Question

1.24

Note this is a computational question. Note there are two parts in the question. Clearly type out your answers to each subpart of the question. Show your steps.

Hong Kong Telecom asked you to assess its internal control system. After careful review, you believed that Hong Kong Telecom has serious flaws in their internal control system. You estimated that the impact associated with this problem is $20 million and that the likelihood is currently 9%. Three procedures can be used to deal with this problem. Procedure A would cost $550,000 and reduce the likelihood to 5%; procedure B would cost $850,000 and reduce the likelihood to 3%. If both procedures were implemented, likelihood would be reduced to 1%.

a. What is the estimated expected loss associated with ABC Corporation’s internal control problem before any new internal control procedures are implemented? ( 5 points)

b. Compute the revised estimate of expected loss if procedure A were implemented and if both procedures were implemented.

Answer 1

a) Impact associated amount = $ 20m

Expected loss before new internal control procedure   = 9% of $20m = $ 20m*9% = $ 1.8 million.

b) revised estimate of expected loss if procedure A were implemented

Procedure A reduce the loss to 5%. Loss = = 20 m*5% = $ 1 million.

And additional expense regarding this = $ 550000.

Total loss = 1000000 + 550000 = $ 1550000

Revised estimate of expected loss if both the procedures implemented

  If both procedures were implemented, likelihood would be reduced to 1%.  

Loss = $ 20m * 1% = $ 200000

And additional expense regarding this = $ 550000.+$850000 = $ 1.4 million

Total Loss = $ 200000 + $ 1400000 = $ 1600000 = $ 1.6 million