Which of the following describes the environment in internal control?

Which of the following describes the environment in internal
control? A company must identify its risks. B. The environment is
the “tone at the top” of the business. C. The environment is
designed to ensure that the business earns profit. D. Internal
auditors monitor company controls to safeguard assets, and
external auditors monitor the controls to ensure that the
accounting records are accurate.

Answer

General guidance

Concepts and reason

Accounting: Accounting is a process of recording the transactions, classifying them in a specific manner, and then it is the process of summarizing, analysing, and interpreting the results. It is a process of preserving the accounts.

Auditing: Auditing is the practice of verification of the data and records that are prepared. It is intentionally done to check the reliability of the accounting records. Accuracy of the statements is also verified.

Fundamentals

Internal control is a process of controlling the risks of an organization. It is a method of eliminating the material errors in the preparation of financial statements by ascertaining the consistency of the accounting documents to safeguard the assets of the company. It is practiced by both private and public companies.

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Assets: Asset is the resource of a company to generate income. Asset is generally classified into fixed assets, current assets, tangible assets, and intangible assets. Fixed assets are the assets that are used to generate income over a long period. Current assets are the assets that are realized within the current financial year. Tangible assets are the assets that can be felt and touched. Intangible assets are the assets that cannot be felt or touched.

Step-by-step

Step 1 of 2

Justify incorrect answer:

A company should identify its risks. It does not describe the environment in internal control.

The environment is not designed to ensure that the business earns profit.

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Internal and external auditors monitor the controls of accounting records. It is not related to the environment.

The environment is in internal control. The given options are incorrect. They are as follows. When a company identifies its risks, it does not describe the environment in internal control. The process of earning profit is not related to the environment towards its internal control. The monitoring activity is also not towards it.

Step 2 of 2

Determine the description of the environment in internal control.

Tone at the top denotes the leadership that it is open, honest with integrity. The behaviour is ethical. The controlling environment has “Tone at the Top” as its component. It is the form of internal audit and internal control. Thus, the environment is linked.

The environment is the “tone at the top” of the business.

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The environment is in internal control. Internal control indicates the whole system of control. The term “Tone at the top” indicates that the integrity in work towards the environment. It describes that the environment in internal control.