Document ID: chunk:federal_register_of_legislation:F2023C01130:body:0:p37
Version: federal_register_of_legislation:F2023C01130
Segment Type: other
Provision Reference: 
Character Range: 110229–113381

emphasises the importance of integrity and ethical behaviour through oral communication and by management example.  Consequently, the attitudes, awareness and actions of management or the owner-manager are of particular importance to the auditor's understanding of a less complex entity's control environment.

Understanding the control environment (Ref: Para. 21(a))

A101.      Audit evidence for the auditor's understanding of the control environment may be obtained through a combination of enquiries and other risk assessment procedures (i.e., corroborating enquiries through observation or inspection of documents).

A102.      In considering the extent to which management demonstrates a commitment to integrity and ethical values, the auditor may obtain an understanding through enquiries of management and employees, and through considering information from external sources, about:

           * How management communicates to employees its views on business practices and ethical behaviour; and

           * Inspecting management's written code of conduct and observing whether management acts in a manner that supports that code.

Evaluating the control environment (Ref: Para. 21(b))

Why the auditor evaluates the control environment

A103.      The auditor's evaluation of how the entity demonstrates behaviour consistent with the entity's commitment to integrity and ethical values; whether the control environment provides an appropriate foundation for the other components of the entity's system of internal control; and whether any identified control deficiencies undermine the other components of the system of internal control, assists the auditor in identifying potential issues in the other components of the system of internal control.  This is because the control environment is foundational to the other components of the entity's system of internal control.  This evaluation may also assist the auditor in understanding risks faced by the entity and therefore in identifying and assessing the risks of material misstatement at the financial report and assertion levels (see paragraph A86).

The auditor's evaluation of the control environment

A104.      The auditor's evaluation of the control environment is based on the understanding obtained in accordance with paragraph 21(a).

A105.      Some entities may be dominated by a single individual who may exercise a great deal of discretion.  The actions and attitudes of that individual may have a pervasive effect on the culture of the entity, which in turn may have a pervasive effect on the control environment.  Such an effect may be positive or negative.
Example:

Direct involvement by a single individual may be key to enabling the entity to meet its growth and other objectives, and can also contribute significantly to an effective system of internal control.  On the other hand, such concentration of knowledge and authority can also lead to an increased susceptibility to misstatement through management override of controls.

A106.      The auditor may consider how the different elements of the control environment may be influenced by the philosophy and