FACTORS AFFECTING EFFECTIVE PROCUREMENT AUDITING OF CDF

PROJECTS IN KENYA

A CASE STUDY OF KIHARU CONSTITUENCY

KARUGO CAROLINE WAMBUI

A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF

PROCUREMENT AND LOGISTICS, IN THE SCHOOL OF

ENTREPRENEURSHIP, PROCUREMENT AND LOGISTICS COLLEGE OF

HUMAN RESOURCE DEVELOPMENT IN PARTIAL FULFILMENT OF THE

REQUIREMENT FOR THE AWARD OF DEGREE OF BACHELOR OF

SCIENCE IN PURCHASING AND SUPPLIES MANAGEMENT OF JOMO

KENYATTA UNIVERSITY OF SCIENCE AND TECHNOLOGY

SEPTEMBER, 2015
 DECLARATION

This research proposal is my original work and has never been presented to any other

university or institution or examination body for the award of a degree, diploma or

certificate.

Signature………………………… Date…………………………………….

KARUGO CAROLINE WAMBUI

HD211-2564/2012

This research project has been submitted for examination with my approval as the

University Supervisor

Signature: ………………………………… Date: …………………………………

SAMUEL MULI

JKUAT, KENYA

i
 DEDICATION

This project is dedicated to my beloved sons, Thomas and Julian, my dear parents Mr.

and Mrs. David Karugo, my brothers and sisters, colleagues and friends who in one way

or the other supported me through encouragement and continuous support throughout the

entire process of my research and project writing.

ii
 ACKNOWLEDGEMENT

I thank all those who supported me in the successful completion of this research project

by giving moral support, financial assistance and advice. My sincere thanks go to my

supervisor and above all I give all thanks and praise to the Almighty God for giving me

the opportunity to successfully complete this research project.

iii
 ABSTRACT

Despite the existence of the devolved funds, internal inefficiencies in their management

have made them not to achieve the desired results. For instance, poverty levels have

increased from 56% in 2002 to 60% in 2008, public service delivery has failed,

inequalities in resource distribution prevails and funds meant for community use have

been looted by corrupt civil servants and politicians. Of specific importance is the CDF

that was meant to control imbalances in regional development and combat poverty at the

grassroots. At its inception in 2003, the fund was allocated 2.5% of the government's

ordinary revenue, which was later increased to 7.5% in 2010. Therefore the study was

aimed at finding out factors affecting effectiveness of auditing procedures on CDF

projects. Specifically it investigated the effects of the legal framework, auditor‟s specific

professional skills, record management and auditor‟s independence on effectiveness of

public procurement audits. A descriptive research design was employed. The target

population was 80 respondents while a sample size of 40 were selected using a stratified

random sampling to ensure representativeness. Both quantitative and qualitative methods

of data analysis were used to get a conclusion of the findings of the subject matter.

iv
 TABLE OF CONTENTS

DECLARATION...............................................................................................................i

DEDICATION…..............................................................................................................ii

ACKNOWLEDGEMENT...............................................................................................iii

ABSTRACT......................................................................................................................iv

TABLE OF CONTENT..................................................................................................v

LIST OF TABLES..........................................................................................................viii

LIST OF FIGURES.........................................................................................................x

LIST OF ACRONYMS/ABBREVIATION..................................................................xi

DEFINITION OF TERMS.............................................................................................xii

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study...............................................................................................1

1.2 Statement of the Problem...............................................................................................5

1.3 Objectives......................................................................................................................6

1.4 Research Questions........................................................................................................6

1.5 Justification of Study.....................................................................................................7

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1.6 Scope of the Study.........................................................................................................7

1.7 Limitations of Study…………………………………………………………………..7

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction....................................................................................................................8

2.2 Theoretical Review........................................................................................................8

2.3 Critique of the Existing Literature...............................................................................26

2.4 Summary……………………......................................................................................27

2.5 Research Gaps………..................................................................................................28

CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1 Research Design...........................................................................................................30

3.2 Target Population.........................................................................................................30

3.3 Sampling Frame...........................................................................................................31

3.4 Sample and Sampling Techniques…………………………………………………...31

3.5 Data Collection Instruments........................................................................................32

3.6 Data Collection Procedure…………………………………………………………..33

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3.7 Data Processing and Analysis .....................................................................................34

CHAPTER FOUR

RESEARCH FINDINGS AND DISCUSSION

4.1 Introduction…………………………………………………………………………..34

4.2 Presentation of finding……………………………………………………………….34

4.3 Conclusion on research findings and data analysis………………………………......54

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1 Introduction…………………………………………………………………………..56

5.2 Summary…………………………………………......................................................56

5.3 Conclusions ………………………………………………………………………....57

5.4 Recommendations……………………………………………………………………57

REFERENCES ..……………………......…...………………..……………………….59

vii
LIST OF TABLES

Table 3.1 Population..........................................................................................................21

Table 4.1 Respondents‟ gender, age and level of education…………………………..…35

Table 4.2 Compliance to the legal provision…………………………………………….36

Table 4.3 Procedures followed on auditing process………………….………………….37

Table 4.4 Transparency in Auditing process………………………………………….…38

Table 4.5 Audit committee accountability…………………………………………….…39

Table 4.6 Effect of legal framework on auditing process………………………………..40

Table 4.7 Professional Skills……………………………………………………………..41

Table 4.8 Audit quality depends on the auditors skills…………………………………..42

Table 4.9 Education and Training Increase auditors‟ skills……………………………...43

Table 4.10 Experience of Auditors on auditing solution………………………………...44

Table 4.11 Auditors‟ skills affect auditing procedure…………………………………...45

Table 4.12 Record management on organization effectiveness………………………….46

Table 4.13 Auditors Depend on Record to carry out an audit…………………...………47

Table 4.14 Lack of proper documentation hinder auditing process…………………...…48

Table 4.15 Record management enhance effective auditing process……………………49

viii
Table 4.16 Contracting external auditors enhance auditors‟ independence……………..50

Table 4.17 External auditors‟ solution is based on facts………………………………...51

Table 4.18 Lack of auditor‟s independence can lead to misstatements in auditing

report……………………………………………………………………………………..52

Table 4.19 External auditors enhances effectiveness in auditing process……………….53

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LIST OF FIGURES

Figure 2.1 Conceptual Frameworks...................................................................................13

Figure 4.1 Compliance to the legal provision…………………………………………....37

Figure 4.2 Effect of legal framework on auditing process……………………………….41

Figure 4.3 Auditors‟ skills affect auditing procedure……………………………………45

Figure 4.4 Record management enhance effective auditing process…………………….50

Figure 4.5 External auditors enhances effectiveness in auditing process………………..54

x
DEFINITION OF TERMS

Accountability it is the obligation of an individual or organization to account

for its activities, accept responsibility for them, and to disclose

the result in a transparent manner. (IFAC, 2004).

Competency is defined as a capability, ability or an underlying characteristic

of an individual, which is casually related to effective or

superior performance (Armstrong, 1995)

Internal control is a process including norms, procedures, performance and

organizational structure established to ensure reasonable

guarantees so as to achieve the settled business goals and avoid

undesirable events, or they could be indicated and fixed.

(Cobit, 2007)

Legal framework refers to a set of rules, procedural steps, or tests often

established through precedent in the common law, through

which judgements can be determined in a given legal case

(Willes, 2012).

Record Management refers to professional practice of managing the records of an

organization throughout their life cycle from the time they are

created to their eventual disposal (Megill, 2005).

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ABRREVIATION AND ACRONYMS

CDF Constituency Development Fund

FPEF Free Primary Education Fund

GDP Gross Domestic Product

ICT Information and Communication Technology

INTOSAI International Organization of Supreme Audit Institutions

LATF Local Authority Transfer Fund

LDCs Least Developed Countries

NARC National Rainbow Coalition

NTA National Tax Payers Association

PPOA Public Procurement Oversight Authority

RELF Rural Electrification Levy Fund

RMLF Rural Maintenance Levy Fund

SEBF Secondary Education Bursary Fund

xii
 CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Public Procurement has become an increasingly important factor in economic and

business circles globally. This is evidenced by the growing interest of donors,

governments, civil society, professional organizations, the private sector and the

general public. After decades of messy Public Procurement systems, a majority of

developing countries, Kenya being no exception, are now reforming the legal,

organizational and institutional frameworks for public procurement. Through public

procurement, 12 to 20% of developing countries‟ GDP is spent annually (and as much

as 70% of GDP in post conflict countries such as Uganda and Sierra-Leone). Even

marginal improvements in procurement systems, therefore can yield enormous

benefits (Basheka, 2010).

