Fraud risk assessments involve the process of identifying and addressing a company’s vulnerability to both internal and external fraud. Once a risk has been identified, a plan is then developed to mitigate those risks by instituting certain procedures and assigning individuals to monitor and effectuate the plan of mitigation.
It is important that a company recognises that specific fraud risks could threaten its financial, operational and brand stability. A fraud risk assessment should be performed yearly especially when an internal or external change occurs.
A fraud risk assessment is tailored to each unique industry and operations. A fraud risk assessment should address four key areas in a company, these four key areas are asset misappropriation, financial and non-financial reporting, regulatory compliance areas, and illegal acts.
Asset Misappropriation – In general cash, inventory, and company assets are subject to misappropriation and must be examined for potential skimming, larceny, and fraudulent disbursements.
Financial and Non-financial Reporting – Inconsistency between financial and non-financial information can reflect that internal fraud is happening. This is usually carried out by management by overriding internal controls. Fraud in the financial statements can include overstating revenues, profits, and assets or understating expenses, losses, and liabilities.
Regulatory Compliance Areas – As business risk becomes increasingly complex due to external risks, auditors must try their best to keep a watchful eye on the relationship between a company’s risk of fraud and their compliance efforts.
Illegal Acts – Fraud is an illegal act and auditors need to maintain sufficient knowledge of the characteristics and indicators of fraud, the techniques that are used to commit fraud and the types of fraud associated with the activities being audited.
Management’s objective should naturally be to implement effective anti-fraud controls within the company. This can often include a combination of manual and automated fraud prevention and detection techniques that enable the organisation to monitor for any indicators of fraud within the scope of its risk tolerance.
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