Effect of Risk Based Auditing on Financial Reporting Quality of Oil Marketing Firms in Kenya

Abstract

With an evolving financial landscape and increasing demands for transparency and accountability, it becomes imperative to understand the impact of risk-based auditing on the quality of financial reporting, especially in specialized sectors like oil marketing. The Kenyan context, with its dynamic oil marketing industry, provides a unique setting to explore this relationship. The study sought to assess the influence of risk-based auditing on the financial reporting quality of oil marketing firms in Kenya. Specifically, it aimed to understand how various components of risk-based auditing, namely risk identification, risk assessment, risk mitigation, and audit planning, relate to the quality of financial reporting. The study also considered the potential controlling effects of firm size and financial leverage on this relationship. A mixed-method approach was adopted, combining primary data sourced from structured questionnaires administered to heads of internal audit in 125 licensed oil marketing firms in Kenya and secondary data extracted from these firms' annual financial statements from 2018 to 2022. The study employed descriptive statistics to outline general trends and regression analysis to pinpoint the relationships between the independent variables (components of risk-based auditing, firm size, and financial leverage) and the dependent variable (financial reporting quality). Regression analysis unveiled that risk identification, risk assessment, risk mitigation, and audit planning significantly predict the quality of financial reporting. Specifically, audit planning exhibited the strongest positive relationship with financial reporting quality (β=0.746, p<0.001), followed by risk mitigation (β=0.323, p<0.001), risk identification (β=0.295, p<0.001), and risk assessment (β=0.217, p=0.004). On the other hand, firm size and financial leverage did not emerge as significant predictors in the model. The study conclusively highlighted the pivotal role of risk-based auditing in enhancing the quality of financial reporting among oil marketing firms in Kenya. While all components of risk-based auditing exhibited significant positive relationships with financial reporting quality, audit planning stood out as the most influential. Given the demonstrated significance of risk-based auditing components, regulatory bodies are advised to emphasize the adoption of these practices in their guidelines and standards. Oil marketing firms should invest in continuous training for their internal audit teams, focusing on the latest methodologies and tools in risk-based auditing. Additionally, fostering a risk-aware corporate culture and periodic reviews of audit processes are recommended to ensure that firms remain adaptive and responsive to the evolving risk landscape.