Procurement refers to the acquisition of goods, services and works by a procuring

entity using public funds. Public bodies have always been big purchasers, dealing

with huge budgets. Public procurement represents 18.42% of the world GDP. In

developing countries, public procurement is increasingly recognized as essential in

service delivery (Basheka, 2010). It accounts for a high proportion of total

expenditure. For example, public procurement accounts for 60% in Kenya, 58% in

Angola, 40% in Malawi and 70% of Uganda‟s public spending. This is very high

when compared with a global average of 12-20 % (Froystad, 2010).

Due to the colossal amount of money involved in government procurement and the

fact that such money comes from the public, there is need for accountability and

transparency. Consequently, various countries both in developed and least developed

countries (LDCs) have instituted procurement reforms involving laws and regulations.
1
The complexities of public procurement performance require more than just a mere

policy framework in every nation. There is need to have direct interventions that

would undo the complexities that bedevil the efforts of the government and

international organization for supporting the public procurement performance

initiatives. In this era of quickly changing corporate environment, purchasing

managers are encouraged to be proactive. Purchasing managers need to develop a

more proactive strategic approach and encouraged a proactive approach to purchasing

planning (Shuetze, 1994).

Government procurement is one of the four economic activities of government (Thai,

2001). The others are: redistributing income through taxation and spending, provision

of public goods and services, and lastly providing the legal framework for economic

activities to flourish. Ordinarily, government procurement includes “buying,

purchasing, renting, leasing or otherwise acquiring any supplies, services or

construction;” and “all functions that pertain to the obtaining of any supply, service or

construction, including description of requirements, selection, and solicitation of

sources, preparation and award of contract and all phases of contract administration.

Although, government procurement is still young as an academic discipline, recent

nature of public procurement suggests that public procurement practice has undergone

major changes particularly in the area of legal reforms.

An appropriate regulatory system is required to enhance transparency and non-

discriminatory tendencies in order to achieve value for money. The law establishes

the procurement methods to be applied, advertising rules and time limits, the content

of tender documents and technical specifications, tender evaluation and award criteria,

procedures for submission, receipt and opening of tenders, and the complaints system

structure and sequence (PPOA, 2007). Ongoya (2005) points out that regulations lays
2
the foundation for separation of powers between institutions managing public

procurement and those checking on compliance. According to Manasseh (2007),

auditors examine procurement transactions and documents, pursuant to the

appointment terms and in compliance with relevant statutory requirements.

Availability of sound legal framework offers boundaries and benchmarks against

which audit is conducted objectively.

In an effort to achieve decentralization of resources in Kenya, several devolved funds

have been operationalized. The funds include; Roads Maintenance Levy Fund

(RMLF) and the District Bursary Fund started in 1993, Local Authority Transfer Fund

(LATF) launched in 1999, Constituency Development Fund (CDF), Secondary

Education Bursary Fund (SEBF) and Free Primary Education Fund (FPEF)

established in 2003 and the Rural Electrification Levy Fund (RELF) that was

operationalized in 2007 (CCG, 2007). All these funds form an important avenue for

the transfer of resources from the central government to the communities.

The constituencies‟ development fund was created through an Act of parliament in

2003 then subsequent amendments CDF (amendment) Act in 2007 and 2013.The fund

was established by the government to devolve resources meant for development

through public participation to the constituencies. The CDF board which runs the fund

receives at least 2.5% of the government annual budgetary allocation revenue in every

financial year which is disbursed to the constituencies for development of public

projects. Such amount is enormous to the economy and needs proper financial

management to achieve the intended objectives.

Therefore, sound procurement will play a critical role to achieve these objectives. Key

operating principle of the legal and regulatory framework is the promotion of value

3
for money practices in public procurement and the maximization of economy,

effectiveness, efficiency and compliance with regulations. According to Kimenyi

(2006) the Constituency Development Fund (CDF), which was established through

the Constituency Development Fund Act of 2003, is one of the ingenious innovations

of the National Rainbow Coalition (NARC) Government of Kenya.

The PPDA Act, 2005 stipulates that effective legal framework in itself prevents fraud

(GOK, 2005). The supplies and management Practitioners Act, 2007 provides for

professionalization of procurement practice which facilitates good record keeping.

This facilitates timely audit and enhance cost efficiency in auditing. Sound

procurement regulations are critical to effectiveness of public procurement audit.

Before the PPDA (2005), there were big discrepancies and differences between the

procurement practices applied in different public entities (PPOA, 2007). The main

laws applied in the conduct of public audits in Kenya include the Public Audit Act,

Public Internal Audit Act, the CDF Act, Public Procurement and Disposal Act (2005).

Other laws applicable include CDF Act (effective 2003 and amended in 2007 and

2013), Supplies Management Practitioners Act (effective 2007), Accountants Act

(effective 2008) and Public Financial Management Act (effective 2004 and amended

in 2012) and ethics and officers Act of 2003.

4
1.2 Problem Statement

Despite the existence of the devolved funds, internal inefficiencies in their

management have made them not to achieve the desired results. For instance, Wanjiru

(2008) documents that poverty levels have increased from 56% in 2002 to 60% in

2008, public service delivery has failed, inequalities in resource distribution prevails

and funds meant for community use have been looted by corrupt civil servants and

politicians. Of specific importance is the CDF that was meant to control imbalances in

regional development and combat poverty at the grassroots. At its inception in 2003,

the fund was allocated 2.5% of the government's ordinary revenue, which was later

increased to 7.5% in 2010. Seventy five per cent of the fund is allocated equally

amongst all 210 constituencies with the remaining 25% being allocated according to

the constituency poverty levels (KIPPRA, 2010).

An audit conducted by National Tax Payers Association (NTA) found that in Kiharu

Constituency the report found wastage of the CDF funds, whereby, Kshs.

5,950,000 had been wasted due to badly implemented projects and Kshs.

600,000 on abandoned projects. The report, however, did give the reasons that

caused bad implementation and abandonment of those projects is through

malpractices in procurement system. 44 million spent in Kiharu Constituency by the

CDF committee on various projects could not be established after it failed to avail

vouchers, bank statements, invoices and procurement documents. Therefore the study

will explore on factors affecting effective procurement auditing CDF projects in

Kenya.

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1.3 Study Objectives

1.3.1General Objective

The aim of this study is to assess on factors affecting effective procurement auditing

of CDF projects in Kenya.

1.3.2 Specific Objectives

i. To establish if legal framework affect effective procurement auditing of CDF

projects in Kenya.

ii. To find out how professional skills affect effective procurement auditing of

CDF projects in Kenya.

iii. To evaluate if poor record management affect effective procurement auditing

of CDF projects in Kenya.

iv. To determine how auditor‟s independence affects effective procurement

auditing of CDF projects in Kenya.

1.4 Research Questions

i. Does legal framework affect effective procurement auditing of CDF projects

in Kenya?

ii. How do professional skills affect effective procurement auditing of CDF

projects in Kenya?

iii. How does poor record management affect effective procurement of CDF

projects in Kenya?

iv. Has auditor‟s independence affects affect effective procurement auditing of

CDF projects in Kenya?

6
1.5 Justification of the study

The study will create new knowledge and awareness in the area of procurement

management in all industry sectors both in the private and public sectors. The findings

will be used by the policy makers as a blue print for the improvement of allocation

and participation of managers in CDF. The study will also provide concrete evidence

on the effect of procurement audit on procurement performance on CDFs and will be

valuable to institutions such as the CDF Board, Public procurement oversight

authority (PPOA), the National Treasury, the National Assembly, civil groups,

academic institutions and the general public.

1.6 Scope of the Study

This research was carried out in Central Province, Murang‟a County, Kiharu

constituency. Respondents were drawn from Kiharu Constituency. This because of the

researcher‟s observation on the auditing of the CDF projects during my industrial

attachment as well as its proximity to the researcher‟s place of work.

1.7 Limitations of the Study

Some respondents were not willing to provide sensitive information especially that

concerning audit reports released by the auditor general since the operations had been

politicized. Other respondents misinterpreted the intensions behind the research and

refused to provide accurate information besides assurances of confidentiality for fear

of disclosure.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter highlights the literature on effective procurement auditing systems

highlighting sections regarding to the various variables and their possible or observed

effects on effective procurement auditing systems. The chapter will also present the

conceptual framework of the study.

2.2 Theoretical Review

2.2.1 Theory of Internal Control

A system of effective internal control is a critical component of an organization‟s

management and a foundation for its safe and sound operation. A system of strong

internal control can help to ensure that the goals and objectives of an organization will

be met, that it will achieve long-term targets and maintain reliable financial and

managerial reporting. Such a system can also help to ensure that the organization will

comply with the laws and regulations as well as policies, plans, internal rules and

procedures, and reduce the risk of unexpected losses and damage to the organization‟s

reputation (Cobit, 2007).

