Conducting the Fraud Risk Assessment
5 minutes
5 Questions
Conducting a fraud risk assessment is a structured process an organization uses to identify where and how fraud could occur, evaluate the likelihood and significance of those risks, and determine how to respond. For a Certified Fraud Examiner, it is a cornerstone of proactive anti-fraud management and is closely tied to the COSO Fraud Risk Management Guide and the ACFE/COSO framework. The process generally begins by assembling the right team. An effective assessment involves people with diverse knowledge: management, internal audit, legal, compliance, IT, operations, and ideally someone with fraud expertise such as a CFE. Senior leadership support and a clear scope (entity-wide, business unit, or process-level) are essential before starting. Next, the team identifies inherent fraud risks. This involves brainstorming and interviewing personnel, reviewing prior incidents, analyzing industry fraud patterns, and considering the fraud triangle—pressures, opportunities, and rationalizations that could motivate or enable misconduct. Risks are typically categorized as fraudulent financial reporting, misappropriation of assets, corruption, and regulatory or other misconduct, and management override of controls must always be considered. The team then assesses each identified risk for likelihood (how probable it is to occur) and significance (its financial, reputational, legal, or operational impact). Risks are often plotted on a heat map or scored to prioritize attention. Assessors also consider who might commit the fraud and the schemes they might use. After that, existing controls are mapped against each risk to evaluate how well they prevent or detect the scheme. Gaps, weaknesses, or missing controls reveal residual risk—the exposure remaining after controls are considered. Finally, the organization responds to residual risks by accepting, avoiding, transferring, or mitigating them through new or strengthened controls, monitoring, or data analytics. Results are documented and reported to management and the board, and the assessment is revisited periodically or when significant changes occur, ensuring it remains a living, ongoing component of the anti-fraud program.
Conducting the Fraud Risk Assessment: A Complete CFE Exam Guide
Overview
Conducting the Fraud Risk Assessment is a core topic in the Fraud Prevention and Deterrence section of the ACFE CFE Exam. It sits within the broader Fraud Risk Assessment domain and describes the actual step-by-step process an organization follows once it has prepared for the assessment (assembled the team, chosen techniques, obtained sponsorship and educated the organization). This guide explains why the topic matters, what it is, how the process works and how to recognize and answer exam questions on it.
Why Conducting the Fraud Risk Assessment Is Important
The ACFE Fraud Examiners Manual stresses that every organization is exposed to fraud risk, regardless of size, industry or sector. A fraud risk assessment is the organization's structured way of proactively identifying and addressing its vulnerabilities to both internal and external fraud. The reasons it is important include:
1. Improves communication and awareness about fraud – the process opens up conversations among employees and management about where fraud could occur and how it could be committed.
2. Identifies where the organization is most vulnerable – it pinpoints the departments, functions, processes and individuals that present the highest risk.
3. Identifies what activities are most vulnerable – it highlights specific schemes (billing schemes, skimming, bribery, financial statement manipulation, etc.) that are realistically possible.
4. Knows who puts the organization at the greatest risk – it considers which people have the opportunity, incentive and access to commit fraud.
5. Develops plans to mitigate fraud risk – results feed directly into the design of preventive and detective controls.
6. Develops techniques to determine whether fraud has occurred – knowing the likely schemes helps design targeted detection procedures and audit tests.
7. Assesses internal controls – it tests whether existing controls are actually addressing the risks they are supposed to address.
8. Complies with regulations and professional standards – frameworks such as COSO, the Sarbanes-Oxley Act, SAS/AU-C 240 and the ACFE/COSO Fraud Risk Management Guide expect organizations to perform and document fraud risk assessments.
Without a disciplined assessment, anti-fraud resources are spread thinly or aimed at the wrong areas, and management operates under the false belief that generic internal controls are enough.
What a Fraud Risk Assessment Is
A fraud risk assessment is a process, not a document and not a one-time event. It is an ongoing, continuous exercise aimed at identifying and addressing the organization's vulnerabilities to fraud. The ACFE emphasizes several conceptual points that frequently appear in exam questions:
• One size does not fit all – the assessment must be tailored to the organization's size, complexity, industry and culture.
• Packaging matters – if the word fraud is too charged for the organizational culture, the exercise can be framed as a risk assessment, business process review or control evaluation to encourage participation.
• Keep it simple – an overly complex methodology discourages participation and reduces the quality of input.
