This paper discusses the problem of the residual compensation effect. The residual compensation effect referred to as the fault compensation effect, is an underrated issue of a model-based diagnostics. In part, this is justified due to the relatively low probability of such an effect. However, there is a belief that the inability to isolate faults in case of the residual compensation effect is ... [Show full abstract] the evident drawback of the model-based diagnostics. This paper shows that under some conditions, the problem of fault compensation could be overcome. In this connection, the necessary and sufficient conditions of fault compensation effect for tri-valued residuals were formulated. Both conditions are explained in the example of the diagnosing of a simple single buffer tank system in open and closed-loop arrangements. In this regard, it was shown the complete disutility of a bi-valued residual evaluation frequently used for fault isolation. In contrast, the advantages of a tri-valued residual evaluation were outlined. This paper also brings a series of practical conclusions allowing for a better understanding of the residual compensation effect.