Auditing And Assurance Services Chapter Summary

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According to Louwers et al, the authors of the book “Auditing and Assurance Services, control environment is defined as the foundation for all other components of internal control on which an effective system of internal control is built and operated by an organization. It serves as a guide to all participants and stakeholders. Control environment includes three important factors; integrity, ethical values and competence of the entity’s people. There are several aspects of the control environment were apparently circumvented in the fraud at Buca. The managers failed to practice integrity and competency. They didn’t perform their works with honesty, responsibility and related to financial issue following the ethical standards as well as laws …show more content…
The ethical tone at the top is considered as the standard set by the organization’s management level whereby performance measures within which the employees of the organization operate their performance. Tone at the top is the one of the most effective standards of the organization’s internal control environment because it impacts strongly by the management team. That is, the board of directors and management at all levels of the organization, they have to practice through their instructions, actions, and behaviors that are crucial to their integrity and ethical standard to reinforce the operation of the organization’s internal control. Tone at the top is the system that set up by the management level, and it is the foundation for all other internal control components. It is very critical for auditors to attain the organization’s information of the internal control environment on all their engagements. Moreover, the right ethical tone at the top must involve several activities, such as establish a system of organizational integrity, set a specific set of a guideline of ethical behavior of employees, and draw a clear responsibility for each employee in the organization, segregation of duties. According to the Buca Case, the organization’s top management level did not establish the ethical tone at the top, so it was the major reason that increased chances for their employees to commit fraud on the organization’s financial statements. Moreover, the auditors had failed to understand the entity’s internal control environment, and they did not document their understanding of the internal control environment. Therefore, it is very important for each organization to have high management level to create their ethical tone at the top in order to control employees’ activities from committed frauds. Especially, auditor must also learn to understand clearly about organization 's’ internal control environment and their

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