How to Conduct a Fraud Risk Assessment?

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Written By Chris Ekai

A fraud risk assessment is a key part of any organization’s efforts to protect itself from financial loss due to fraudulent activities. Several steps for risk assessment include identifying fraud risks, quantifying fraud risks, risk response, monitor and evaluate risks and report risks. But how do you go about conducting a fraud risk assessment? This blog post will outline the steps you need to take to assess your organization’s vulnerability to fraud and put in place the appropriate safeguards.

In order to carry out a fraud risk assessment, you must first understand what a fraud risk assessment is. A fraud risk assessment is a process of identifying, assessing, and managing the risks of fraud within an organization. It is important to undertake a fraud risk assessment to protect your business from financial losses and reputational damage. There are several steps that you can take to carry out a fraud risk assessment. In this blog post, we will outline the steps that you need to take in order to assess the risks of fraud in your organization.

How is Fraud Risk Defined?

A fraud risk assessment is a procedure to evaluate your company’s fraud vulnerability, risks, and current defenses.

A fraud risk assessment can help an organization find out how potential fraudsters may try to get around existing defenses. If the evaluation determines that these countermeasures are insufficient to counteract the fraud risks, the firm may consider improving them or implementing new and more efficient countermeasures.

It’s critical to know what must happen for a fraud to occur in order for an organization to accurately assess risk and risk appetite. If an organization has a clear and detailed knowledge of the company’s fraud risks, it will be better positioned to make necessary changes in corporate procedures or policy and program design.

The fraud risk assessment procedure should be both fact-based and inventive. Those performing the evaluation should be aware of existing fraud tactics, consider who might misuse their corporate procedures or programs, and identify how they would do it.

The outcomes of fraud risk assessments are an important component of a fraud control plan, which provides details on the company’s strategies, procedures, and present countermeasures to address the assessed fraud threats.

What is the Main Purpose of a Fraud Risk Assessment?

A fraud risk assessment is a procedure that helps you assess your company’s fraud vulnerability, associated risks, and existing countermeasures. A competent fraud risk assessment allows you to detail how prospective fraudsters may attempt to circumvent current controls.

The current controls in place in your company need to be outlined and their effectiveness measured. To properly address a fraud risk, all stakeholders need to know what they are doing.

Some of the factors that are typically considered when assessing fraud risk include:-

  • The type of business
  • The products or services offered,
  • The size of the company,
  • The customer base, where sales and payments take place,
  • Any known history of fraudulent activity.
  • By considering all of these factors, organizations can get a better picture of which areas may be more vulnerable to fraud and what measures should be taken to mitigate those risks.

The goal is to develop a comprehensive plan for mitigating these risks, which may include enhanced controls, employee training, and other measures. By taking steps to address fraud threats, organizations can help protect their bottom line and mitigate the potential damage that fraud can cause.

A fraud risk assessment should be conducted periodically in order to ensure that the organization’s risk profile remains current, and should be tailored to the specific needs of the organization. Some factors that should be considered include the size and structure of the organization, its business activities, its geographical location, and its level of exposure to various types of fraud.

What are the Types of Fraud Risks?

– Fraudulent misrepresentation: This is when someone intentionally provides false information in order to deceive another party. For example, a company might lie about its financial stability in order to win a contract.

– Fraudulent inducement: This occurs when someone is coerced or tricked into entering into a contract or agreement that they would not have otherwise agreed to. For example, a contractor might promise one price for a job, but then significantly increase the cost once the work has begun.

– Financial fraud: This is any type of scam or theft that involves financial instruments such as money, stocks, or property.

-Credit card fraud: This is when someone uses a stolen or fake credit card to make fraudulent purchases.

-Employee theft: This is when employees steal money or goods from their employers.

-Money laundering: This is when criminals try to disguise the origins of their illegal money by making it look like it came from legitimate sources.

-Insurance fraud: This is when people attempt to illegally collect insurance payments by faking injuries, damage, or losses.

