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3) Control environment is the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the entity. Four of the subcomponents the auditor must consider are: integrity and ethical values (the product of the entity’s ethical and behavioral standards and how they are communicated and reinforced in practice), commitment to competence (management’s consideration of the competence levels for specific jobs and how those levels translate into requisite skills and knowledge), organizational structure (the existing lines of responsibility and authority), and management’s philosophy and operating style (management provides clear signals to employees about the importance of internal control).
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