University of Perpetual Help System Laguna

EFFECTIVENESS OF
College of Business and Accountancy

INTERNAL CONTROL
SYSTEM ON
PROFITABILITY OF
SMES IN BIÑAN CITY
Aspa, Austin Lloyd M.
Escaño, Jerilyn C.
Valencia, Mae O.
Vinoya, Harly E.
Bachelor of Science in Accountancy
Statement of the Problem
This study will determine the effectiveness of internal control system

to the profitability of the SME's. This topic will seek answers specifically

to the following questions:

1. What is the level of effectiveness of internal control system of SMEs?

2. What is the level of profitability of SMEs?

3. Is there any significant relationship between internal control system

and profitability of SMEs?

H0: There is no significant relationship between internal control system

systems interact with and were open to their environments and that they can cultivate

qualitatively new properties through emergence that results in ceaseless innovation. He

argued that Systems Theory centers on the arrangement of and interrelationships between the

parts which connect them into a whole rather than reducing an entity or organization to the

properties of its parts or elements. In such time, an entity recognized a system that is

independent of the concrete substance of the elements such as various departments like

accounting, human resources, financing, etc. as an example. Hence, same principles and

concepts of organization support the different disciplines, which provide a basis for their

unification. In applying the approach of Systems Theory, the study determined that there are
 Based on the aforementioned discussion of the study undertaken, this
theory helped the researchers to envision the fact that part of an
interrelated network of connected issues in internal control system is the
isolated internal problem. Indeed this theory supports corporate
governance as one of the key role of management.
 Committee of Sponsoring Organizations or COSO (2015) defined
internal control as a process, implemented by an entity's board of
directors, management and other personnel, designed to provide
reasonable assurance regarding the achievement of objective relating to
operational, reporting, and compliance. It is present in all organizations,
standardized in large companies and is often implemented in very small
firms. It is important for an organization to formalize an internal control
system for it is the way in which the management maximizes their
resources to reach their goals particularly with their financial
performance - profitability being one of its manifestation.
 As stated in Muya & Gathogo (2016), profitability is the ability to
make benefits arising from the organization's business operations. It
refers to money that an entity can yield from its resources. Accordingly, it
is the profit maximization that most companies are aiming for as stated in
Vinesh & Velnampy (2014). At some point, it is profitability that
captivates investors and the business is likely to survive for a long period
of time (Farah and Nina, 2016).
 In Accounting Theory, profitability refers to the surplus of profit over
expense for a given period of time. Since profitability provides a clear
interpretation of business performance, it is vital to the manager of the
firms and also with the owners and other stakeholders who are associated
or involved in the firm. Ratios on profitability such as Return on Assets
or ROA and others are used to measure the earning capacity of business
entities and is considered as an indicator of firm's growth and success
(Najed, et. al., 2012). A high ROA ratio is a great pointer of a good
performance or profitability of an entity (Bentum, 2012).
Operational Model

Independent Dependent
Variable Variable
Effectiveness
of Internal
Profitability
Control
System
 Synthesis of State of the Art
From the review of related literature and studies done, it has been found out that realization of

affirmative financial performance and profitability depends on whether firms implement internal

control system or ICS. Accounting Tools (2016), UHY Haines Norton Chartered Accountants

(2014), Emirates Chartered Accountants Group (2013), Patience (2013), Debora, et al. (2013),

Giriunas (2015), Beukes (2014), AICPA Employee Benefit Plan Audit Quality Center (2015),

Kamaruddin and Ramlu (2017), Jabnoun (2012), Marks (2012), Paraskevi (2016), and Ayagre, et. al.

(2014) discussed the definition of internal control system, its importance and effectiveness.

Accordingly, ICS is intended to safeguard assets, limit errors, and ensure that tasks are led in an

affirmed way, also ICS is a prerequisite for effective and efficient management. Moreover, ICS is

also considered as an essential element to operate in good practices and is vital for good financial

accounting.
 On the other hand, the existence of relationship between ICS and SMEs was
portrayed in the study of Beukes (2014), Ali, et al. (2012), Boateng, et al. (2014),
Nyakundi, et al. (2014), Monday (2015), Ayyasht (2017), Margaretha and Supartika
(2016), Ciobanu and Popa (2014), Olumola (2014), and Ali et al. (2015). It was
discovered that the five components of ICS together with information technology
affects not just the financial but also the operational performance of SMEs. It was
also found out that the effectiveness of ICS bolster productivity and development of
an organization by securing the general assets in which will subsequently turn away
instance of issues within the entity. By then, it can be concluded from the literature
that ICS and profitability of SMEs are related with each other.
 Gaps bridged by the present study
The researchers seek to reveal the effectiveness of internal control system to the
profitability of SMEs. The following are the gaps that were able to bridge:

1. There were no other studies yet conducted about the effectiveness of internal control to the
profitability of SMEs within Biñan City.

2. There were no other studies yet conducted about the effectiveness of internal control
system of SMEs within Biñan City.

3. There were no other studies yet concerning the relationship of internal control to the
profitability of SMEs within Biñan City.

In the view of the gaps identified, the researchers decided to determine the relationship
between Effectiveness of Internal Control System and Profitability of SMEs.
 Research method
The study sought to examine the effectiveness of internal control
system on SMEs’ profitability. The researchers will apply the
descriptive-correlation method of research that will try to prove the
significance of the relationship between the effectiveness of internal
control system and the profitability of the chosen respondents.
Correlational design looks for the variables that seem to interact with
each other, so when one of the variables moves, the others will follow.
 Population of the Study
Population entails all people or items with similar characteristics
that a researcher intends to study and draw statistical inferences or
conclusions. The population will be comprise of Small and Medium
enterprises (SMEs) operating within the area of Binan City. Based on
the record taken from the City Government Office of Binan the total
population of SMEs in the city as of 2018 is 68 and 30 out of the total
population will be used as the respondents of this survey.
Evaluation and Scoring 
To measure the respondents’ effectiveness of internal control system and
profitability, the following points will be used.

Assigned Numerical Categorical Verbal

4 3.51 ˗ 4.00 Strongly Agree (SA) Very High

3 2.51 ˗ 3.50 Agree (A) High

2 1.51 ˗ 2.50 Disagree (D) Low

Strongly Disagree
1 1.00 ˗ 1.50 Very Low
(SD)
 Data Gathering Procedure 
The researchers prepare letters for the management of SMEs to ask
permission on conducting the survey. Actual visit to the respondents’
location was made by the researchers to personally conduct the survey
to the management of the company. Then the researchers ensured the
100% retrieval of the answered questionnaires. Afterwards, the
gathered data were tallied and tabulated by the researchers subject to
statistical treatment.
 Statistical Treatment of Data
1. Weighted Mean will be used to determine the level of (a)
effectiveness of internal control system and (b) profitability of SMEs.

2. Pearson r will be used to determine if there is a significant