As a general rule, the cost of internal control should not exceed the

As a general rule, the cost of internal control should not exceed the

• A. Expected benefit
• B. Actual cost
• C. Budgeted amount
• D. Financial return on investment

Answer: (A)

Internal control decisions should be guided by a cost-benefit approach: you weigh what the control costs against the benefits it is expected to provide in reducing risk, preventing errors, and improving compliance and efficiency. The best answer reflects that idea—the cost of implementing a control should not exceed the benefits you expect to gain from it. If the anticipated benefits (tangible savings from prevented losses, improved accuracy, deterrence of fraud, etc.) are greater than the cost, the control is worthwhile; if the cost would exceed those expected benefits, it isn’t cost-effective to put in place. Why not the other choices: considering actual costs after the fact isn’t as helpful for deciding whether to implement a control in the first place; budgeting is about planning amounts rather than evaluating ongoing value; and while financial return on investment is related, the general rule used in internal controls focuses on expected benefits to determine cost-effectiveness rather than a post-implementation ROI calculation.

Internal control decisions should be guided by a cost-benefit approach: you weigh what the control costs against the benefits it is expected to provide in reducing risk, preventing errors, and improving compliance and efficiency. The best answer reflects that idea—the cost of implementing a control should not exceed the benefits you expect to gain from it. If the anticipated benefits (tangible savings from prevented losses, improved accuracy, deterrence of fraud, etc.) are greater than the cost, the control is worthwhile; if the cost would exceed those expected benefits, it isn’t cost-effective to put in place.

Why not the other choices: considering actual costs after the fact isn’t as helpful for deciding whether to implement a control in the first place; budgeting is about planning amounts rather than evaluating ongoing value; and while financial return on investment is related, the general rule used in internal controls focuses on expected benefits to determine cost-effectiveness rather than a post-implementation ROI calculation.