A. The audit committee is active in overseeing the entity’s financial reporting policies.
Answer A is incorrect. An active audit committee tends to temper management's aggressive stance.
B. External policies established by parties outside the entity affect its accounting practices.
Answer B is incorrect. External policies tend to moderate such management tendencies.
C. Management is dominated by one individual who is also a shareholder.
Answer C is correct because these noted factors tend to have an especially significant influence on the control environment when management is dominated by one or a few individuals. Such a circumstance allows management to effectively implement aggressive financial reporting and emphasize meeting profit goals.
D. Internal auditors have direct access to the board of directors and entity management.
Answer D is incorrect. Internal auditors tend to mitigate management's aggressive attitude.
Control environment. The control environment factors set the tone of an organization, influencing the control consciousness of its people. The seven control environment factors, which you may remember using the mnemonic IC HAMBO, are
I | - | Integrity and ethical values |
C | - | Commitment to competence |
H | - | Human resource policies and practices |
A | - | Assignment of authority and responsibility |
M | - | Management’s philosophy and operating style |
B | - | Board of directors or audit committee participation |
O | - | Organizational structure |
What situation would exacerbate the status of the control environment?
Answer C is correct because these noted factors tend to have an especially significant influence on the control environment when management is dominated by one or a few... [continues]
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