Internal controls weaknesses in administering public programs are reported under two

categories by the degree of severity- reportable conditions (less severe) and material

weaknesses (more severe). Reportable conditions are significant deficiencies in the

design or operation of the internal controls over compliance that could adversely

affect a departmental ministry's ability to administer a major public program in

8
accordance with laws and regulations. Material weaknesses are reportable conditions

of such magnitude that one or more of the internal control components does not

reduce to an acceptably low level the risk that noncompliance with laws and

regulations may occur and not be detected timely (GOK, 2009).

Ministry of Finance Treasury Circular No. 1612005 requires independent auditors to

identify reportable conditions and material weaknesses in internal controls over major

public programs. In virtually all jurisdictions, the public sector plays a major role in

society, and effective governance in the public sector can encourage the efficient use

of resources, strengthen accountability for the stewardship of those resources,

improve management and service delivery, and thereby contribute to improving

peoples' lives. Effective governance is also essential for building confidence in public

sector entities-which is in itself necessary if public sector entities are to be effective in

meeting their objectives (International Federation of Accountants (IFAC) Corporate

Governance in Public Sector, 2004)

2.2.2 Principal Agent Theory

Agency theory was exposited by Alchian and Demsetz (1994) and further developed

by Jensen and Meckling (1976). The theory defines the relationship between the

principals, such as shareholders and agents or company executives and managers. In

this theory, shareholders who are the owners of the company, hire the agents to

perform work. Principals delegate the running of business to the managers, who are

the shareholders‟ agents (Clarke, 2004).

According to Rungtusanatham (2007), two parties have an agency relationship when

they cooperate and engage in an association wherein one party delegates decisions or

work to another to act on its behalf. The important assumptions underlying agency

theory are that: potential goal conflicts exist between principals and agents; each party
9
acts in its own self-interest; information asymmetry frequently exists between

principals and agents; agents are more risk averse than the principals; and efficiency

is the effectiveness criterion.

The theory deals with situations in which the principal is in a position to induce the

agent, to perform some task in the principal‟s interest, but not necessarily the agent‟s.

Accounting officers and procurement managers in state corporations play the agent

role for the government and the organization stakeholders. Compliance with

procurement rules and regulations may be as result of principal-agent problem

(Langevoort, 2002). The PPDA, (2005) bestows the responsibility of compliance with

PP legal framework on the Accounting Officers of the PEs. Theory will be useful in

explaining the relationship between the government and the state corporations in

compliance to the legal framework. Theory will explain how the actions of the agent

affect the principal and other stakeholders for example making non optimal decisions

as far as the utilization of financial resources and non financial resources are

concerned.

The Public sector represents a principal-agent relationship. The official acts as the

principal's agent and must periodically account for their use and stewardship of

resources and the extent to which the public's objectives have been accomplished. The

Public sector needs adequate internal controls to properly administer public service

programs. Inadequate, poorly designed, or improperly applied internal controls could

lead to the misappropriation of public resources or the failure to ensure the public

service objectives, procedures and compliance requirements have been met. These

failures could prevent or deny eligible citizens from receiving needed services.

Weaknesses in internal controls could also lead to the government imposing sanctions

in the form of fines, suspension or dismissal of any accounting officer in charge

(GOK, 2008).
10
2.2.3 Institutional Theory

Institutional theory adopts a sociological perspective to explain organizational

structures and behavior. It draws attention to the social and cultural factors that

influence organizational decision-making and in particular how rationalized activities

are adopted by organizations. The institutional theory is the traditional approach that

is used to examine elements of public procurement (Obanda, 2010).

Dunn (2000) identifies three pillars of institutions as regulatory, normative and

cultural cognitive. The regulatory pillar emphasizes the use of rules, laws and

sanctions as enforcement mechanism, with expedience as basis for compliance. The

normative pillar refers to norms and values with social obligation as the basis of

compliance. The cultural-cognitive pillar rests on shared understanding on common

beliefs, symbols, and shared understanding.

2.2.4 Public Interest Theories of Regulation

The first group of regulation theories account for regulation from the point of view of

aiming for public interest. This public interest can be further described as the best

possible allocation of scarce resources for individual and collective goods. In western

economies, the allocation of scarce resources is to a significant extent coordinated by

the market mechanism. In this theory, it can even be demonstrated that, under certain

circumstances, the allocation of resources by means of the market mechanism is

optimal. Because these conditions are frequently not adhered to in practice, the

allocation of resources is not optimal and a demand for methods for improving the

allocation arises (Craswell, 1995). One of the methods of achieving efficiency in the

allocation of resources is government regulation. According to public interest theory,

government regulation is the instrument for overcoming the disadvantages of

11
imperfect competition, unbalanced market operation, missing markets and undesirable

market results.

Public sector governance encompasses the policies and procedures used to direct an

organization's activities to provide reasonable assurance that objectives are met and

that operations are carried out in an ethical and accountable manner .In the public

sector, governance relates to the means by which goals are established and

accomplished. It also includes activities that ensure a government's credibility,

establish equitable provision of services, and assure appropriate behavior of

government officials-reducing the risk of public corruption. Moreover, good public

governance requires fair and impartially enforced legal frameworks. The absence of

good governance structures and lack of adherence to basic governance principles

increases the risks of public corruption, which is defined as the misuse of entrusted

power for private gain.

The principles of good governance -transparency and accountability; fairness and

equity; efficiency and effectiveness; respect for the rule of law; and high standards of

ethical behavior- represent the basis upon which to build open government.

Accountability is the process whereby public sector entities, and the individuals

within them, are responsible for their decisions and actions, including their

stewardship of public funds and all aspects of performance, and submit themselves to

appropriate external scrutiny. It is achieved by all parties having a clear understanding

of those responsibilities, and having clearly defined roles through a robust structure.

In effect, accountability is the obligation to answer for responsibility conferred

(IFAC, 2004). The principle of transparency relates to the openness of government to

its citizens. Good governance includes appropriate disclosure of key information to

12
stakeholders so that they have the necessary facts about the government's performance

and operations.

2.2.7 Conceptual Framework

Independent Variables Dependent Variable

Legal Frame Work

Professional Skills

Effective Procurement Auditing

of CDF Projects

Record Management

Auditor‟s Independence

2.2.7.1 Legal Framework on Public Procurement Audit

Legal framework refers to a set of rules, procedural steps, or tests often established

through precedent in the common law, through which judgements can be determined

in a given legal case (Willes, 2012). There are a multitude of such laws, including

legislations and regulations directly related to public procurement as well as other

related topics. These laws are divided into legislations and regulations that affect

public procurement either directly or indirectly; in addition to applicable regulations

of the principal laws which enclose tender documents. The fact that municipalities

and autonomous public institutions follow different guidelines and regulations from

13
the central public administration makes it difficult to encompass these antiquated laws

that fail to cope with modern developments and business and market requirements.

The implementation of these laws throughout the public sector as a whole would

eliminate discrepancies between public administrations and counties. Discussion of

the provisions applied to all public administrations, and partially to autonomous

public agencies and county governments, will proceed from the Public Accounting

Law and the Bidding System, among others. Provisions related solely to public

autonomous agencies and counties will also be broken down according to the level of

their significance within the procurement process.

Willes (2012) argues that the lack of a written agreement between organizations and

the audit firm can contribute to substandard audits by public accountants. To foster

sound and productive communication and to avoid misunderstandings, both parties

should agree in writing on important audit-related matters. Make clear at the start -

before bidders spend time assessing the nature of the job and estimating its costs -

which an organization expects to sign a formal document as the culmination of the

proposal process. Audit firms unwilling to commit to signing such a document are

better avoided.

Every public entity is a creation of the law, which specifies the objectives and means

of attaining the objectives (GOK, 2005). Auditor comes in as independent party, to

verify compliance to the legal provisions, and communicate their findings to

representatives of the public, usually the national assembly (GOK, 2009). The key

elements of the audit law include; compliance, monitoring, documentation and

reporting.

14
An appropriate regulatory system is required to enhance transparency and non-

discriminatory in order to achieve value for money. The law establishes the

procurement methods to be applied, advertising rules and time limits, the content of

tender documents and technical specifications, tender evaluation and award criteria,

procedures for submission, receipt and opening of tenders, and the complaints system

structure and sequence (PPOA, 2007).

Every government entity should comply with laws, rules and regulations applicable to

its operations and business activities. Likewise, all company directors, officers and

employees are required to comply with all laws, rules and regulation applicable to

their company related business activities and responsibilities. In addition to the local

laws each of the countries in which we are based there are some laws that apply to our

company‟s operation globally. Ongoya (2005) points out that regulations lays the

foundation for separation of powers between institutions managing public

procurement and those checking on compliance. According to Manasseh (2007),

auditors examine procurement transactions and documents, pursuant to the

appointment terms and in compliance with relevant statutory requirements.

