Partial fulfillment for award of Master of Commerce

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This study evaluated the level of effectiveness of internal controls operating in Nairobi. Secondly, this study examined the relationship between the age of an enterprise and effectiveness of its system of internal control. Thirdly, this study explored the relationship between the amount of resources held by an enterprise and its effectiveness of its system of internal control. Fourthly, this study investigated the nature of the relationship between internal control and financial performance. The study was quantitative and was carried on from September 2007 to June 2009. Using a sample of 30 small business as listed in the National Social Security Fund (NSSF) Register of Kenya, 2008, the study sought to meet the above mentioned objectives. Data was collected from the managers of small business using interviews and examination of documents pertaining to internal control. the response rate was 80%. Data was then analyzed using descriptive statistics and regression analysis. The study found that there are deficiencies in the systems of internal controls, with the degree of deficiencies varying from enterprise to another. the components of internal control that were missing in most businesses surveyed were: firstly, risk analysis, and secondly lack of proper flow of information. In addition, the study established that the sample population lacked awareness of what constituted an effective system of internal control. The study also found that there is significant statistical evidence to support the negative relationship between the age of an enterprise and the the effectiveness of its system of internal control. In addition, the study established that there is a negative correlation between the resources held by an enterprise and its internal control weaknesses. finally, the study found that there is a weak negative relationship between the internal control weaknesses and financial performance. there is need to enlighten operators of small business of what constitutes an efficient and effective system of internal control through seminars and forums. To cut down on the cost of maintaining full fledged internal audit and human resources departments, the small business should outsource this to specialist professional firms who will aid them on a timely basis. The researcher suggests that there is need to replicate the study in medium and large enterprises. Finally, there is need to establish the nature of frauds occurring in small businesses.