• Why Should Management Consider the Cost of Internal Controls in Relation to Benefits?

The cost-benefit principle states that the cost of implementing and maintaining internal controls

should not exceed the benefits derived from those controls. Effective internal controls help mitigate

risks, improve efficiency, and ensure compliance, but their implementation comes with costs (e.g.,

time, resources, systems).

Management must evaluate whether the benefits of preventing or detecting potential issues (e.g.,

fraud, errors) justify the associated costs.

• Why Other Options Are Incorrect:

A . The available budget: While the budget is important, internal controls are not solely dictated by

budget constraints; their effectiveness and benefit-to-cost ratio are key considerations.

B . Inherent risks: While inherent risks are a factor in determining control needs, the relationship

between cost and benefit remains the primary consideration.

D . Risk of collusion: Controls address collusion risks, but management does not prioritize collusion

specifically when assessing cost versus benefit.

• Reference and Documents:

COSO Internal Control Framework: Highlights the cost-benefit principle when implementing controls.

GAO Standards for Internal Control (Green Book): Emphasizes balancing costs with benefits when

designing internal control systems.