• Sponsorship is critical – the assessment must be supported by senior management and the board (or audit committee). The sponsor should be senior enough to command respect, independent enough to be objective, and committed to seeing the results acted upon.
• Independence and objectivity – those leading the assessment must be objective and free from bias. The team should have diverse knowledge, skills and perspectives.
• Culture is a key influence – an open, ethical culture will yield candid input; a culture of fear or silence will yield little.
The assessment is typically built around a fraud risk assessment framework – often a matrix or spreadsheet – with columns for identified fraud risks and schemes, likelihood, significance, people and departments involved, existing anti-fraud controls, control effectiveness, residual risk and the fraud risk response.
How the Process Works: The Steps in Conducting the Assessment
The ACFE outlines a logical sequence of steps. Learn the order and the key concept in each step.
Step 1 – Identify potential inherent fraud risks
The team brainstorms the fraud risks that could apply to the organization before considering any controls. Inherent risk is the risk that exists in the absence of controls. The brainstorming should consider:
• Incentives, pressures and opportunities to commit fraud (the Fraud Triangle), including compensation structures tied to performance targets.
• The risk of management override of controls, which must always be considered because management is uniquely positioned to bypass controls.
• The full population of fraud risks: fraudulent financial reporting, misappropriation of assets, corruption (bribery, kickbacks, conflicts of interest), regulatory and legal misconduct, and reputational risk.
• Information technology and information system risks, including unauthorized access and data manipulation.
• Industry-specific and regulatory risks.
Input is gathered using interviews, focus groups, surveys, questionnaires, anonymous feedback mechanisms and reviews of prior incidents, audit reports and hotline data.
Step 2 – Assess the likelihood of occurrence of the identified fraud risks
Each identified risk is rated by how likely it is to occur, typically using three categories: remote, reasonably possible and probable. Factors considered include past instances of the fraud within the organization, prevalence of the scheme in the industry, the strength of the internal control environment, resources available to address fraud, the support of management and the ethical standards of the organization, unexplained losses, complaints from customers or vendors, the volume and complexity of transactions, and the number of individuals involved in a process.
Step 3 – Assess the significance of the identified fraud risks to the organization
Significance (impact) is commonly rated as inconsequential, more than inconsequential or material. The team must look beyond pure monetary loss and consider the financial statement and monetary significance, the organization's financial condition, the value of the threatened assets, the criticality of the affected operations, the impact on revenue, reputational damage, and legal and regulatory consequences. A scheme with a small dollar value can still be highly significant if it damages reputation or triggers regulatory action.
Step 4 – Evaluate which people and departments are most likely to commit fraud and identify the methods they are likely to use
Here the team maps risks to the individuals and functions that have the opportunity (through position, authority and access), the incentive or pressure and the ability to rationalize. It also considers whether collusion would be needed and which combinations of people could override controls. Understanding the likely perpetrators and methods makes it possible to design targeted controls and detection procedures.
Step 5 – Identify and map existing preventive and detective controls to the relevant fraud risks
The team lists the controls already in place and links them to specific risks. Preventive controls are designed to stop fraud before it occurs (segregation of duties, authorization limits, access controls, background checks, anti-fraud training). Detective controls are designed to identify fraud after it has occurred (reconciliations, independent reviews, data analytics, surprise audits, hotlines, exception reports). Mapping reveals gaps where a risk has no corresponding control and redundancies where resources may be wasted.
Step 6 – Evaluate whether the identified controls are operating effectively and efficiently
A control that exists on paper is not necessarily working. The team reviews internal and external audit reports, prior control testing, exception reports and incident history, and may perform its own testing. Both design effectiveness (is the control capable of addressing the risk?) and operating effectiveness (is it actually being performed consistently?) must be considered.
Step 7 – Identify and evaluate residual fraud risks resulting from ineffective or nonexistent controls
Residual risk is the risk that remains after existing controls are taken into account. It is essentially inherent risk reduced by the mitigating effect of effective controls. Residual risks are evaluated against the organization's risk tolerance (risk appetite) to decide whether they are acceptable or require a response.
Responding to Residual Fraud Risks
For each residual risk that exceeds tolerance, management must choose a response. The ACFE identifies four options, which may be used in combination:
• Avoid the risk – eliminate the activity or exit the business line that creates the risk.
• Transfer the risk – shift the financial consequences to a third party, most commonly through insurance (such as fidelity bonds) or contractual arrangements.
