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ACCA Strategic Professional · Strategic Business Leader · Management and internal control systems

Marlow Foods is considering whether to add a further preventive control over inventory write-offs. The cost of the control is estimated to exceed the expected loss it would prevent. Which principle of internal control design does this decision best illustrate?

Controls should be cost-effective. When a control costs more than the expected loss it would prevent, it is not justified, so management may accept the residual risk. Internal control gives reasonable, not absolute, assurance, and its design is management's responsibility rather than the external auditor's.

  1. AControls should be cost-effective, with benefits exceeding costsCorrect
  2. BControls must eliminate all risk of loss
  3. CControls should be designed only by external auditors
  4. DControls are needed only where fraud has already occurred

Explanation

A well-designed system weighs the cost of a control against the risk reduction it delivers. If cost exceeds expected loss prevented, the control is not justified. No system can eliminate all risk, and design is a management responsibility, not triggered only by past fraud.

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