CHAPTER 1

THE PROBLEM AND ITS BACKGROUND

Introduction
Internal control is affected by people. Its not merely
policy manuals and forms, but people functioning at every level
of the institution. During the normal course of our lives we
implement internal control to be able for us to achieve our
objective. We all use internal controls to some extent in our
daily lives. Internal controls can be complex, but in their
simplest form are anything we do to help us achieve our goals and
objectives. For example, locking the door of our house before we
leave for work or school, the objective is to prevent unwanted
entry into our homes, thus, safeguarding our household contents.
Another example is keeping your mobile phone or personal computer
by

setting

password

to

prevent

unwanted

access

to

your

important files.
One of the most widely accepted concepts in the theory and
practice of auditing is the importance of the clients system of
internal control to generate reliable financial information. If
the auditor is convinced that the client has an excellent system
of internal control, one that includes adequate internal controls
for

providing

reliable

data

and

for

safeguarding

assets

and

records, the amount of audit evidence to be accumulated can be

significantly less than when controls are not adequate. In some
instances, internal control may be so inadequate as to preclude
conducting an effective audit. (Ma. Elenita Cabrera, Principles
of Auditing and other Assurance Services,2004, Volume 1, GIC
Enterprises

&

Co.,Inc.,

2019

C.M.

Recto

Avenue,

Manila

Philippines, p. 548)
The purposes of the study of the internal control system are
to obtain (1) knowledge and understanding of the procedures and
methods prescribed and (2) a reasonable degree of assurance that
these procedures and methods are in use and operating as planned.
These purposes can be accomplished by performing a two- phase
study of the system referred to as (1) a review of the system and
(2)

test

of

compliance.

After

obtaining

knowledge

and

understanding of how the internal control system is supposed to

function in the review phase, in the test of compliance phase the
auditor determines how the system is actually functioning.(Donald
A.

Watne

and

Peter

B.

Turney,

Auditing

EDP

Systems,

1984,

Prentice- Hall, Inc., Englewood Cliffs, New Jersey 07632, p.97)

According to Cook and Wincle (1976), the Internal Control
System

resembles

the

human

nervous

system

which

is

spread

throughout the business carrying orders and reactions to and from

the

management.

It

is

directly

linked

to

the

organizational

structure and the general rules of the business. (Cai, 1997)

It plays an integral role in a companys success. Some of
them

install

security

or

surveillance

systems

to

act

as

detective control to identify the perpetrator, thus safeguarding

of assets. Internal controls consists of all the measures taken
by the organization for the purpose of protecting its resources
against

waste,

fraud

and

inefficiency,

ensuring

accuracy

and

reliability of accounting and operating data, ensuring compliance

with relevant laws and regulations and with the policies of the
organization

and

evaluating

the

level

of

performance

in

all

organizational units of the organization.

The

term

was

adopted

by

the

Anglo-Saxons

(Internal

Auditing) and refers to the unit of Internal Control which aims

at the evaluation of the sufficient functioning of the Internal
Control System, that is the secondary functions (Controls) and
suggests that there is room for improvements in cases where
weaknesses

are

being

discovered

(Financial

Postman

magazine,

2004).
A

system

of

internal

control

embraces

not

only

the

accounting and financial aspects, but includes the entire method

of related procedures developed according to an integrated plan

of performing activities. It will not only produce adequate and

reliable

financial

reports

but

it

is

also

makes

management

discharged its duty of directing its activities intelligently.

Measuring

actual

performance

and

determining

and

applying

appropriate corrective actions to problems arising inside the

organization.
Also,

internal

controls

are

classified

as

either

administrative or accounting. Administrative controls include the

design of the organization, strategies, corporate values, work
ethics, and policies on human resources and all other policies
not directly related to accounting systems. Accounting controls
include

those

records,

systems,

and

reports

that

relate

to

processing of transactions and are basically concerned with the

safeguarding of assets and maintaining a system that produces
reliable and accurate accounting information. (Agamata, Franklin
T., Management Advisory Services- A Comprehensive Guide, Manila:
GIC Enterprises & Co. inc., 2009, p.29.)
It

has

recently

become

more

important

because

of

the

emphasis place by shareholders on corporate governance and the

demands this places on boards of directors and executives to
implement and demonstrate control over operations. This control
objective relates to the reliability of financial reporting which
is

provided

by

the

organizations

accounting

systems

and

recording functions. (Racaza and Evangelista, Auditing Theory for

students & Practice Guide for auditors, 4th edition, 2011, pp.
207-208)
Internal control plays an important role in how management
meets its stewardship or agency responsibilities. Management has
the responsibility to maintain controls that provide reasonable
assurance that adequate control exists over the entitys assets
and records. Proper internal control not only ensures that assets
and records are safeguarded, but also creates an environment in
which efficiency and effectiveness are encouraged and monitored.
Management also needs a control system that generates reliable
information for decision making. If the information system does
not generate reliable information, management may be unable to
make informed decisions about issues such as product pricing,
cost of production and profit information.
The schools Division of Cauayan City have a total of 12
private secondary schools.
Into this matter the researcher come up with this idea of
conducting the study about the internal control system among the
eight

out

of

twelve

private

high

schools

in

Cauayan

City,

Isabela. These schools are Our Lady of the Pillar College-HS,

University

of

Perpetual

Help

System,

Saint

Xavier

Montessori

School, Merry Sunshine Montessori School, Isabela Colleges Inc.,

Children of Lourdes Academy, Metropolitan Bible Baptist Learning

Center, and Saint Claire College of Region II.
In the light of the foregoing ideas it is very important to
study the internal control system of the private schools to
identify the internal control practices, explore managements
understanding and the definition of internal control to assess
the internal control of schools.
Therefore this study was conducted to assess the Internal
Control System of the selected private high schools in Cauayan
City, Isabela.