• Mitigate the risk – implement new or improved preventive and detective controls to reduce likelihood or impact.
• Assume the risk – accept the risk where the cost of control exceeds the potential loss, with documented approval.
Cost-benefit analysis is central: controls should not cost more than the risk they address.
Reporting the Results
Results must be reported objectively to the sponsor, senior management and the board or audit committee. Reporting should be clear, tailored to the audience, and should explain the methodology, the identified risks, their likelihood and significance, control gaps, residual risks and the recommended responses. The ACFE advises reporting honestly even when results are uncomfortable; sugar-coating defeats the purpose.
Making an Impact: Acting on the Assessment
The assessment creates value only when its results are used. Key points include:
• Begin with the end in mind – design the process so that actionable results are produced.
• Assign ownership of each identified risk and each remediation action to a specific manager with a timeline.
• Use the results to inform the internal audit plan, so audit resources are focused on the highest fraud risk areas.
• Use the results to improve the fraud risk management program, including training, hotline promotion and control enhancements.
• Build the assessment into an ongoing process: it should be refreshed at least annually and whenever there are significant changes such as mergers, new systems, restructuring, new products, new regulations or leadership changes.
Common Pitfalls Tested on the Exam
• Treating the assessment as a one-time project rather than a continuous process.
• Having a single person perform the assessment instead of a team with diverse knowledge of the business.
• Focusing only on financial statement fraud and ignoring asset misappropriation, corruption and reputational risks.
• Ignoring the risk of management override.
• Confusing inherent risk with residual risk.
• Believing the goal is to eliminate all fraud risk; the realistic goal is to reduce residual risk to an acceptable level.
• Failing to act on or report the results.
Exam Tips: Answering Questions on Conducting the Fraud Risk Assessment
Tip 1 – Memorize the sequence of steps. The CFE Exam frequently asks which step comes first, next or last. The order is: identify inherent fraud risks → assess likelihood → assess significance → evaluate people, departments and methods → identify and map existing preventive and detective controls → evaluate control effectiveness → identify and evaluate residual risks → respond to residual risks → report results. A classic question asks what the team should do before considering controls; the answer is to identify inherent risks.
Tip 2 – Know the two key risk definitions cold. Inherent risk = risk assuming no controls exist. Residual risk = risk remaining after considering existing controls. If a question describes a risk that remains after controls are considered, the answer is residual risk.
Tip 3 – Learn the rating scales. Likelihood: remote, reasonably possible, probable. Significance: inconsequential, more than inconsequential, material. Questions may present a scenario and ask you to classify the risk, or may present one category and ask which dimension (likelihood or significance) it belongs to.
Tip 4 – Remember the four responses to residual risk. Avoid, transfer, mitigate, assume. Purchasing insurance is transfer; adding a control is mitigate; discontinuing a risky activity is avoid; deciding to accept a low-value risk is assume. If a question says the responses are mutually exclusive, that is false – they can be combined.
Tip 5 – Distinguish preventive from detective controls. If the control stops fraud before it happens (segregation of duties, approvals, access restrictions), it is preventive. If it finds fraud after the fact (reconciliations, analytics, surprise audits, hotlines), it is detective. Expect scenario questions that describe a control and ask you to classify it.
Tip 6 – Watch for absolute language in true/false items. Statements such as a fraud risk assessment should be performed once when the anti-fraud program is established, the assessment should be led by one individual to ensure consistency, the assessment should focus exclusively on financial statement fraud or the objective is to eliminate all fraud risk are false. The ACFE position is ongoing, team-based, comprehensive and focused on reducing risk to an acceptable level.
Tip 7 – Know the factors that influence likelihood. Past instances, industry prevalence, control environment, management support, ethical standards, unexplained losses, complaints, transaction volume and complexity, and the number of people involved. If asked which factor is not relevant to likelihood, look for a factor that really relates to significance (such as the value of the asset or reputational impact).
Tip 8 – Know the factors that influence significance. Financial statement and monetary impact, financial condition of the organization, value of threatened assets, criticality to operations, revenue impact, reputational harm and legal or regulatory consequences. Remember that significance is more than dollars.
Tip 9 – Remember who should be involved. The team should include people from accounting and finance, non-financial business units, risk management, legal, compliance and ethics, internal audit and, where appropriate, external consultants. Sponsorship should come from senior management or the board. Questions that suggest the assessment should be kept secret from employees, or that employees should not be involved, are testing the ACFE principle that the organization should be educated about and engaged in the process.
