a continuous review of activities, documents and accounting records carried out by internal accounts staff appointed for this purpose. It will be under the control of an internal auditor answerable to the management from whom he and his staff will take their instructions.

2.8 Scope and objectives of an internal audit function

The scope and objectives of internal audit depends on the size and structure of the entity and the responsibility assigned to it by management. Ordinarily these would include the following: (a) Review of the accounting and internal control systems. Management is responsible for establishing an internal control system. These systems demand proper attention and continuous review, a function that is usually assigned to internal audit. The internal audit function designs a work plan that shows the areas and control procedures that will be reviewed during the year. (b) Carrying out examination of financial and operating information. This may include detailed testing of transactions and accounting and operating procedures. (c) Review of the economy, efficiency and effectiveness of operations including non-financial controls of an entity. (d) Review of the entity's compliance with laws and regulations. The internal audit function reviews whether the company has put in place appropriate procedures to ensure that all the relevant laws and regulations are adhered to. This will include review of adherence to laws such as taxation legislation, stock exchange listing regulations, among others. (e) Review of the entity's compliance with management policies and other internal requirements. (f) Carrying out independent investigations into the affairs of the company as required by management. The internal audit function will carry out investigations e.g. where frauds are suspected, where there is suspected inefficiency in the use of the company resources.

2.9 Components of Internal Audit

The control environment that acts as the foundation an internal audit system This component encompasses a code of conduct that defines the company's commitment to the quality and ethical behaviour, the identification of risks and the definition of a plan as to how the risks will be managed , the establishment of control activities possesses to ensure that they run more efficient and lowest possible cost, the provision of information to support control activities and the monitoring of internal controls, from within the organisation by management and from outside the process either by an internal audit function or one-off exercises.

Figure i: Interrelated Internal control Components.

Management's Objectives

Information & Communication

Monitoring

Control activities

Risk Assessment.

Control Environment.

Source: Robert and Louwers, (2002)

The control environment sets the tone of an organization, influencing the control consciousness of its people .It is the foundation for effective internal controls, providing discipline and structure. The control environment factors include integrity, ethical values, competence of employees and actions of the management and the board of directors concerning the entitys internal controls and its importance. Since one of the most important features of control environment is the people who make the system work, it implies therefore that companys personnel problems sometimes create internal control problems. (Robert and lauwers, 2002)

Risk assessment is a process of identifying and responding to business risks and the results thereof. Business risks are those factors, events and condition that may prevent the organization from achieving its business objectives. Due to the rapidly changing environment in which todays business operates, management, internal auditors and external auditors must focus on risks to entitys operation and ensure controls are in place to eliminate, mitigate or compensate for risks. Risk assessment includes the risks present in the financial reporting category especially when financial statement may be unreliable, when in existing assets or assets owned by other companies are reported, when they improperly valued and failure to report liabilities and expenses. (Robert and Lauwers, 2002)

Information and communication involves the information system relevant to financial reporting objectives which includes the accounting system, consist of procedures whether automated or manual and records established. This consequently helps to initiate, record, and report entity transactions and to maintain accountability for the related assets the abilities and equity. Communication also involves providing an understanding of individual roles and responsibilities pertaining to internal controls over financial reporting .An information and communication system however processes transactions and produces management report without necessarily guaranteeing accuracy. Nevertheless the internal control system contains important elements of controls. (William F et al, 2006)

While the control environment is pervasive, control activities are specific action taken by a clients management and employees to help ensure that management directives are carried out. Control activities, both manual and computerised, are imposed on the accounting system for the purpose of preventing, detecting and correcting errors and frauds that might enter and

floor through the financial statement. Control procedures have various activities and are applied to various organizational and functional levels. (William F et al, 2006) Internal control systems need to be monitored and thus, the management should assess the quality of its control performance on a timely basis. It entails internal controls performance over time and the design and operation of control in a timely basis taking necessary corrective actions. Errors, frauds and internal control deficiencies should be reported to top management and to the audit committee. Monitoring helps to ensure internal control continue to operate effectively. (William F et al 2006)

2.10 Impact of Information Technology on Internal Audit

The power of the computers has increased exponentially while the cost of such technologies has decreased. This comprises technological advances such as data processing, telecommunication; advanced networking capabilities and e-commerce. Such technology presents both challenges and opportunities for auditors. (William F, 2000)

