In auditing control environment or internal control environment is one of the components of internal control system. Unlike other components, this is rather a resultant of many different factors or activities taking place inside the entity.
We know Internal control environment in our daily life as office environment, the term we use to mean how things there. Just as particular office can have strict environment and does not tolerate disobedience, laziness, dishonesty, fraud this basically results in strict control environment as it helps keep things under control.
Entity’s control environment is mostly dictated by management’s own practices. If management follows stated rules and encourage following the rules by giving incentives and implementing punishments time to time then it will keep employees under check as they know that if they will do something wrong, they will be accounted for. This very realisation is a result of control environment that entity has and what management has garnered over a period of time.
Control environment is considered the most important component of internal control system, as it not only supplements the other components effectively but also keep the wrong things from happening even if there are deficiencies in other components of internal control system.
For example, management is not formally checking the sales invoices every period. Because of this relaxation, someone might think of committing a fraud by raising fake invoices. But if there is a strong punishment in place which is always enforced if someone gets caught, there just a fear of getting caught will keep the clerk from committing fraud.
As said earlier, control environment or controlled environment is a result of many different factors including:
- attitude, management style and philosophy, awareness, knowledge, competence, behaviour and decisions of management
- participation and influence of those charged with governance
- independence, authority, leisure and kind of support employees enjoy
- how strongly management pursues to be better at everything
- several other factors that affect the way management and employees interact