-Tax fraud – This is when a person or business intentionally tries to avoid paying taxes they owe. For example, they might try to claim false deductions on their tax return, or they might not report all of their income.

Fraud risk management

Common areas for fraud

Fraud affects every business in some way, but because it is often unseen, constantly shifting, and poorly comprehended by the majority of individuals, the risks and consequences of fraud are frequently understated and overlooked. The following are the most popular areas where fraud risks can appear:

Steps for Conducting a Fraud risk assessment

Identify & analyze possible risks

Identifying the greatest potential fraud risks for an organization is a crucial first step in performing a fraud risk assessment. An assessment can evaluate risks related to theft. Breach of trust, misappropriation of assets, manipulation of records, corruption by individuals or collusion with external parties are just a few examples of the types of fraud risk that an organization should consider when performing a fraud risk assessment.

Establish Risk Quantification Procedures

The process of quantifying fraud risks generally involves the following steps:

  1. Defining and understanding the business objectives that will be used to measure risk.
  2. Determining the specific types of fraud that could occur and which could have the biggest impact on the business.
  3. Assessing the vulnerability of each area of the business to those types of fraud.
  4. Estimating the likelihood that each type of fraud will occur.
  5. Combining all of this information to create a risk score for each area of the business.

Risk response

  1. Develop a risk response plan: This should include steps for detecting and preventing fraud, as well as procedures for responding to any incidents that occur.
  2. Identify and assess the risks: It’s important to assess which risks are most likely to impact your business, and what damage they could potentially cause and their improvement actions.
  3. Take action to mitigate the risks: Once you know what the risks are, you can take steps to reduce or eliminate them. This might include implementing tighter security measures, updating your fraud prevention policies, or conducting training exercises for your employees.
  4. Monitor the risks and update the plan as needed: The risk environment is always changing, so it’s important to continually monitor and review.

Keep track of and evaluate risks

  1. Periodically review your company’s risk assessment and fraud prevention plan to ensure that it still accurately reflects your current business operations and vulnerabilities.
  2. Review your accounting procedures to ensure that they are effective in detecting and preventing financial statement fraud.
  3. Audit your systems regularly to look for red flags of fraudulent activity, and make sure employees are trained to do the same.
  4. Monitor employee behavior for any signs of unusual or suspicious activity.
  5. Stay up-to-date on current scams and schemes being used by fraudsters, so you can be prepared to protect your business against them.

Fraud risk report

To create a fraud risk report plan, start by identifying the types of fraud risks your organization faces and then prioritize them. You should also consider how you will respond to each type of risk and what actions you can take to prevent them from happening. This document can also be called fraud control plan.

A fraud risk report plan is a proactive measure that organizations can take to help prevent fraud. The following are the steps in coming up with a fraud control plan/report.

  1. Review company policies and procedures related to fraud risk.
  2. Review recent financial statements and management reports for red flags or indicators of fraudulent activity.
  3. Interview key personnel, including senior management and employees with access to sensitive information, to assess their understanding of the company’s fraud risk assessment process and identify any areas of potential vulnerability.
  4. Develop a fraud risk report that includes an overview of the company’s fraud risk assessment process, as well as specific areas of concern or vulnerability identified during the review process.
  5. Present the fraud risk report to senior management for review and approval.


Financial fraud may seem like a distant or far-fetched concern, but the reality is that it happens every day and to organizations of all sizes. A risk assessment can help identify your organization’s vulnerabilities to financial fraud before they become costly problems. Conducting a thorough fraud risk assessment is the best way to protect your organization from financial loss. This article has outlined how you can go about conducting such an assessment and put in place safeguards against fraudulent activities. For example, an organization might be able to reduce its exposure by implementing new procedures for authorizing payments or limiting access privileges. If you would like assistance with assessing your risks and developing a response plan appropriate for your company’s needs, please contact us today!


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