ENVIRONMENT OF INTERNAL CONTROL

The environment in which internal control operates has an impact on the effectiveness of the specific
control procedures. The control environment means the overall attitude awareness and actions of
directors and managements regarding the internal control system and its importance in the entity. A
strong control environment, for example, one with tight budgetary controls and an effective internal audit
function, can significantly complement specific control procedures. However, a strong environment does
not, by itself, ensure the effectiveness of the overall system of internal control. The internal control
environment may be affected by :
(a) Organisational structure : The organisational structure of an entity serves as a framework as
practicable, to preclude an individual from overriding the control system and should provide for the
segregation of incompatible functions. Functions are incompatible if their combination may permit
the commitment and concealment of fraud or error. Functions that typically are segregated are
access to assets, authorisation, execution of transactions, and record keeping.
(b) Management supervision : Management is responsible for devising and maintaining the system of
internal control. In carrying out its supervisory responsibility, management should review theadequacy of internal control on a regular basis to ensure that all significant controls are operating
effectively. When an entity has an internal audit department, management may delegate to it
some of its supervisory functions, especially with respect to the review of internal control. This
particular internal audit function constitutes a separate component of internal control undertaken
by specially assigned staff within the entity with the objective of determining whether other internal
controls are well designed and properly operated.
(c) Personnel : The proper functioning of any system depends on the competence and honesty of
those operating it. The qualifications, selection and training as well as the personal characteristics
of the personnel involved are important features in establishing and maintaining a system of
internal control.
ENVIRONMENT OF INTERNAL CONTROL