Availability of sound legal framework offers boundaries and benchmarks against

which audit is conducted objectively.

A legal framework encompasses the laws, regulations and policies that are put in

place to govern an organization or an activity. The public procurement legal

framework clearly covers the whole scope of public procurement (PP), all stages of

the procurement process, methods of procurement, ethics and transparency (Thai,

2001). A good PP legal framework is based on the principles of openness and

transparency, fair competition, impartiality, and integrity.

15
The compliance with statutory and professional requirements is vested with auditors.

Auditors are not implying that financial statements are free from bias or they have

been verified. The role of auditors was to examine the reasonableness of

management's justifications for its representations. Hence, auditors are required to

form an opinion on whether the financial statements show a true and fair view.

However, although auditors are required to form opinions, this does not necessarily

mean that financial statements did show true and fair view. The concern now is

whether the true and fair view is the message that auditors are trying to convey

(Raghunandan, 2002).

2.2.7.2 Record Management

Megill (2005) defines record management as the professional practice of managing

the records of an organization throughout their life cycle from the time they are

created to their eventual disposal. It includes identifying, classifying, storing,

securing, retrieving, tracking and permanently preserving records. Record

management is primarily concerned with the managing the evidence of organization‟s

activities as well as reduction or mitigation of risk associated with it. Just as the

records of the organization come in a variety of formats, the storage of records can

vary throughout the organization. File maintenance may be carried out by the owner,

designee, a records repository, or clerk. Records may be managed in a centralized

location, such as a records center or repository, or the control of records may be

decentralized across various departments and locations within the entity. Records may

be formally and discretely identified by coding and housed in folders specifically

designed for optimum protection and storage capacity, or they may be casually

identified and filed with no apparent indexing. Organizations that manage records

casually find it difficult to access and retrieve information when needed. The
16
inefficiency of filing maintenance and storage systems can prove to be costly in terms

of wasted space and resources expended searching for records.

During the course of an audit, original paper records owned by the area under review

are sometimes needed as evidence to support findings. Ideally, copies should be made

but on the rare occasion when original evidence is required, a copy of the record or a

marker should be placed in the organization‟s file and the original returned as soon as

possible. In order to maintain audit trails the original records may have to remain

within the internal audit records system until the audit is completed (e.g. when all

actions have been agreed and completed by management). These documents need to

be held securely when in the custody of internal audit. Where digital material is

concerned, access to content can be given without custody and relevant metadata

examined and, if necessary, the record extracted. The integrity of information and

records being used by internal audit must be maintained and a clear distinction made

between the records used and those created by the audit service.

Internal audit information will largely consist of documents (e.g. work in progress

such as draft working papers or draft reports). It is not always necessary to retain all

versions of working papers and reports, but it might be useful to retain at least those

versions where significant changes were made in order to be able to demonstrate how

final versions were reached and to support the decision making process that resulted

in final versions of audit reports, findings and recommendations. The information and

records should be organised to ensure that: staff can work effectively and efficiently

without having to waste time hunting for information; internal auditors can find what

they need quickly and easily or determine who has the data; new staff can learn to use

the system quickly; any risks that information can be accidentally amended, deleted or

that confidential information can be accidentally disseminated are minimized; internal

17
audit work is conducted in an orderly, efficient and accountable manner; audit

findings, conclusions and recommendations are fully documented and supported;

continuity is provided in the event of a disaster; legislative and regulatory

requirements are met; records are relevant, reliable, authentic, complete and usable;

records are retained only for as long as they are needed and disposed of in accordance

with the organization‟s information disposal rules, relevant regulations and

legislation; there is an “audit trail” which enables any record entry to be traced to a

named individual at a given date/time with the secure knowledge that all alterations

can be traced and deletions identified; new staff can see what has been done, or not

done, and why and any decisions made can be justified or recognized at a later date

(Megill, 2005).

According to PPOA (2008), an organization‟s ability to function effectively and give

account of its actions will be undermined if sound records management principles are

not applied. Procurement records play a significant role as evidence of purchases of

goods and services. Unorganized or otherwise poorly managed records mean that an

organization does not have ready access to authoritative information, to support sound

decision making or delivery of programs and services. This factor contributes to

difficulties in retrieval and use of procurement records efficiently and therefore

inability to carry out the audit process. Sound records management is a critical

component for good governance, effective and efficient administration, transparency,

accountability and delivery of quality services to the citizens. Good record keeping

practices contribute to the following: creation and maintenance of accurate and

reliable information; easy accessibility to information; transparency and

accountability; procurement units and procuring entities performing their functions

efficiently; availability of authentic, reliable and tangible records to fight corruption;

and resources being matched to objectives.

18
Records form the foundation of good and accountable administration. Unorganized

and poorly managed records lead to inability to access information needed to support

policy formulation, implementation and delivery of programs and services.

Procurement records provide the controls that document how a procurement action

was undertaken, and protects essential audit trails. Disorganized records mean

reviewers and auditors take an excessive amount of time to locate needed records. A

well managed procurement records management system will enable the physical and

logical control of records and prevent unauthorized access, tampering, loss,

misplacement or destruction of documents. Proper records management is essential

for ensuring transparency and probity in the procurement and financial management.

Records are important for accountability and are a powerful deterrent against

procurement and financial malpractices. Weak records management practices mean

officials cannot be held accountable for their actions (PPOA, 2008).

2.2.7.3 Professional Skills

The main purpose of the audit is to assure outsiders that the financial statements are

free from material misstatements, the value of an audit depends on the outsiders ex-

ante perception of; the probability that the auditor will discover the breaches or errors

in the reporting system and on the probability that the auditor will report the

discovered breaches or errors (DeAngelo, 1981). This factor is very important to

develop the auditor and to achieve a high level of quality for public sectors, during:

development of leadership and management skills and proficiencies; the development

of an overall workforce plan; policies relating to handing over of tasks; creation of

staff knowledge and skills; equal treatment and fair opportunity to all staff.

Competency is defined as a capability, ability or an underlying characteristic of an

individual, which is casually related to effective or superior performance. For

19
purposes of this study, competency is used to refer to applied knowledge and skills,

performance delivery, and the behaviour required getting things done very well

(Armstrong and Baron, 1995). Competencies are divided into two categories;

technical and behavioural competency. Public procurement professionals have to

strive to achieve three competing demands of meeting commercial interests with key

themes of value for money, economy, efficiency and effectiveness; the regulatory

interests with key themes of competition, transparency, equality and compliance and

the social interests whose key themes include public interest, employment concerns,

social exclusion, economic development and environment policy. In an effort to attain

these demands, organizations constantly look for employees who have skills

necessary to deal with the wide variety of tasks faced by purchasing professionals.

Procurement professionals need a set of flexible skills due to changing local

government contexts. No single skill can be adequate to manage the procurement

portfolio of great complexity in local government systems. Procurement tasks demand

professionals with high-level strategic, tactical as well as operational skills. These

skills should potentially take a broader supply chain multi-disciplinary and integrative

approach.

Many researches find that there is a positive association between audit quality and the

auditor skills and proficiency. Also, technical capability seems to increase the

auditor‟s remuneration: the level of education, the working experience and the

certification type of the auditor are found to be positively associated with hourly fee

rates. Hence, the results suggesting that both size and technical capability have a

positive impact on auditor remuneration (Sundgren, 1998). To become a performance

auditor, a performance audit team-leader or a performance audit manager, certain

distinctive qualifications have to be met. For instance, a performance auditor should

20
be well educated in the social sciences and in scientific Investigation/evaluation

methods. Special knowledge of the different functional areas to be audited might also

prove essential, but advanced skills in accounting and financial auditing are not

always needed in performance auditing or program evaluation.

Where organization have organized their performance auditing separately from

financial auditing, it is quite acceptable that personnel selected for performance

auditing have different backgrounds and skills than those selected for financial

auditing. To meet the quality requirements specified in the Auditing Standards, the

SAI should have a program to ensure that its staff maintains professional proficiency

through continuous education and training. A key factor in the development process is

learning through practical auditing work INTOSAI, (2001). Managerial training

recognizes that demonstrated skill at auditing does not necessarily equip one to

manage an ISA or supervise an audit team.

