Page 64 - CA Inter Audit PARAM

CA Ravi Taori
Advise what is included in control environment. Also explain the elements of control environment."
OR
Z Ltd. is a manufacturer of ready-made garments. During the year 2021-22, they have opened two new
branches and there is a substantial increase in their sales. The management has appointed CA R to review
the internal control system of the company as they feel that there are lapses in the control environment
of the company. What is included in the control environment and what will the auditor evaluate in order
obtain an understanding of the control environment?
Answer ➢ Control Environment:
Component of Internal Control: The auditor shall obtain an understanding of the control
environment. As part of obtaining this understanding, the auditor shall evaluate whether:
• Management has created and maintained a culture of honesty and ethical
behavior; and
• The strengths in the control environment elements collectively provide an
appropriate foundation for the other components of internal control.

➢ What is included in Control Environment?
The control environment includes:
the governance and management functions and
the attitudes, awareness, and actions of those charged with governance and management.

The control environment sets the tone of an organization, influencing the control
consciousness of its people.
➢ Elements of the control environment that may be relevant when obtaining an understanding
of the control environment include the following:
TCWG Related
• Participation by those charged with governance – Attributes of those charged
with governance such as:
o Their independence from management.
o Their experience and stature (Reputation).
o The extent of their involvement and the information they receive,
and the scrutiny of activities.
o The appropriateness of their actions, including the degree to
which difficult questions are raised and pursued with
management, and their interaction with internal and external
auditors.
Management Related
Management’s philosophy and operating style – Characteristics such as management’s:
• Approach to taking and managing business risks.
• Attitudes toward information processing and accounting functions and
personnel.
• Attitudes and actions toward financial reporting.

Human Resource
Human resource policies and practices – Policies and practices that relate to, for example,
recruitment, orientation, training, evaluation, counselling, promotion, compensation, and
remedial actions.

Competence:
Commitment to competence – Matters such as management’s consideration of the
competence levels for particular jobs and how those levels translate into requisite skills and
knowledge.

Organisational structure
Organisational structure – The framework within which an entity’s activities for achieving
its objectives are planned, executed, controlled, and reviewed.

Authority and Responsibility:

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