Tip 10 – Always consider management override. If a question asks which risk must be considered in every fraud risk assessment regardless of the organization, the risk of management override of controls is a strong answer.
Tip 11 – Apply the cost-benefit principle. When a scenario asks whether a control should be implemented, remember that the cost of the control should not exceed the expected benefit. A low-likelihood, inconsequential risk may appropriately be assumed rather than mitigated.
Tip 12 – Connect the assessment to the audit plan. Questions may ask how the fraud risk assessment relates to internal audit. The correct view is that the assessment informs and focuses the audit plan on higher-risk areas; it does not replace the audit, and the audit does not replace the assessment.
Tip 13 – Read scenario questions for the stage being described. If the scenario mentions brainstorming schemes, it is Step 1. If it mentions rating how likely a scheme is, it is Step 2. If it mentions linking controls to risks, it is Step 5. If it mentions testing whether controls work, it is Step 6. If it mentions deciding to purchase insurance, it is the response stage. Matching the action to the stage will quickly eliminate wrong answers.
Quick Review Summary
• Purpose: proactively identify and address fraud vulnerabilities; improve awareness; focus resources; satisfy regulatory expectations.
• Nature: ongoing, tailored, simple, team-based, sponsored by senior leadership, objective.
• Steps: identify inherent risks → likelihood → significance → people and methods → map controls → test effectiveness → residual risk → respond → report.
• Likelihood scale: remote / reasonably possible / probable.
• Significance scale: inconsequential / more than inconsequential / material.
• Responses: avoid, transfer, mitigate, assume.
• Key distinction: inherent risk (no controls) versus residual risk (after controls).
• Always consider management override and non-financial impacts such as reputation and regulatory exposure.
• Results must be reported objectively and acted upon with assigned ownership, and the assessment must be refreshed regularly.
Conducting the Fraud Risk Assessment is a core topic in the Fraud Prevention and Deterrence section of the ACFE CFE Exam. It sits within the broader Fraud Risk Assessment domain and describes the actual step-by-step process an organization follows once it has prepared for the assessment (assembled the team, chosen techniques, obtained sponsorship and educated the organization). This guide explains why the topic matters, what it is, how the process works and how to recognize and answer exam questions on it.
Why Conducting the Fraud Risk Assessment Is Important
The ACFE Fraud Examiners Manual stresses that every organization is exposed to fraud risk, regardless of size, industry or sector. A fraud risk assessment is the organization's structured way of proactively identifying and addressing its vulnerabilities to both internal and external fraud. The reasons it is important include:
1. Improves communication and awareness about fraud – the process opens up conversations among employees and management about where fraud could occur and how it could be committed.
2. Identifies where the organization is most vulnerable – it pinpoints the departments, functions, processes and individuals that present the highest risk.
3. Identifies what activities are most vulnerable – it highlights specific schemes (billing schemes, skimming, bribery, financial statement manipulation, etc.) that are realistically possible.
4. Knows who puts the organization at the greatest risk – it considers which people have the opportunity, incentive and access to commit fraud.
5. Develops plans to mitigate fraud risk – results feed directly into the design of preventive and detective controls.
6. Develops techniques to determine whether fraud has occurred – knowing the likely schemes helps design targeted detection procedures and audit tests.
7. Assesses internal controls – it tests whether existing controls are actually addressing the risks they are supposed to address.
8. Complies with regulations and professional standards – frameworks such as COSO, the Sarbanes-Oxley Act, SAS/AU-C 240 and the ACFE/COSO Fraud Risk Management Guide expect organizations to perform and document fraud risk assessments.
Without a disciplined assessment, anti-fraud resources are spread thinly or aimed at the wrong areas, and management operates under the false belief that generic internal controls are enough.
What a Fraud Risk Assessment Is
A fraud risk assessment is a process, not a document and not a one-time event. It is an ongoing, continuous exercise aimed at identifying and addressing the organization's vulnerabilities to fraud. The ACFE emphasizes several conceptual points that frequently appear in exam questions:
• One size does not fit all – the assessment must be tailored to the organization's size, complexity, industry and culture.
• Packaging matters – if the word fraud is too charged for the organizational culture, the exercise can be framed as a risk assessment, business process review or control evaluation to encourage participation.
• Keep it simple – an overly complex methodology discourages participation and reduces the quality of input.