One of the challenges for the auditors is to understand this technology and how it impacts the audit process. This may require additional education and training on the part of the auditors. The application of the computer technology to accounting system may also offer significant opportunities to the auditors e.g. computerised accounting system may make the conduct of some parts of the audit less mundane, more interesting to the audit staff, and more efficient. Many auditing firms now provide their staff auditors with micro-computers and audit software, which facilitates tasks such as trial balance and working papers preparations. Audit software allows auditors more sophisticated and powerful analytical procedures such as regression analysis. Audit software also lets auditors download clients data files and performs more extensive tests. (William F, 2000) An auditor can use a manual audit procedure called auditing around the computer or computer assisted audit techniques (CAAT) called auditing through the computer. In the CAAT, emphasis is on the input and processing stage of transaction processing CAATS includes: a. Transaction tagging This is where the internal auditor uses electric mark (tag) to mark specific transactions and follow them through the clients system. b. Embedded audit modules

This are sections of the application program code that collects transactions data for the internal auditor e.g. an auditor might want to examine all transactions affecting a specific account code that are greater than sh. 5000 c. Test data (test deck) Refers to a technique that uses the application program to process a set of test data, of the results of which are already known. The clients system is used to process the auditors data, off-line and while under the auditors control. d. Integrated test facility (ITF) Similar to the test data approach except that the test data is commingled with line data. The clients system is used to process the auditors data online

2.11 The system of internal check

The internal check system is part of the internal control system but instead of being concerned with the verification and ascertainment of certain matters as detailed in the opening paragraphs, it consists for auditing purposes of supervisory control over the actions and work of employees. The supervision is exercised by (i) Division and segregation of duties as between individuals so that the work of one individual provides an automatic check on that of another, or (ii) Frequent checking of ones persons work by another at irregular intervals. Source: Spencer N (1995)

2.12 Professional standards of internal auditing

To maintain consistently high-quality services across the internal services across the internal auditing profession, the IIA has issued standards for the professional practice of internal auditing. Purpose, authority and responsibility The purpose, authority, and responsibility of the internal auditing department should be set forth in the departments charter, as approved by the organisations board of directors. Its purpose should be consistent with the IIAs definition of internal auditing.

Independence and objectivity Since internal auditors are employees of the organisation, they cannot have the perceived independence of external auditors. However, independence is still very important to internal auditors. They should maintain an impartial, unbiased attitude and avoid conflicts of interest. Independence of the internal auditing department is enhanced when the chief audit executive reports to a level of management of sufficient stature to ensure broad audit coverage, and adequate consideration and implementation of the auditors recommendations. Ideally, the chief audit executive should report directly to the audit committee of the board of directors. Independence is also enhanced when potential conflicts of interest are considered in assigning staff to audit assignment. For example, it would be a conflict of interest for an internal auditor to audit an area in which that individual was recently employed. It is difficult, if not impossible; to remain objective in evaluating one owns operating decision. (Whittington .O. 2004) 2.13 Need for internal audit I. Increased size and complexity of businesses

Increased size and business spread dilutes direct management oversight on various functions, necessitating the need for a full time, independent and dedicated team to review and appraise operations.

II.

Enhanced compliance requirements

Increase in the geographical spread of the businesses has also led to crossing of political frontiers by businesses in a bid to tap global capital. This has thrown up compliance with the laws of the home country as well as the laws of that land as a critical factor for existence of businesses abroad.

III.

Focus on risk management and internal controls to manage them.

Internal auditors can carry out their job in a more focused manner by directing their efforts in the areas where there is a greater risk, thereby enhancing the overall efficiency of the process and adding greater value with the same set of resources.

IV.

Unconventional business models

Businesses today use unconventional models and practices, for example, outsourcing of noncore areas, such as accounting. V. Intensive use of information technology.

Information technology (IT) is invariably embedded in all spheres of activities of a modern business enterprise today, from data processing to resource planning to online sales and ecommerce. Use of IT has, however, increased the threat of data thefts or losses on account of systems failure or hacking/ espionage, as well as the need to comply with the cyber laws, etc. VI. Stringent norms mandated by regulators to protect investors.

