Question

Kermit Ltd’s accounts payable process involves paying creditors on the 28^th of every month. Checks are generated from creditors’ invoices but sometimes this process is subject to data errors. When these data errors occur, the entire month’s accounts payable checks are destroyed and then re-processed at a cost of $8,500. A new data validation step matching creditors’ invoices to purchase orders to the automated check preparation process is expected to reduce the likelihood of data errors happening from 6% to 2% at a cost of $500 per creditor pay period (i.e. once a month).

1. In terms of the risk model please identify the event or threat that is confronting Kermit Ltd?

2. What is the likelihood or probability that the threat you identified in the previous question will occur?

3. . What is the estimated impact or potential loss from the threat you identified in question 1?

4. Identify the potential control that can be used to guard against the threat that you identified in question 1 .

5. Please calculate the cost or benefit from putting in place the potential control you identified in question 4. You must show your workings or you will be given a 0 for this question.

6. Is it cost-beneficial to implement the control you identified in question 4 and calculated in question 5 ? Justify your answer.

Answer 1

Ans:

a.

The event or threat that is confronting Kermit Ltd is failure of check generation because of Data errors. In case of data errors occur, the entire month’s accounts payable checks are destroyed and have to be reprocessed.

b.

Probabilty of occuring threat identified in point 1 is 6%. i.e on an average 6 out of 100 times this error occurs.

c.

Estimated impact or potential loss from identified threat is $8,500*6% = $510 (every month on an average).

d.

A new data validation step matching creditors’ invoices to purchase orders to the automated check preparation process is expected to reduce the likelihood of data errors happening from 6% to 2%.

e.

Cost of putting in place of new system : $500 per month.

Probability of error will reduce to 2%.

Saving in loss from data errors: $8,500 (6%-2%) = $340 per month.

Therefore overall cost increase by $500-$340 = $160.

f.

No it will on an average increase the monthly cost by $160 by placing in the new matching system.