How to Conduct a Fraud Risk Assessment: A Practical 6-Step Method

Most organisations assess financial, operational and IT risk. Far fewer ask a simpler, more uncomfortable question: if someone wanted to defraud us, how would they do it — and would we notice?

A fraud risk assessment answers exactly that. It is recommended by the COSO/ACFE Fraud Risk Management Guide, expected by audit committees, and increasingly requested by banks, investors and multinational customers. Done well, it is also one of the most cost-effective things a growing company can do.

Step 1 — Set the scope and the team

Decide which entities, processes and systems are in scope. For a first assessment, focus on where money and valuable assets move: procurement and payments, sales and revenue, payroll and expenses, inventory, treasury and financial reporting.

Build a small team: a facilitator with fraud expertise, plus the owners of each process. Their knowledge of how things really work — including the workarounds — is essential.

Step 2 — Identify fraud scenarios

Run short workshops per process and brainstorm concrete scenarios, not generic risks. “Fraud in procurement” is too vague. “A buyer colludes with a supplier to inflate prices in exchange for a kickback” is a scenario you can assess.

Cover the three main categories of occupational fraud:

• Asset misappropriation — theft of cash, inventory or other assets, false expenses, fictitious vendors.
• Corruption — bribery, kickbacks, conflicts of interest, bid rigging.
• Financial statement fraud — manipulated revenue, reserves or valuations.

Always include management override of controls as a separate scenario. It is the one risk every organisation has.

Step 3 — Rate inherent risk

For each scenario, estimate likelihood and impact before considering controls. Use a simple, consistent scale (for example 1–5) and define it in writing so different workshops score the same way. Consider the fraud triangle: pressure or incentive, opportunity and rationalisation.

Step 4 — Map existing controls

Link each scenario to the controls that should prevent or detect it: approvals, segregation of duties, reconciliations, system restrictions, analytics, independent reviews. Ask two questions for each control: is it designed to address this specific scenario? and do we have evidence it actually operates?

Step 5 — Rate residual risk and decide the response

Residual risk is what remains after controls. Plot it on a heat map and agree on a response for anything above your tolerance:

• add or strengthen a preventive control;
• add a detective control — for example a monthly data-analytics test;
• accept the risk explicitly, with an accountable owner.

Data analytics is often the fastest win. Tests such as vendor–employee matching, duplicate payments or journal entries posted at unusual times can be automated and repeated.

Step 6 — Report, own and repeat

Present the results to management and the audit committee in one page: top risks, owners, actions and deadlines. Then embed the register into your annual compliance plan and refresh it at least yearly — and whenever the business changes significantly, such as after an acquisition, a new system or entry into a new market.

Common mistakes to avoid

• Treating it as a questionnaire. Scenarios come from conversations, not checkbox surveys.
• Ignoring management. Senior people have the most access and the most ability to override controls.
• Producing a report nobody owns. Every high residual risk needs a named owner and a date.
• Doing it once. Fraud risk moves with the business.

A well-run assessment usually takes three to six weeks for a mid-sized company and immediately shows where to focus limited resources. If you would like an experienced facilitator, see our fraud risk assessment service or the Fraud Risk Assessment in Practice course.