The regulators are coming up in a big way to protect the interests of the investors. The focus of the latest regulations being ethical conduct of business, and enhanced corporate governance and financial reporting requirements, etc

VII.

An increasingly competitive environment.

Whereas deregulation and globalisation have melted the political as well as other barriers to entry in the markets for goods and services, free flow of capital, technology and knowhow among the countries as well as strong infrastructure has helped in bringing down the costs of production and better access to the existing and potential consumers. This in turn, has lured more and more players in the existing markets, thereby, stiffening the competition.

2.14 Advantages of internal audit

There are many advantages of the internal audit. First of all the main advantage of the internal audit is to eliminate the chances of the frauds. The second thing if the internal auditor is appointed by the organization then they can easily cut down the burden of external auditor to do the audit in the business. So this is the reason for appointing the internal audit for the company. So there are many companies which use appoints the internal auditor for their accounts which can help them to make the true and clear view of the financial statements of the business.

The internal auditor is appointed by the many companies to keep an eye on the staff like clerks and accounts so that they cannot make any fraud in the accounts of the company so the

benefits of the internal audit is that the account are audited on the regular basis so there are less chances of frauds for the clerks and accountants. So these are the main advantages of the internal auditor. The internal auditor must be a chartered account which can be appointed by any company at any time. So this has become a trend that the public companies have appointed an internal auditor for their company (www.blurtit.com)

2.15 Disadvantages of Internal Audits

Internal auditing can sometimes fail to check planned frauds. Management can play many tricks in order to manipulate accounts to conceal inefficiencies. These types of frauds are not disclosed and the audited accounts will not always show a true and fair view. If the information from management is false then there is room for fraud and therefore internal audits can sometimes yield undesirable results. Auditing can fail to disclose the correct information of what's happening. Background entries may not be totally clear to audit staff and management may be vague on their clarifications. Whether or not these things happen, an auditor still has to give his report. Another disadvantage to audits is that they don't always show the true picture. An auditor's purpose fails when they don't see the real business affairs; the view of the audit is altered.

2.16 Empirical studies.

The internal audit function has received increasing attention as an important component of the government financial management and a tool for improving the performance of the government sector. According to Diamond J (2002) the audit function has always been viewed as an integral part of government financial management, and increasingly as an instrument for improving the performance of the government sector. Auditing covers a broad range of activities, which have different objectives. Traditionally, it has been a mechanism for assuring the government of its ministries (internal audit), and the legislature (external audit), that public funds are received and spent in compliance with appropriation and other relevant laws (compliance audits), and that the government's reported use of funds fairly and accurately represents its financial position(financial audits). Coram, P (2008) evaluated the importance of the internal audit function in detecting and self-reporting of fraud through misappropriation of assets within organizations. His study compares the detected and self-reported level of fraud when internal audit is conducted in-house, outsourced or a combination of the two. This research examines two important

issues in contemporary corporate governance. By examining the association between both the existence and the type (in-house versus outsourced) of internal audit function and the propensity to detect and self-report fraud, we evaluate the importance of internal audit as a control and monitoring mechanism within organizations. Both internal and external auditors emphasize the importance of fraud assessment and detection partly in response to calls by professional bodies, regulatory agencies and governments. This data expands our understanding of the importance of the internal audit function and its association with fraud detection. The internal auditors work may affect the nature, timing, and the extent if the audit procedures performed by the internal auditor. For example, as part of their regular work, internal auditor may review, assess and monitor the entity's controls that are included in the various accounting cycles. Similarly as part of their work may include confirming receivables or observing certain physical inventories. If the internal auditors are competent and objective, the independent auditor may use the internal auditors' work. The materiality of the account balance of class of transactions and its related audit risk may also determine how much the independent auditor can rely on internal auditors work. When internal auditors' provide direct assistance, the auditor should supervise, review, evaluate, and test their work.(Messier W. F Jr. 2000)

2.17 Conceptual framework.

Reviewing the Internal Control System, we have been able to identify three distinctive areas of activity: (a) Internal Control, embracing the overall organisational programme of the business. This may comprise Flow charts and a Manual, clearly defining the structure of managerial control, duties and responsibilities of staff and chain of command. (b) Internal check, which provides for systematic checking and interlocking in carrying out functions. (c) Internal audit, covering the investigation and scrutiny of all transactions for verification and elimination of fraud and error.