The required new skills, such as operational and strategic planning, budgeting for time

and money, etc. grow more extensive as one moves to increasingly senior positions

within the organization. Continuing education ensures that auditors routinely undergo

training to continuously maintain and enhance their professional capabilities. A

commitment to life-long learning should be encouraged (Wee, 2002). On the other

hand, continuous education and training may include such topics as current

developments in performance audit methodology, management or supervision,

qualitative investigation methods, case study analysis, statistical sampling,

quantitative data-gathering techniques, evaluation design, data analysis, and reader-

based writing. It may also include subjects related to auditors‟ fieldwork, such as

public administration, public policy and structure, government administration policy,

economics, social sciences, or Information Technology science.

21
Moreover, disciplinary actions such as warnings or cancellations of authorization are,

of course, not possible against non-certified auditors. This means that the prevailing

legislation, rather than the set of auditing standards adopted by the profession, sets the

lower bound of audit quality for the non certified auditors. As a consequence, it may

be that the minimum audit quality differs between certified and non-certified auditors.

There is also some evidence supporting that view. For example, Sundgren, (1998)

found that non-certified auditors are less likely to modify the audit report, which

suggests that non certified auditors provide lower assurance than certified auditors.

Simunic and Stein, (1987) suggested that although auditor moral hazard has received

sortie attention in the academic literature, it is perceived to be particularly acute in the

government environment. In this environment, the chances of client financial failure

and consequent ex post revelation of lower-than-implied audit quality are minimal.

Thus, there is a need for alternative mechanisms for enhancing the credibility of the

audit. Both the General Accounting Office GAO (1987) and the American Institute of

Certified Public Accountants AICPA (1987) view appropriate audit procurement

practices as a mechanism for ensuring that the contracted audit quality is in fact

delivered. The GAO and the AICPA (2003) suggested that appropriate procurement

practices can independently contribute to the selection of a competent auditor in a

market in which it is difficult to directly assess whether an auditor possesses the

specialized knowledge necessary to provide a high quality government audit.

2.2.7.4 Auditor's Independence

An independent audit committee enhances the independence of external auditor, and

ensures that auditor is free from management influence. The committee can conduct

informal and private meetings without the presence of the company‟s management to

22
encourage the external auditor to be transparent on material issues at an early stage.

The best known definition of independency in academic literature is De Angelo,

(1981). Others include: an attitude/state of mind Schuetze, (1994); a function of

character with the integrity and trustworthiness being key Magill and Previts, (1991).

The U.K.s guide to professional ethics refers to integrity, objectivity, and

independence.

Auditors should Ethical show honesty, integrity, probity, diligence, fairness, trust and

respect while performing their duties. Ethical behaviour includes avoiding conflicts of

interest, and not making improper use of an individual‟s position (Wee, 2002). Ethical

behaviour supports openness and accountability in procurement with the result that

suppliers have confidence in participating in the Government marketplace. It also

reduces the cost of managing risks and enhances trust in public administration. Ethical

behavior is important in public procurement as it involves the expenditure of public

money, and is subject to public scrutiny. Public officials should always behave

ethically and fairly in their business undertakings. Ethical behavior supports openness

and accountability in a procurement process and gives suppliers confidence to

participate in the Government marketplace. Ethical behavior can also reduce the cost

of managing risks associated with fraud, theft, corruption, and other improper

behavior; and enhance confidence in public administration (Karanja and Mugo, 2010)

A procurement audit process that conforms to the expected standards of integrity,

uprightness and honesty is one in which clear procedures are consistent with

Government policies and legislation are established, understood and followed from

the outset. These procedures need to consider the legitimate interests of public and

ensure that all suppliers are treated equitably (Wee 2002). An important and effective

way to maintain ethics awareness in agencies is to provide training for employees.

23
Ethics training and seminars can be provided, along with training in more specific

areas, such as procurement procedures, record keeping, records management, and

accountability and administrative law. Regular reviews or audits of procurement

processes can be done to ensure probity is being considered and achieved (Amos and

Weathington, 2008).

Ponemon and Gabhart, (1990) used Kohlberg stage model of moral development and

ethical cognition to examine an auditor's implicit reasoning in the resolution of an

independence conflict. This well-validated model distinguishes three levels of ethical

cognition: Pre-conventional, Conventional, and Post-conventional. They found that a

systematic relationship exists between auditors measured ethical cognition and their

resolution of an independence conflict in a hypothetical situation. They also found

that independence judgments are significantly influenced by penalty related factors

and are less sensitive to affiliation factors (i.e., living up to expectations).

Windsor and Ashkanasy (1995) extended Ponemon and Gabharts, (1990) study by

including economic and personal belief variables, the moral atmosphere of the audit

firm, is also being explored by researchers, although no clear results have yet emerged

Ashkanasy and Windsor, (1997). Raghunandan, (2002) suggested that auditors with

longer tenure are more likely to be independent, and are consistent with Myers (2003)

in that longer auditor tenure is associated with higher quality of reported earnings.

Craswell (1995); Krishnan,(2003). This implies that auditors with higher audit quality

(i.e., auditors independent) are more likely to resist client management pressures than

auditors with lower audit quality.

This study will examine auditor independence in auditor-client negotiation over

financial reporting issues, and whether high quality auditors are more likely than low

24
quality auditors to resist client management pressures in auditor-client negotiation

over financial reporting issues. Wright and Wright, (1997) argued that auditor

independence is at the heart of the integrity of the audit process. When auditors and

clients negotiate issues about financial reporting, maintaining the integrity of the

independent audit function is mandatory for auditors and required by the standards of

the accounting profession. Recently, financial scandals at companies such as Enron

and WorldCom have eroded public confidence in the independence of the accounting

profession and the quality of audit services.

The scope of the independent audit should encompass not only the fair presentation of

the basic financial statements, but also the fair presentation of the financial statements

of individual funds and component units. The cost of extending full audit coverage to

the financial statements of individual funds and component units can be justified by

the additional degree of assurance provided. Nevertheless, the selection of the

appropriate scope of the independent audit ultimately remains a matter of professional

judgment. Accordingly, those responsible for securing independent audits should

make their decision concerning the appropriate scope of the audit engagement based

upon their particular government‟s specific needs and circumstances, consistent with

applicable legal requirements (Magill and Previts1991).

Governmental entities should undertake a full-scale competitive process for the

selection of independent auditors at the end of the term of each audit contract,

consistent with applicable legal requirements. Ideally, auditor independence would be

enhanced by a policy requiring that the independent auditor be replaced at the end of

the audit contract, as is often the case in the private sector. Unfortunately, the frequent

lack of competition among audit firms fully qualified to perform public-sector audits

could make a policy of mandatory auditor rotation counterproductive. In such cases, it

25
is recommended that a governmental entity actively seek the participation of all

qualified firms, including the current auditors, assuming that the past performance of

the current auditors has proven satisfactory (Francis, 2004). Except in cases where a

multiyear agreement has taken the form of a series of single-year contracts, a

contractual provision for the automatic renewal of the audit contract (e.g., an

automatic second term for the auditor upon satisfactory performance) is inconsistent

with this recommendation.

Professional standards allow independent auditors to perform certain types of non-

audit services for their audit clients. Any significant non-audit services should always

be approved in advance by a governmental entity‟s audit committee. Furthermore,

governmental entities should routinely explore the possibility of alternative service

providers before making a decision to engage their independent auditors to perform

significant non-audit services. Abbott, (2001) states that audit procurement process

should be structured so that the principal factor in the selection of an independent

auditor is the auditor‟s ability to perform a quality audit. In no case should price be

allowed to serve as the sole criterion for the selection of an independent auditor.

2.3 Critique of Existing Literature

Audit is playing an important role in developing and enhancing the global economy

and business firms. Auditors express an opinion on the fairness of financial

statements. However, some regulators and small audit firms claimed that audit firm

size does not affect audit quality and therefore should be irrelevant in the selection of

an auditor. More recently the Global Financial Crisis has seen policy makers once

again focus attention on the importance of an effective audit function as a key

component in effective capital markets and attempt to identify key drivers of audit

26
quality. These investigations and regulatory changes make it clear that there has been

considerable dissatisfaction with the effectiveness of corporate governance, the

quality of the audit process and the roles of auditors and auditing (Francis 2004).

Policy decisions have been made despite the fact that the empirical evidence

regarding factors that can enhance or impair audit effectiveness is inconclusive and

uncertain. Accordingly, this study provides empirical evidence on the factors that are

perceived to affect audit quality, specifically the relative importance of audit-team and

audit-firm attributes in affecting audit quality as perceived by users of audit services.

However, research into perceptions of audit quality is important because it determines

the credibility of the audit report (Shockley, 1981), and that have the potential to

erode public confidence in the integrity of the financial reporting system (Pany and

Reckers 1988). Consequently, gaining an understanding of factors that affect

perceptions of audit quality is important because it can help regulators and the

accounting profession to formulate policy based on empirical evidence rather than on

a prior assumptions (Schelluch and Thorpe 1995).

