Certified Government Auditing Professional (CGAP) Practice Exam

In an early stage audit, which component of internal control is being assessed when reviewing top management's statements and the client's Code of Ethics?

1. Risk assessment

2. Monitoring

3. Control Activities

4. Control Environment

The correct answer is: Control Environment

When reviewing top management's statements and the client's Code of Ethics in an early stage audit, the component of internal control being assessed is the Control Environment. The Control Environment serves as the foundation for all other components of internal control. It sets the tone of the organization, influencing how control activities are structured and the overall culture regarding ethics and compliance. Top management's statements reflect their commitment to ethical conduct, governance, and the integrity of the organization, while the Code of Ethics demonstrates the standards expected for behavior within the organization. Both elements highlight the importance placed on ethical behavior and integrity at the leadership level, which is a critical aspect of the Control Environment. A strong Control Environment fosters a culture of accountability and encourages adherence to laws and regulations, ultimately supporting the overall effectiveness of internal controls. In contrast, the other components—such as Risk Assessment, Monitoring, and Control Activities—focus more on identifying risks, ongoing assessments of the control systems, and specific policies or procedures in place to mitigate those risks. However, they are built upon the foundational principles established through the Control Environment, making it vital to assess these leadership and ethical components in the early stages of an audit.