Control environment refers to overall attitude, awareness and actions of governance and management regarding the internal control system and its importance in the entity. The control environment has an effect on the effectiveness of the specific control procedures. 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, itself, ensure the effectiveness of the internal control system.
Factors reflected in the control environment include:
The function of the board of directors and its committees.
Management‟s philosophy and operating style.
The entity‟s organizational structure and methods of assigning authority and responsibility.
Management‟s control system including the internal audit function, personnel policies and procedures and segregation of duties.