Document ID: chunk:federal_register_of_legislation:F2023C01130:body:0:p79
Version: federal_register_of_legislation:F2023C01130
Segment Type: other
Provision Reference: 
Character Range: 235615–238911

a financial report audit.

3.                   Included within the entity's system of internal control are aspects that relate to the entity's reporting objectives, including its financial reporting objectives, but it may also include aspects that relate to its operations or compliance objectives, when such aspects are relevant to financial reporting.
Example:

Controls over compliance with laws and regulations may be relevant to financial reporting when such controls are relevant to the entity's preparation of disclosures of contingencies in the financial report.

Components of the Entity's System of Internal Control

Control Environment

4.                   The control environment includes the governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity's system of internal control, and its importance in the entity.  The control environment sets the tone of an organisation, influencing the control consciousness of its people, and provides the overall foundation for the operation of the other components of the entity's system of internal control.

5.                   An entity's control consciousness is influenced by those charged with governance, because one of their roles is to counterbalance pressures on management in relation to financial reporting that may arise from market demands or remuneration schemes.  The effectiveness of the design of the control environment in relation to participation by those charged with governance is therefore influenced by such matters as:

           * Their independence from management and their ability to evaluate the actions of management.

           * Whether they understand the entity's business transactions.

           * The extent to which they evaluate whether the financial report is prepared in accordance with the applicable financial reporting framework, including whether the financial report include adequate disclosures.

6.                   The control environment encompasses the following elements:

(a)                How management's responsibilities are carried out, such as creating and maintaining the entity's culture and demonstrating management's commitment to integrity and ethical values.  The effectiveness of controls cannot rise above the integrity and ethical values of the people who create, administer, and monitor them.  Integrity and ethical behaviour are the product of the entity's ethical and behavioural standards or codes of conduct, how they are communicated (e.g., through policy statements), and how they are reinforced in practice (e.g., through management actions to eliminate or mitigate incentives or temptations that might prompt personnel to engage in dishonest, illegal, or unethical acts).  The communication of entity policies on integrity and ethical values may include the communication of behavioural standards to personnel through policy statements and codes of conduct and by example.

(b)                When those charged with governance are separate from management, how those charged with governance demonstrate independence from management and exercise oversight of the entity's system of internal control.  An entity's control consciousness is influenced by those charged