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ACCA Strategic Professional · Strategic Business Leader · Internal control and management reporting

Brightwell Energy's board reviews risk annually and concludes that, for a major new project, the cost of adding a further control would exceed the expected loss it prevents. Which internal control principle does this reflect?

The principle is that controls should be cost-effective. A control is justified only when the risk reduction it delivers exceeds its cost, so the board rightly declines a control costing more than the loss it prevents. Internal control gives reasonable, not absolute, assurance.

  1. AControls should be cost-effective, so benefits should exceed costsCorrect
  2. BControls must eliminate all risk before any project proceeds
  3. CControls should be designed only by external auditors
  4. DControls are only needed for financial reporting risks

Explanation

Internal control design should be proportionate: a control is worthwhile only if its benefit in reducing risk exceeds its cost. Eliminating all risk is impossible and uneconomic. Controls also cover operational and compliance objectives, not just financial reporting.

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