7.5 During a recent review, ABC Corporation discovered that it has a serious internal control problem. It is estimated that the impact associated with this problem is $1 million and that the likelihood is currently 5%. Two internal control procedures have been proposed to deal with this problem. Procedure A would cost $25,000 and reduce likelihood to 2%; procedure B would cost $30,000 and reduce likelihood to 1%. If both procedures were implemented, likelihood would be reduced to 0.1%. a. What is the estimated expected loss associated with ABC Corporation's internal control problem before any new internal control procedures are implemented? Expected Loss = Risk * Exposure = 0.05 * $1,000,000 = $50,000 b. Compute the revised estimate of expected loss if procedure A were implemented, if procedure B were implemented, and if both procedures were implemented. Control Revised Reduction in Cost of Net Procedure Risk Exposure Expected Expected Control(s) Benefit Loss Loss (Cost) A 0.02 $1,000,000 $20,000 $30,000 $25,000 $ 5,000 B 0.01 $1,000,000 $10,000 $40,000 $30,000 $10,000 Both 0.001 $1,000,000 $ 1,000 $49,000 $55,000 $(6,000)