13.3 Fraud Risk Assessment and Response

Fraud risk assessment is a crucial step in auditing, helping identify vulnerabilities within organizations. Auditors systematically evaluate business processes, potential fraud schemes, and existing controls to prioritize risks. This process informs targeted audit plans and resource allocation.

Responding to fraud risks involves tailoring audit procedures, gathering evidence, and assessing internal control effectiveness. Auditors must maintain professional skepticism, communicate findings, and consider the impact on their overall opinion. This approach ensures thorough fraud detection and prevention in auditing.

Fraud Risk Assessment

Conducting a Comprehensive Assessment

Top images from around the web for Conducting a Comprehensive Assessment

• 

  Dressing up security with Bow-Ties | Black Swan Security View original

  Is this image relevant?

• 

  The Integration of Forensic Accounting and the Management Control System as Tools for Combating ... View original

  Is this image relevant?

• 

  Fraud deterrence - Wikipedia View original

  Is this image relevant?

• 

  Dressing up security with Bow-Ties | Black Swan Security View original

  Is this image relevant?

• 

  The Integration of Forensic Accounting and the Management Control System as Tools for Combating ... View original

  Is this image relevant?

1 of 3

Top images from around the web for Conducting a Comprehensive Assessment

• 

  Dressing up security with Bow-Ties | Black Swan Security View original

  Is this image relevant?

• 

  The Integration of Forensic Accounting and the Management Control System as Tools for Combating ... View original

  Is this image relevant?

• 

  Fraud deterrence - Wikipedia View original

  Is this image relevant?

• 

  Dressing up security with Bow-Ties | Black Swan Security View original

  Is this image relevant?

• 

  The Integration of Forensic Accounting and the Management Control System as Tools for Combating ... View original

  Is this image relevant?

1 of 3

• Conduct a comprehensive fraud risk assessment to identify potential areas of vulnerability
• A fraud risk assessment is a systematic process of identifying, analyzing, and prioritizing potential fraud risks within an organization
• Key components of a fraud risk assessment include understanding the organization's business processes, identifying potential fraud schemes, evaluating existing controls, and assessing the likelihood and impact of each identified risk
• Common fraud risk factors to consider include management override of controls, complex transactions, high-pressure environments, lack of segregation of duties, and weak internal controls
• Fraud risk assessments should be conducted regularly and updated as changes occur within the organization or its environment

Utilizing Assessment Results

• Results of the fraud risk assessment should be used to develop a targeted audit plan and allocate audit resources effectively
• Continuous monitoring and data analytics techniques can be employed to identify potential fraud indicators and high-risk transactions on an ongoing basis (journal entry testing, vendor analysis)

Audit Procedures for Fraud Risks

Tailoring Procedures to Identified Risks

• Develop and implement appropriate audit procedures to address identified fraud risks
• Audit procedures should be tailored to address the specific fraud risks identified during the risk assessment process
• Substantive testing procedures may include detailed transaction testing, data mining, and analysis of journal entries to identify unusual patterns or anomalies
• Analytical procedures can be used to identify trends, fluctuations, or relationships that may indicate fraudulent activity (ratio analysis, trend analysis)

Gathering Evidence and Incorporating Unpredictability

• Interviewing key personnel and performing background checks can provide valuable insights into potential fraud risks and control weaknesses
• Incorporating an element of unpredictability in audit procedures can help detect fraud schemes that may be concealed during routine audits (surprise inventory counts, unannounced site visits)
• Audit procedures should be designed to gather sufficient, appropriate evidence to support conclusions regarding the presence or absence of fraud

Internal Control Effectiveness for Fraud

Assessing Design and Operating Effectiveness

• Evaluate the effectiveness of internal controls in preventing and detecting fraud
• Internal controls are policies, procedures, and processes designed to prevent, detect, and correct fraud and errors within an organization
• Key internal controls relevant to fraud prevention and detection include segregation of duties, authorization and approval processes, access controls, and monitoring activities
• Auditors should assess the design and operating effectiveness of internal controls through a combination of inquiry, observation, inspection, and re-performance

Communicating Deficiencies and Ongoing Evaluation

• Weaknesses in internal controls, such as lack of oversight, inadequate documentation, or improper segregation of duties, can increase the risk of fraud
• Auditors should communicate identified control deficiencies to management and those charged with governance, along with recommendations for improvement
• The effectiveness of internal controls should be evaluated on an ongoing basis to ensure they remain adequate in light of changing fraud risks and business conditions

Responding to Fraud

Maintaining Professional Skepticism and Gathering Evidence

• Respond appropriately to suspected or detected fraud, including documentation and reporting requirements
• Auditors have a professional responsibility to maintain an attitude of professional skepticism and to respond appropriately to any indications of fraud
• If fraud is suspected or detected, auditors should gather additional evidence to determine the nature, extent, and potential impact of the fraudulent activity

Communicating Findings and Considering Audit Impact

• Audit documentation should include a description of the fraud risk, the audit procedures performed, the evidence obtained, and the conclusions reached
• Auditors should communicate their findings to management and those charged with governance in a timely manner, including any identified instances of fraud or significant deficiencies in internal controls
• In cases of material fraud, auditors may be required to report the matter to regulatory authorities or law enforcement agencies (SEC, FBI)
• Auditors should consider the impact of fraud on the overall audit opinion and the need for any modifications to the audit report
• The audit firm should have established protocols and guidelines for responding to and documenting suspected or detected fraud to ensure a consistent and appropriate response