Question

An effective control environment suggests that _______.

1) internal control risk should be assessed at the maximum
2) management and those charged with the audit demonstrate a commitment to ethical values and strong internal control
3) management and those charged with governance demonstrate a commitment to ethical values and strong internal control
4) the system of internal control is ineffective

Answer 1

An effective control environment requires a commitment to ethical values and strong internal controls from management and governance, promoting integrity and risk management while enabling the reporting of mismanagement.

Step-by-step explanation:

An effective control environment suggests that management and those charged with governance demonstrate a commitment to ethical values and strong internal control. This foundational aspect of an internal control system ensures that an organization operates with integrity and is able to respond to a range of risks.

Such an environment also helps to ensure that there is rigorous oversight and that staff feel empowered to report mismanagement or unethical behavior, despite internal resistance to criticism. Command-and-control regulations can lead to inefficiencies as firms with different production technologies face varying abatement costs. However, a robust internal control framework provides incentives for continuous improvement beyond mere compliance with standards.