2.4 Summary

Researchers insist that the procedures associated with auditor's hiring are considered

important factors that affect auditor's independency and auditing effectiveness.

Hameed, (1995) found that the most important factors that affect auditing quality are

auditor's experience, honesty, and the knowledge in accounting and auditing

standards. Alqam and Alrajabi, (1997) in their research in public Jordanian companies

found that auditor rotation is affected by three categories; firm specific factors such as

management replacement, auditing office specific factors such as auditing quality, and

factors related to international auditing standards and auditing ethics. Also, Abbott

27
and Parker, (1999) investigated auditor changes found that the presence of active and

independent audit committees is associated with increases in audit quality at the time

of auditor changes. Dunn, (2000) found a positive association between industry-

specialized audit firms and analysts' rankings of disclosure quality in unregulated

industries, but no relation in regulated industries. Abbott, (2001) argued that

independent and active audit committees demand a higher level of audit quality due to

concerns about monetary or reputation losses arising from financial misstatements.

Prior researches documented a positive association between audit quality and some

factors such as internal control. Other studies have employed more direct measures,

such as the outcomes of quality control, firm size, audit fees, auditor independence,

auditor reputation, industry specialization, auditor qualifications and proficiency.

2.5 Research Gaps

There is a vast body of literature relating to effective audit and its measurement.

Despite the extent of that literature, no single generally accepted definition or

generally accepted measure of audit effectiveness has emerged. Much of the audit

quality literature derives from DeAngelo‟s definition. He defines audit quality as “the

joint probability that an auditor will both discover and report a breach in the client‟s

accounting system. The discovery of a misstatement measures quality in terms of

auditor‟s knowledge and ability, while reporting the misstatement depends on the

auditor‟s incentives to disclose” DeAngelo, (1981). This definition is appropriate for

external financial statement audits; it can be expanded to include other types of

auditors (e.g., internal auditors) and audits (e.g., compliance and operational audits).

Despite the lack of a comprehensive definition of audit effectiveness covering all

types of audits and auditors, it is reasonable to assume this term incorporates

28
compliance with relevant audit procedures and standards. Audit Quality as an agency

relationship arises when one or more principals (e.g. an owner) engage another person

as their agent (or steward) to perform a service on their behalf. Performance of this

service results in the delegation of some decision-making authority to the agent. This

delegation of responsibility by the principal and the resulting division of labor are

helpful in promoting an efficient and productive economy.

29
 CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.0 Introduction

This chapter describes the research design, population, sampling frame, sample and

sample technique, research instruments, data collection procedure, pilot that was

undertaken as well as the researcher‟s data processing and analysis of the same data

collected.

3.1 Research Design

The research design was descriptive. It is deemed as the best approach with regard to

collection of facts as they were on the ground without any manipulation of the

variables under study. It concurs with Kombo, (2006) when he argued that a

descriptive study design could be used when the emphasis is determination of the

extent to which a problem is influenced by the variables under study. In this case, the

study sort to find out factors affecting effective procurement auditing of CDF projects

in Kenya.

3.2 Population

According to Mugenda and Mugenda (2003), target population is the complete set of

individuals‟ cases or objects with some common characteristics to which the

researcher want to generalize the results of the study, population comprised of 80

members consisting of 7 procurement officers, 10 project managers, 23 auditors and

40 selected local citizens.

30
3.3 Sampling Frame

A sampling frame is a list or other device used to define a researcher's population of

interest. The sampling frame defines a set of elements from which a researcher can

select a sample of the target population. Because a researcher rarely has direct access

to the entire population of interest in social science research, a researcher must rely

upon a sampling frame to represent all of the elements of the population of interest.

Generally, sampling frames can be divided into two types, list and no list. The sample

was drawn from procurement officers, project managers, auditors and selected local

citizens.

3.4 Samples and Sampling technique

Orodho (2005) says that a sample is a small portion of a target population, while

sampling is selecting a given number of subjects from a defined population as a

representative of that population. The researcher applied the stratified random

sampling to come up with a sample size of 40 respondents which was 50% of the

population under the study. These respondents were best placed to furnish the

researcher with relevant data.

Table 3.1 Population

Category Frequency Percentage %

Procurement officers 7 6%

Project managers 10 56%

Auditors 23 38%

31
Total 80 100%

Source: Kiharu Constituency CDF Board (2015)

3.5 Data Collection Instruments

The data for the study was collected using questionnaires containing structured and

unstructured questions drafted from the objectives, research questions and the

variables of the study. Borg and Gall (1989) pointed out that questionnaires were

appropriate because they collect information that was not directly observable as they

inquire about feelings, motivations, attitudes, accomplishments as well as the

experiences of individuals. They further observed that questionnaires had an added

advantage of being less costly and using less time in data collection. Orodho (2005)

said that anonymity is also possible through use of questionnaire and therefore

respondents are likely to be free to express their views. Other techniques used were a

study of records and documents at the CDF offices concerning payments,

Procurement and Auditing reports.

3.6 Data Collection Procedure

The researcher used questionnaires which were issued to the Procurement Officers,

Auditors, Project Managers and the Local Citizen. Both primary and secondary data

were corrected during the research.

3.6.1 Primary data

This data was collected through the issuing of questionnaires to the target population

through interview so that various aspects of the variables were properly captured free

of ambiguity and redundancies. The questionnaires were then sorted and cleaned off

errors.

32
3.6.2 Secondary data

This was collected by a study of records and documents at the CDF office concerning

payments, procurement and various audit reports.

3.7 Pilot test

The reliability of the research is also said to have been proven if the researcher pre-

tests the questionnaire. The reason for the pre-test is to check that the information is

appropriate for the research or not. In order to make the research more reliable the

empirical study is combined with theoretical study. In this study, questionnaires were

pilot tested in the neighboring Mathioya and Maragua constituencies in order to check

their reliability. The results of the pilot test were used to develop a more reliable and

effective data collection tool. A research is said to be reliable if it is replicated and it

has similar or identical results.

3.7 Data Analysis and presentation

Data collected was organized and cleaned of errors made during data collection. The

data was then coded, keyed in the computer and analyzed using descriptive statistics

with the aid of Statistical Package for Social Sciences (SPSS), Microsoft Excel and

Microsoft Access computer software. Both quantitative and qualitative statistical

techniques were used to summarize the data. The results of the analysis were

interpreted in form of descriptive statistics which measured the tally, spread and

influence of the variables under study. The findings were presented in tables, bar

graphs and pie charts.

33
 CHAPTER FOUR

RESEARCH FINDINGS AND DISCUSSION

4.0 Introduction

The research objective was to establish the factors affecting effective procurement

auditing of CDF projects in Kenya. This chapter presents the analysis, findings and

discussion. The findings are presented in percentages and frequency distributions,

mean and standard deviations. A total of 40 questionnaires were issued out and only

34 were returned. This represented a response rate of 85%.

4.1 Presentation of findings.

4.1.0 Factors affecting effective Procurement Auditing

The respondents were requested to indicate the extent to which various factors

affecting effective procurement auditing of CDF projects in Kenya. The range was

„strongly disagree‟ (1) to „strongly agree‟ (5). This finding would assist the researcher

to determine how effective procurement auditing affects CDF projects.

Table 4.1 Respondents’ gender, age and level of education

Table 1 Respondents’ gender, age and level of education.

n Percentage %

male 20 58.8

Female 14 41.2

Total 34 100

34
From the total of 34 (thirty four) respondents interviewed, 20 were male which was

58.8 % of the sample size while female were 14 representing 41.2 of the sample size.

Table 4.2 Compliance to the legal provision

Table 2 Compliance to the legal provision

n Percentage %

Strongly agree 9 26

Agree 13 38

Undecided 8 24

Disagree 3 9

Strongly disagree 1 3

Total 34 100

The results from table 4.2 show that that 26% of the respondents strongly agreed, 38%

agreed, 24% were undecided, 9% disagreed while 3% strongly disagreed. Therefore,

there was compliance to the legal provision as it was indicated by the respondents.

The implementation of laws throughout the public sector as a whole would eliminate

discrepancies between public administrations and counties which lead to proper

utilization of public funds.

35
Figure 4.2 Compliance to the legal provision

Table 4.3 Procedures followed on auditing process

Table 3 Procedures followed on auditing process

n Percentage %

Strongly agree 14 41

Agree 8 23

Undecided 5 15

Disagree 4 12

Strongly disagree 3 9

Total 34 100

The study revealed that the auditing process require right procedures to be followed.

