Control Environment

The control environment includes the governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity’s internal control and its importance in the entity. The control environment sets the tone of an organization, influencing the control consciousness of its people.

The control environment encompasses the following elements:

(i) Communication and Enforcement of Integrity and Ethical Values:

The effectiveness of controls cannot rise above the integrity and ethical values of the people who create, administer, and monitor them. Integrity and ethical behavior is the product of the entity’s ethical and behavioral standards, how they are communicated, and how they are reinforced in practice. The enforcement of integrity and ethical values includes, for example,
1- Management actions to eliminate or mitigate incentives or temptations that might prompt personnel to engage in dishonest, illegal, or unethical acts.
2- The communication of entity policies on integrity and ethical values may include the communication of behavioral standards to personnel through policy statements and codes of conduct and by example.

(ii) Commitment to Competence:

Competence is the knowledge and skills necessary to accomplish tasks that define the individual’s job. Matters such as management’s consideration of the competence levels for particular jobs and how those levels translate intro requisite skills and knowledge.

(iii) Participation by Those Charged with Governance:

An entity’s control consciousness is influenced significantly by those charged with governance. The importance of the responsibilities of those charged with governance is recognized in codes of practice and other laws and regulations or guidance produced for the benefit of those charged with governance. Other responsibilities of those charged with
governance include oversight of the design and effective operation of whistle-blower procedures and the process for reviewing the effectiveness of the entity’s internal control.

(iv) Management’s Philosophy and Operating Style:

Management’s philosophy and operating style encompass a broad range of characteristics. For example, Management’s attitudes and actions toward financial reporting may manifest themselves through conservative or aggressive selection from available alternative accounting principles, or conscientiousness and conservatism with which accounting estimates are developed.

(v) Organizational Structure:

The frame-work, within which an entity’s activities for achieving its objectives are planned, executed, controlled, and reviewed. Establishing a relevant organizational structure includes considering key areas of authority and responsibility and appropriate lines of reporting. The appropriateness of an entity’s organizational structure depends, in part, on its size and the nature of its activities.

(vi) Assignment of Authority and Responsibility:

Matters such as how authority and responsibility for operating activities are assigned and how reporting relationships and authorization hierarchies are established. The assignment of authority and responsibility may include
1- Policies relating to appropriate business practices, knowledge and experience of key personnel, and resources provided for carrying out duties.
2- Policies and communications directed at ensuring that all personnel understand the entity’s objectives, know how their individual actions interrelate and contribute to those objectives, and recognize how and for what they will be held accountable.

(vii)Human Resource Policies and Practices:

Human resource policies and practices often demonstrate important matters in relation to the control consciousness of an entity. For example,
1- Standards for recruiting the most qualified individuals – with emphasis on educational background, prior work experience, past accomplishments, and evidence of integrity and ethical behavior – demonstrate an entity’s commitment to competent and trustworthy people.
2- Training policies that communicate prospective roles and responsibilities and include practices such as training schools and seminars illustrate expected levels of performance and behavior.
3- Promotions driven by periodic performance appraisals demonstrate the entity’s commitment to the advancement of qualified personnel to higher levels of responsibility.