INTERNAL CONTROL SYSTEM

[Independent variable]

INTERNAL CONTROL (Overheads)

INTERNAL CHECKS [Dependent variables]

INTERNAL AUDIT

Internal authorisation Whole system of controls: 1. Financial, 2. Regulatory, within the business. Arrangements for 1. Allocation of authority 2. Division & segregation of work. 3. Supervisory control. 1. Scrutiny and check to verify transactions in records and accounts. 2. Elimination of fraud and error.

Source: Spencer N, (1995)

CHAPTER 3: RESEARCH METHODOLOGY

3.1 Introduction This chapter covers the research design, target population, sampling, data collection, data analysis and data presentation. 3.2 Research Design The study will employ a descriptive survey involving NHIF and NSSF in Nakuru County. The technique will be applicable because it will help to determine the current status of the effectiveness of internal audit of financial systems. 3.3 Target Population The target population comprised of NSSF and NHIF in Nakuru County. The study will cover the entire selected population where the respondents will be the institutions accountants. The institutions were chosen for the study because they provide services under government policies where auditing is compulsory. 3.4 Census A census will be conducted for this study, this is because the target population is small and therefore data will be obtained from the entire population to form a strong basis for concrete generalization for data analysis. Census refers to a comprehensive examination of all elements that constitute a population, a total enumeration rather than a sample (Kothari, C R. 1990) 3.5 Data Collection Primary data will be collected using closed ended questionnaire which will be administered on the auditors of the institutions through drop-pick-later basis. The primary focus of the questionnaire will be to establish the effectiveness of internal audits of financial systems in NHIF and NSSF. Upon expiry of the time given to the respondents, all questionnaires will be collected and analysed. 3.6 Data Analysis The numerical data will be analyzed by the use of percentages, mean, mode and median.

3.7 Data Presentation Analysed data will be presented by use of tables, charts and graphs to facilitate the summarization and communication of the data.

REFERENCES
David ORegan (2004), Auditors dictionary, terms, concepts, processes and regulations, John Wiley and Sons; Oxford. Jack C. Robertson, Timothy J. Louwers (2002) Auditing and Assurance: A systematic approach, McGrahill Irwin; New York. Manasseh, PN 1993, Principles of auditing, Focus Books Publishers, Nairobi. Mwindi, D (2005), Auditing, Focus Publishing Limited, Nairobi. Saleemi, NA (1997), Auditing simplified, NA Saleemi Publishers, Nairobi. William F Messier, (2003) Auditing and Assurance: A systematic approach, McGrahill Irwin; New York. www.nhif.or.ke/healthinsurance. www.nssf.or.ke/nssf-background.

APPENDIX 1: LETTER OF INTRODUCTION

EGERTON UNIVERSITY, FACULTY OF COMMERCE, DEPARTMENT OF ACCOUNTING, FINANCE AND MANAGEMENT SCIENCE, P.O. BOX 13357-20100, NAKURU TO: THE INTERNAL AUDITOR/ FINANCE MANAGER/CHIEF ACCOUNTANT, Dear Sir/Madam, RE: REQUEST FOR THE COLLECTION OF RESEARCH DATA We are undergraduate students of Egerton University pursuing a Degree in Bachelor of Commerce. As a requirement of Bachelor of Commerce degree we are conducting a research on an assessment of the effectiveness of internal audit of financial systems of NSSF and NHIF in Nakuru County. Your organisation has been selected to form part of the study. We kindly request you to fill in the attached questionnaire. The information you give will be treated with utmost confidentiality and the results shall be for academic purposes only. A copy of the research will be availed to you on request. Your kind co-operation will be highly appreciated. Yours Sincerely, REGISTRATION NUMBER CP12/60343/09 CP12/60361/09 CP12/60565/09 CP12/60555/09 CP12/60419/09 NAME SIGN ................. ................. ................ ............. DATE ...................... .................... ................. ................ ...............

ALEX KAMAU KINYUA BARBARA MBOCHO CYRUS MUHIA NJOROGE NICKSON THEURI

WINNIE SILVON ANYANGO...............