From the study 41% strongly agreed that auditing process require right procedure

followed, 23%, agreed, 15% were undecided, 12% disagreed while 9% strongly

36
disagreed. When the right procedures are followed the auditors are able to achieve the

desired results.

Table 4.4 Transparency in Auditing process

Table 4 Transparency in Auditing process

n Percentage %

Strongly agree 22 65

Agree 8 23

Undecided 4 12

Disagree 0 0

Strongly disagree 0 0

Total 34 100

From table 4.4 above when the respondents were asked on transparency in auditing

process, 65% strongly agreed that it was important, 23% agreed, 12% were undecided

while neither of the respondents disagreed nor strongly disagreed. Auditing procedure

requires fairness. Auditors are required to form an opinion on whether the financial

statements show a true and fair view. However, although auditors are required to form

opinions, this does not necessarily mean that financial statements did show true and

fair view. When it is carried in a transparent manner the stakeholders of public entities

are able to gain confidence with the auditors.

37
Table 4.5 Audit committee accountability

Table 5 Audit committee accountability

n Percentage %

Strongly agree 18 53

Agree 12 35

Undecided 3 9

Disagree 1 3

Strongly disagree 0 0

Total 34 100

Table 4.5 shows that 53% of the respondents strongly agreed that every member of

auditing committee should be accountable, 35% agreed, 9% were undecided while 3%

disagreed. Therefore, the auditing committee members should account on every

resource used to facilitate auditing in their organizations.

Table 4.6 Effect of legal framework on auditing process

Table 6 Effect of legal framework on auditing process

n Percentage %

Strongly agree 17 50

Agree 9 26

Undecided 3 9

38
Disagree 4 12

Strongly disagree 1 3

Total 34 100

The study show that 50% of the respondents strongly agreed on legal framework

affecting effectiveness of auditing process, 26% agreed, 9% undecided, 12%

disagreed while 3% strongly disagreed. Every public entity is a creation of the law,

which specifies the objectives and means of attaining the objectives. Auditor comes in

as independent party, to verify compliance to the legal provisions, and communicate

their findings to representatives of the public, usually the national assembly (GOK,

2009). The key elements of the audit law include; compliance, monitoring,

documentation and reporting.

Figure 4.6 Effect of legal framework on auditing process

39
Table 4.7 Professional Skills

Table 7 Professional Skills

n Percentage %

Strongly agree 19 56

Agree 7 20

Undecided 5 15

Disagree 2 6

Strongly disagree 1 3

Total 34 100

Table 4.7 show that 56% of the respondents strongly agreed that professional skills

are very important in any auditing process, 20% agreed, 15% were undecided, 6%

disagreed while 3% strongly disagreed. The professional skills from auditors are

required since audit assures outsiders that the financial statements are free from

material misstatements, the value of an audit depends on the outsiders ex-ante

perception of; the probability that the auditor will discover the breaches or errors in

the reporting system and on the probability that the auditor will report the discovered

breaches or errors.

40
Table 4.8 Audit quality depends on the auditors skills

Table 8 Audit quality depends on the auditors skills

n Percentage %

Strongly agree 18 53

Agree 11 32

Undecided 2 6

Disagree 2 6

Strongly disagree 1 3

Total 34 100

From table 4.8 when the respondents were asked on whether audit quality depends on

auditor‟s skills and proficiency, 53% strongly agreed, 32% agreed, 6% were

undecided, 6% disagreed while 3% strongly disagreed. The outcome of the auditing

process depends on the competency of the auditors. To become a performance

auditor, a performance audit team-leader or a performance audit manager, certain

distinctive qualifications have to be met. For instance, a performance auditor should

be well educated in the social sciences and in scientific Investigation/evaluation

methods. Special knowledge of the different functional areas to be audited might also

prove essential, but advanced skills in accounting and financial auditing are not

always needed in performance auditing or program evaluation.

41
Table 4.9 Education and Training Increase auditors’ skills

Table 9 Education and Training Increase auditors’ skills

n Percentage %

Strongly agree 19 56

Agree 13 38

Undecided 0 0

Disagree 1 3

Strongly disagree 1 3

Total 34 100

Table 4.9 shows that 56% of the respondents strongly agreed that continuous

education and training increases auditors‟ skills, 38% agreed, 3% disagreed while 3%

strongly disagreed. Continuing education ensures that auditors routinely undergo

training to continuously maintain and enhance their professional capabilities. (Wee,

2002). The required new skills, such as operational and strategic planning, budgeting

for time and money, etc. grow more extensive as one moves to increasingly senior

positions within the organization.

42
Table 4.10 Experience of Auditors on auditing solution

Table 10 Experience of Auditors on Auditing solution

n Percentage %

Strongly agree 14 41

Agree 16 47

Undecided 3 9

Disagree 1 3

Strongly disagree 0 0

Total 34 100

Table 4.10 shows that 41% of the respondents strongly agreed that experienced

auditors are likely to come up with effective solution, 47% agreed, 9% were

undecided while 3% disagreed. Therefore, the experienced auditors know how they

can achieve the auditing objectives.

Table 4.11 Auditors’ skills affect auditing procedure

Table 11 Auditors’ skills affect auditing procedure

n Percentage %

Strongly agree 16 47

Agree 13 38

Undecided 5 15

43
Disagree 0 0

Strongly disagree 0 0

Total 34 100

Study analysis shows that 47% of the respondents strongly agreed that auditors‟ skills

affect auditing procedures, 38% agreed, while 15% were undecided. The study

showed that auditing CDF projects mostly depended on the skills of the auditors.

Figure 4.11 Auditors’ skills affect auditing procedure

Table 4.12 Record management on organization effectiveness

Table 12 Record management on organization effectiveness

n Percentage %

Strongly agree 18 53

Agree 11 32

44
Undecided 3 9

Disagree 1 3

Strongly disagree 1 3

Total 34 100

Table 4.12 shows that 53% of the respondents strongly agreed that record

management enhances organization effectiveness, 32% agreed, 9% were undecided,

3% disagreed while 3% disagreed. It enhances through managing the evidence of

organization‟s activities as well as reduction or mitigation of risk associated with it.

Just as the records of the organization come in a variety of formats, the storage of

records can vary throughout the organization.

Table 4.13 Auditors Depend on Record to carry out an audit

Table 13 Auditors depend of records to carry out an audit

n Percentage %

Strongly agree 13 38

Agree 16 47

Undecided 3 9

Disagree 2 6

Strongly disagree 0 0

Total 34 100

Table 4.13 shows that 38% of the respondents agreed that auditors depend on records

to carry out auditing process, 47% agreed, 9% were undecided while 6% disagreed.

45
Auditors usually compare what is in the records and what they can see then make

recommendation.

Table 4.14 Lack of proper documentation hinder auditing process

Table 14 Lack of proper documentation hinder auditing process

n Percentage %

Strongly agree 16 47

Agree 9 26

Undecided 5 15

Disagree 3 9

Strongly disagree 1 3

Total 34 100

From table 4.14 the researcher found that 47% of the respondents strongly agreed that

lack of proper documentation hinders auditing process, 26% agreed, 15% were

undecided, 9% disagreed while 3% strongly disagreed. Disorganized records mean

reviewers and auditors take an excessive amount of time to locate needed records. A

well managed procurement record management system will enable the physical and

logical control of records and prevent unauthorized access, tampering, loss,

misplacement or destruction of documents. Unorganized and poorly managed records

lead to inability to access information needed to support policy formulation,

implementation and delivery of programs and services.

46
Table 4.15 Record management enhance effective auditing process

Table 15 Record management enhance effective auditing process

n Percentage %

Strongly agree 11 32

Agree 14 41

Undecided 8 24

Disagree 1 3

Strongly disagree 0 0

Total 34 100

Table 4.15 shows that 32% of the respondents strongly agreed that record

management affect effective auditing process, 41% agreed, 24% were undecided

while 3% disagreed. Records form the foundation of good and accountable

administration. Procurement records provide the controls that document how a

procurement action was undertaken, and protects essential audit trails. Proper records

management is essential for ensuring transparency and probity in the procurement and

financial management. Records are important for accountability and are a powerful

deterrent against procurement and financial malpractices.

47
Figure 4.15 Record management enhance effective auditing process

Table 4.16 Contracting external auditors enhance auditors’ independence

Table 16 Contracting external auditors enhance auditors’ independence

n Percentage %

Strongly agree 12 35

Agree 15 44

Undecided 1 3

Disagree 4 12

Strongly disagree 2 6

Total 34 100

Table 4.16 shows that 35% of the respondents strongly agreed that contracting

external auditors enhances auditor‟s independence, 44% agreed, 3% were undecided,

48
12% disagreed while 6% strongly disagreed. An independent audit committee

enhances the independence of external auditor, and ensures that auditor is free from

management influence. Auditor independence is at the heart of the integrity of the

audit process. When auditors and clients negotiate issues about financial reporting,

maintaining the integrity of the independent audit function is mandatory for auditors

and required by the standards of the accounting profession.

