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Fraud Risk Assessment: A need for today’s organization

Deepti Shikha

| Updated: Jan 14, 2020 | Category: Internal Audit

Fraud Risk Assessment

A fraud risk assessment is used by management to identify and understand risks in its business. It also checks and controls the weaknesses that can cause a fraud risk to the organization. Fraud Risk Assessment reviews all the internal and external fraud risks in the process. The assessment can be performed using formats such as matrix and narrative or any other form that best suits the organization. It is essential to establish controls and procedures to develop a plan, once the risk is identified. The management and managers perform fraud assessment work.

What do you understand by Fraud Risk Assessment?

Every business or organization, at some point at the time, faces the risk of fraud within them. Fraud vulnerability is classified in the following categories:

Asset misappropriation
Asset misappropriation

A complete fraud assessment is done by division or function. The departments to be included in the assessment are Finance and Accounting, Human Resources Management (payroll), Purchasing and Contracting, and Information Technology. The agencies need to have control of Information Technology to prevent risks. The assessment should be executed and updated periodically due to changes in:

division or function of Fraud Assement

Components for Fraud Risk Assessment

  • Identifying all types of fraud risk and schemes

Fraudulent disbursements, cyber fraud theft, manipulation of liabilities, false employee qualifications or certification, inappropriate journal entries are some of the examples types of fraud risks.

  • Determine anti-fraud controls available

Checking on internal and preventive controls available in the organization

  • Determine chances of its occurrence

We need to check the probability of its occurrence.

  • Identify its effect in the business

The risk of losing the fraud will cause to the business is to be determined. Will it be identical or catastrophic?

  • Know how to manage risks

The prevention methods should be established for precautionary purposes.

What factors influence fraud risk in an organization?

factors influence fraud risk
factors influence fraud risk
  • The nature of business.
  • The environment in which it operates.
  • The effectiveness of its internal controls.
  • The ethics and values of the company and its employees.

Why should the organizations conduct a Fraud Risk Assessment?

Fraud Risk Assessment needs to be conducted for the following reasons:

  • To improve communication and awareness about the fraud.
  • To identify what all activities are the most susceptible to fraud.
  • To develop plans to mitigate fraud risks.
  • Develop techniques to determine if fraud has occurred in risky areas.
  • Assess All the internal controls
  • Comply with regulations and professional standards.

Execution of Fraud Risk Assessments

To ensure execution of Fraud Risk Assessment following method is to be used:

Execution of Fraud Risk Assessments
Execution of Fraud Risk Assessments

Sample Framework Assessment Framework

  • Identify the essential fraud risks.
  •  Assess the likelihood of occurrence and its significance to the organization.
  • Evaluation of the departments and the methods most likely to commit fraud.

Analysis

Fraud Risk can be analyzed both qualitatively and quantitatively using the appropriate framework:

  • Identify and map the existing preventive and detective controls to the relevant fraud risks.

Preventive controls

  • Awareness of fraud risk program.
  • Performing background checks.
  • Reviewing third party transactions.
  • Dividing the duties.
  • Reviewing proper alignment between an individual’s authority and his level of responsibility.

Detective Controls

  • Establishing a whistleblower hotline.
  • Implementing proactive controls such as independent reconciliation’s, reviews, physical inspections, analysis, and audits.
  • Performing surprise audits.
  • To adjudge the proper functioning of identified controls.

Results and Reporting

A specified approach should be used by the team to protect from losing valuable information or obtaining unreliable or meaningless results.

Fraud Risk Identification

Fraud Risk Identification
Fraud Risk Identification

The Risk assessment team identifies the organization’s fraud risk. After identifying the information should be shared with the board or committee and in the absence of this to the senior managers of the agency.

Incentives, pressures, and opportunities

Organizations have to look into weak internal controls and a lack of segregation of duties to check the motives of employees. Opportunities to commit fraud to exist in all organizations.

Management override of Control’s

It is significant to take into account the potential for management override of controls established to prevent or detect fraud.

The population of Fraud Risks

Fraud Risk Assessment requires a clear understanding of the process. Any scheme that is relevant to the agency is considered.

Misappropriation of Assets

Misappropriation of assets is done by:

  • Employees
  • Vendors
  • Former employees and others outside the organization.

It can also be said as theft of assets.

Corruption

Corruption includes:

  • Bribery and gratuities,
  • Aiding and abetting fraud by other parties,
  • Conflicts of interest,
  • Embezzlement.

Information Technology and Fraud Risk

Information Technology is an important component of any risk assessment. Information Technology includes threats to data integrity, threats from hackers to system security, and theft from financial and sensitive information.

Regulatory and Legal Misconduct

Regulatory and legal Misconduct includes a broad range of risks, such as conflicts of interest, contract terms, and state and federal regulations. Some of the risks are considered as high risks to the business looking at its nature.

Know the Battle Plan for Fraud Risk Assessment

There are two ways to perform the assessment:

Battle Plan for Fraud Risk Assessment
Battle Plan for Fraud Risk Assessment

Self assessment

The members check the vulnerabilities of their practices against identified fraud risks. They can do this by using IT tools ranging from Excel to online Web surveys.

Advantages: This is a low-cost, time-effective, user-friendly way of collecting participants’ assessments.

Disadvantages: It isn’t effortless to draw a conclusion that can be applied generally because the self- assessment is based on an individual’s interpretation.

Assessment via Workshop

The selected members in a group, with diverse expertise and points of view, can give a more objective and detailed assessment.

Advantages: The workshopping procedure can yield participants’ agreement on a joint evaluation of the fraud risks and quality results.

Disadvantages: It can be challenging to coordinate the meeting mainly if the enterprise operates in different geographical, political, and legal environments. It needs to be led by a skilled individual with a good understanding of the business. Plus, it’s more challenging to report and analyze.

We can help you with the Fraud Assessment!

We at Enterslice provide you with the best services in Fraud Risk Assessment:

Fraud Assessment

Fraud Assessment

Conclusion

The guiding principles provide a basic framework and direction for the performance of a fraud risk assessment. To assure receiving continued benefits, fraud risk assessments should be performed by management regularly. The business and the market are continuously emerging, and as a result, the organization’s fraud risk assessment needs to keep momentum with these changes to deliver continued benefits. Fraud Risk assessment is tool to prevent committing of frauds in the organization.

Also Read: An Overview of Forensic Technology Services




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Deepti Shikha

Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. She has enough experience in handling legal affairs of the company. In the initial days of her career, she has worked as a legal researcher and has 3+ years of experience.

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