4915-6-4RQ

AID: 1825 | 14/06/2013

Factors affecting control environment

The control environment refers to the manner in which the organization should manage
its internal control system.
The factors that affect the control environment are mentioned below:
Communication and enforcement of integrity and ethical values
The entitys internal control must be created, administered and monitored with
integrity and code of ethics. The entity must communicate the ethical standards to
the employees, and encourage them to work with honesty and integrity. For
instance, the entity must not force the employees to achieve impractical goals and
also keep harsh penalties for failure in achievement.
A commitment to competence
Competence is the knowledge and skills required to achieve the desired goals
within a definite period of time. The management of the entity must set a standard
for completing a particular task; and thus delegate a proper description of the
work to the employees who possess the potentiality to meet the standard of that
particular task. In other words, the entity must recruit the right person for the right
kind of work.
Participation of those charged with governance
The board of directors and the audit committee must create awareness of internal
control within the entity. It is the responsibility of the board of directors and the
audit committee to examine the policies and procedures, internal control
activities, solving of difficult questions raised by the management, and interaction
with the internal and external auditors.
Managements philosophy and operating style
It refers to the manner in which the manager manages the internal control
activities. An effective manner of internal control management enhances a better
quality of internal control. The management must have an appropriate approach
and attitude towards its employees, presentation of financial reports, risks
involved in business activities, accounting, and management information system.
Organizational structure
The organizational structure represents the delegation of authority and
responsibility within the organization. It sets the boundaries within which the
activities are planned, administered, executed and implemented. The
organizational structure considers the volume and nature of activities, and the
internal and external factors affecting it.
Assignment of authority and responsibility
This factor shows in what manner the authority and responsibility are distributed
among the employees of the organization. The authority and responsibility are
assigned through certain policies and procedures which ensure that the work is
delegated as per the competence and potentials of the employees, proper
communication is made regarding the nature of work to be performed,
accountability, entitys objectives, job standards, and contribution towards the
achievement of goals.
Human resources policies and procedures
The entity should have appropriate policies and procedures for appointing
qualitative personnel. It would prevent the entity to face personnel related issues
in future. The entity should hire knowledgeable and skilled personnel that are
capable of performing effective work.