The auditor of EFG Ltd., a company engaged in the Tours & Travel business, needs to obtain an understanding of the company's control…

(a) The auditor shall obtain an understanding of the control environment. As part of obtaining this understanding, the auditor shall evaluate whether: (i) Management has created and maintained a culture of honesty and ethical behaviour and (ii) The strengths in the control environment elements collectively provide an appropriate foundation for the other components of internal control. The control environment includes: (i) the governance and management functions and (ii) the attitudes, awareness, and actions of those charged with governance and management. (iii) the control environment sets the tone of an organization, influencing the control consciousness of its people. Elements of the Control Environment Elements of the control environment that may be relevant when obtaining an understanding of the control environment include the following: (a) Communication and enforcement of integrity and ethical values The effectiveness of controls cannot rise above the integrity and ethical values of the people who create, administer, and monitor them. Integrity and ethical behaviour are the product of the entity's ethical and behavioural standards, how they are communicated, and how they are reinforced in practice. The enforcement of integrity and ethical values includes, for example, management actions to eliminate or mitigate incentives or temptations that might prompt personnel to engage in dishonest, illegal, or unethical acts. The communication of entity policies on integrity and ethical values may include the communication of behavioural standards to personnel through policy statements and codes of conduct and by example. (b) Commitment to competence: Matters such as management's consideration of the competence levels for particular jobs and how those levels translate into requisite skills and knowledge. (c) Participation by those charged with governance: It includes attributes of those charged with governance such as their independence from management, their experience and stature, the extent of their involvement and the information they receive and the scrutiny of activities. (d) Management's philosophy and operating style: Management's philosophy and operating style encompass a broad range of characteristics. For example, management's attitudes and actions towards financial reporting- what approach is taken by management in selecting accounting policies, approach in developing accounting estimates etc. Matters such as approach of management to taking and managing business risks, management's attitude towards information processing and accounting function and personnel reflects upon management's philosophy and operating style. (e) Organisational structure: The framework within which an entity's activities for achieving its objectives are planned, executed, controlled, and reviewed. Establishing a relevant organisational structure includes considering key areas of authority and responsibility and appropriate lines of reporting. The appropriateness of an entity's organisational structure depends, in part, on its size and the nature of its activities. (f) Assignment of authority and responsibility: Matters such as how authority and responsibility for operating activities are assigned and how reporting relationships and authorisation hierarchies are established. (g) Human resource policies and practices Policies and practices that relate to, for example, recruitment, orientation, training, evaluation, counselling, promotion, compensation, and remedial actions. Human resource policies and practices often demonstrate important matters in relation to the control consciousness of an entity.