A. Control Environment
The control environment is the organizational structure and culture created by management and employees to sustain organizational support for effective internal controls. When designing, evaluating, or modifying the organizational structure, management must clearly demonstrate their commitment to competence in the workplace. Within the organizational structure, management must clearly:
- Define areas of authority and responsibility.
- Appropriately delegate authority and responsibility throughout the organization.
- Establish a suitable hierarchy for reporting.
- Support appropriate human capital policies for hiring, training, evaluating, counseling, advancing, compensating, and disciplining personnel.
- Uphold the need for personnel to possess and maintain the proper knowledge and skills to perform their assigned duties.
The organizational culture is also crucial within this standard. The culture should be defined by management’s leadership in setting values of integrity and ethical behavior, but is also affected by the relationship between the organization and the Board of Regents. Management’s philosophy and operational style will set the tone within the organization. Management’s commitment to establishing and maintaining effective internal controls should cascade down and permeate the organization’s control environment which will aid in the successful implementation of internal control systems.
- Understand the importance of maintaining effective internal control within the organization.
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