Table 4.17 External auditors’ solution is based on facts

Table 17 External auditors’ solution is based on facts

n Percentage %

Strongly agree 16 47

Agree 9 26

Undecided 5 15

Disagree 3 9

Strongly disagree 1 3

Total 34 100

Table 4.17 shows that 47% of the respondents strongly agreed that external auditors‟

solution is based on facts, 26% agreed, 15% were undecided, 9% disagreed while 3%

strongly disagreed. Since the external auditors are independent thus not influenced by

the management they are likely to make solutions based on data they collect. The

scope of the independent audit should encompass not only the fair presentation of the

basic financial statements, but also the fair presentation of the financial statements of

individual funds and component units.

49
Table 4.18 Lack of auditor’s independence can lead to misstatements in auditing

report

Table 18 Lack of auditor’s independence can lead to misstatements in auditing

report

n Percentage %

Strongly agree 17 50

Agree 10 29

Undecided 3 9

Disagree 2 6

Strongly disagree 2 6

Total 34 100

Table 4.18 shows that 50% of the respondents strongly agreed that lack of auditor‟s

independence can lead to misstatements in auditing report, 29% agreed, 9% were

undecided, 6% disagreed while 6% strongly disagreed. Misstatement of auditing

reports are mostly experienced to internal auditors whereby they are forced to write

the report due in the favor of the management.

Table 4.19 External auditors enhances effectiveness in auditing process

Table 19 External auditors enhances effectiveness in auditing process

n Percentage %

Strongly agree 19 56

50
Agree 10 29

Undecided 2 6

Disagree 3 9

Strongly disagree 0 0

Total 34 100

Table 4.19 shows that 56% of the respondents strongly agreed that external auditors

enhances effectiveness in auditing process, 29% agreed, 6% were undecided while

9% disagreed. Independent auditors are more likely to resist client management

pressures than auditors with lower audit quality thus enhancing auditing effectiveness

especially in CDF projects.

Figure 4.19 External auditors enhances effectiveness in auditing process

4.2 Conclusion on research findings and data analysis

The respondents were asked on how legal framework affected audit procedures of

CDF projects on Likert scale of 1 to 5 scores where 1 represents strongly disagree and

5 represent strongly agree, 50% of the respondents strongly agreed on legal

framework affecting effectiveness of auditing process. This confirms the findings by

51
Manasseh (2007) that Public Procurement regulation acts are generally acceptable

framework that guide procurement audit of the public sector entities. The findings

also indicate that Public Procurement Regulations 2005 is also considered important

to effective public procurement audit. This finding re-enforces the view of Manasseh

(2007) which perceived public procurement regulation as one of the important factors

in conducting effective public procurement audit.

From the study analysis professional skills play an important role in auditing

procedures of CDF projects. It showed that experience in procurement audit,

education and training enhance the auditor‟s skills to carry out audit in an effective

manner. Managerial training recognizes that demonstrated skill at auditing does not

necessarily equip one to manage or supervise an audit team. The required new skills,

such as operational and strategic planning, budgeting for time and money, etc. grow

more extensive as one moves to increasingly senior positions within the organization.

Continuing education ensures that auditors routinely undergo training to continuously

maintain and enhance their professional capabilities. This compares with Manasseh

(2007) assertions that auditors need to have certain attributes in order to perform

effective public procurement audits.

The respondents were asked to state how proper record management affected audit

procedures of CDF projects on Likert scale of 1 to 5 scores where 1 represents

strongly disagree and 5 represent strongly agree. They revealed that the auditors rely

on the records to carry out the audit. On other hand they stated that lack of proper

documents was a challenge that faced audit procedures of CDF projects in Kenya.

Auditor‟s independence is an important factor that affects the effectiveness of audit

procedures of CDF projects in Kenya. The scope of the independent audit should

52
encompass not only the fair presentation of the basic financial statements, but also the

fair presentation of the financial statements of individual funds and component units.

This contradicts Johnstone (2006) finding that unbiased public procurement audit is

based on audit techniques applied and the quality of the personnel involved.

53
 CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 INTRODUCTION

This chapter presents a summary of the key findings of the study as well as the

conclusions and recommendations for further research.

5.2 SUMMARY

Regulations lay the foundation for separation of powers between institutions

managing public procurement and those checking on compliance. A legal framework

encompasses the laws, regulations and policies that are put in place to govern an

organization or an activity. The public procurement legal framework clearly covers

the whole scope of public procurement (PP), all stages of the procurement process,

methods of procurement, ethics and transparency.

Records form the foundation of good and accountable administration. Unorganized

and poorly managed records lead to inability to access information needed to support

policy formulation, implementation and delivery of programs and services.

Procurement records provide the controls that document how a procurement action

was undertaken, and protects essential audit trails. Poor records management by

internal audit can render the wider organization vulnerable to breaching the

appropriate regulations. Internal audit services themselves are auditable and good

record management demonstrates compliance with the relevant standards.

Technical capability seems to increase the auditor‟s remuneration: the level of

education, the working experience and the certification type of the auditor are found

to be positively associated with hourly fee rates. Hence, the results suggesting that

54
both size and technical capability have a positive impact on auditor remuneration. To

become a performance auditor, a performance audit team-leader or a performance

audit manager, certain distinctive qualifications have to be met. For instance, a

performance auditor should be well educated in the social sciences and in scientific

Investigation/evaluation methods.

Auditor independence is at the heart of the integrity of the audit process. When

auditors and clients negotiate issues about financial reporting, maintaining the

integrity of the independent audit function is mandatory for auditors and required by

the standards of the accounting profession. Independence means being objective and

unbiased while performing professional services. It requires being independent in fact

and in appearance.

5.3 CONCLUSION

The study concludes that legal framework, professional skills, record management

and auditors‟ independence affect audit procedures of CDF projects in Kenya.

5.3 RECOMMENDATIONS

Based on the study findings the following recommendations are made. Professional

skills, regulatory framework (CDF Act 2007, Public Procurement and Disposal Act

2005, Public Procurement Regulations 2005, and Public Audit Act 2003) were some

of the issues that came out as respectively having the strongest influence on the

effectiveness of procurement audit on CDF projects. The government should employ

professional auditors to undertake public procurement audit and facilitate their

continuous training to ensure they are well equipped with necessary technical skills.

These will ensure effectiveness of public procurement audit. Through legislation, the

government should enact comprehensive laws to regulate procurement functions and

55
outline clear policy and procedures to be followed by procurement entities. These will

offer auditors platforms to benchmark and objectively base their audit findings and

give the audit report validity which is an important ingredient of effective audit.

56
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 Appendix I: Research Questionnaire

Instructions

Please respond to the questions giving your honest views based on your knowledge or

experience by ticking in the boxes besides the options or writing your comments. This

information will be treated with high confidentiality. Instructions: please fill in the score

sheet to help in collecting data on factors affecting effective auditing in CDF projects in

Kenya.

Section A: Legal framework on public procurement

Strongly Agree Undecided Disagree Strongly

agree disagree

5 4 3 2 1

1. There is compliance to the

legal provision

2. Auditing process requires

right procedures to be

followed

3. There should be

transparency in the auditing

procedure

4. Every member of auditing

committee should be

i
accountable

5. To what extent do you

agree legal framework affect

effectiveness of auditing

procedures

Section B: Professional Skills

Strongly Agree Undecided Disagree Strongly

agree disagree

5 4 3 2 1

1. Professional skills are very

important in any auditing

process.

2. Audit quality depends on

auditor‟s skills and

proficiency

3. Continuous education and

training increase auditor‟s

skills

4. Experienced auditors are

likely to come up with

ii
effective solution

5. Auditor‟s experience

affects auditing procedure.

Section C: Record Management

Strongly Agree Undecided Disagree Strongly

agree disagree

5 4 3 2 1

2. Having good record

management enhances

organization effectiveness

3. Auditors depend on

records to carry out auditing

process

4. Lack of proper

documentation hinders

auditing process.

5. Record management affect

the effectiveness of auditing

procedures

iii
Section D: Auditor’s Independence

Strongly Agree Undecided Disagree Strongly

agree disagree

5 4 3 2 1

1. Contracting external

auditors enhances auditor‟s

independence

2. External auditors‟ solution

is based on facts.

3. Lack of auditor‟s

independence can lead to

misstatements in auditing

report

4. Contracting external

auditors enhances auditor‟s

independence

5. External auditors enhances

effectiveness in auditing

process

iv