• Sponsorship is critical – the assessment must be supported by senior management and the board (or audit committee). The sponsor should be senior enough to command respect, independent enough to be objective, and committed to seeing the results acted upon.
• Independence and objectivity – those leading the assessment must be objective and free from bias. The team should have diverse knowledge, skills and perspectives.
• Culture is a key influence – an open, ethical culture will yield candid input; a culture of fear or silence will yield little.
The assessment is typically built around a fraud risk assessment framework – often a matrix or spreadsheet – with columns for identified fraud risks and schemes, likelihood, significance, people and departments involved, existing anti-fraud controls, control effectiveness, residual risk and the fraud risk response.
How the Process Works: The Steps in Conducting the Assessment
The ACFE outlines a logical sequence of steps. Learn the order and the key concept in each step.
Step 1 – Identify potential inherent fraud risks
The team brainstorms the fraud risks that could apply to the organization before considering any controls. Inherent risk is the risk that exists in the absence of controls. The brainstorming should consider:
• Incentives, pressures and opportunities to commit fraud (the Fraud Triangle), including compensation structures tied to performance targets.
• The risk of management override of controls, which must always be considered because management is uniquely positioned to bypass controls.
• The full population of fraud risks: fraudulent financial reporting, misappropriation of assets, corruption (bribery, kickbacks, conflicts of interest), regulatory and legal misconduct, and reputational risk.
• Information technology and information system risks, including unauthorized access and data manipulation.
• Industry-specific and regulatory risks.
Input is gathered using interviews, focus groups, surveys, questionnaires, anonymous feedback mechanisms and reviews of prior incidents, audit reports and hotline data.
Step 2 – Assess the likelihood of occurrence of the identified fraud risks
Each identified risk is rated by how likely it is to occur, typically using three categories: remote, reasonably possible and probable. Factors considered include past instances of the fraud within the organization, prevalence of the scheme in the industry, the strength of the internal control environment, resources available to address fraud, the support of management and the ethical standards of the organization, unexplained losses, complaints from customers or vendors, the volume and complexity of transactions, and the number of individuals involved in a process.
Step 3 – Assess the significance of the identified fraud risks to the organization
Significance (impact) is commonly rated as inconsequential, more than inconsequential or material. The team must look beyond pure monetary loss and consider the financial statement and monetary significance, the organization's financial condition, the value of the threatened assets, the criticality of the affected operations, the impact on revenue, reputational damage, and legal and regulatory consequences. A scheme with a small dollar value can still be highly significant if it damages reputation or triggers regulatory action.
Step 4 – Evaluate which people and departments are most likely to commit fraud and identify the methods they are likely to use
Here the team maps risks to the individuals and functions that have the opportunity (through position, authority and access), the incentive or pressure and the ability to rationalize. It also considers whether collusion would be needed and which combinations of people could override controls. Understanding the likely perpetrators and methods makes it possible to design targeted controls and detection procedures.
Step 5 – Identify and map existing preventive and detective controls to the relevant fraud risks
The team lists the controls already in place and links them to specific risks. Preventive controls are designed to stop fraud before it occurs (segregation of duties, authorization limits, access controls, background checks, anti-fraud training). Detective controls are designed to identify fraud after it has occurred (reconciliations, independent reviews, data analytics, surprise audits, hotlines, exception reports). Mapping reveals gaps where a risk has no corresponding control and redundancies where resources may be wasted.
Step 6 – Evaluate whether the identified controls are operating effectively and efficiently
A control that exists on paper is not necessarily working. The team reviews internal and external audit reports, prior control testing, exception reports and incident history, and may perform its own testing. Both design effectiveness (is the control capable of addressing the risk?) and operating effectiveness (is it actually being performed consistently?) must be considered.
Step 7 – Identify and evaluate residual fraud risks resulting from ineffective or nonexistent controls
Residual risk is the risk that remains after existing controls are taken into account. It is essentially inherent risk reduced by the mitigating effect of effective controls. Residual risks are evaluated against the organization's risk tolerance (risk appetite) to decide whether they are acceptable or require a response.
Responding to Residual Fraud Risks
For each residual risk that exceeds tolerance, management must choose a response. The ACFE identifies four options, which may be used in combination:
• Avoid the risk – eliminate the activity or exit the business line that creates the risk.
• Transfer the risk – shift the financial consequences to a third party, most commonly through insurance (such as fidelity bonds) or contractual arrangements.
• Mitigate the risk – implement new or improved preventive and detective controls to reduce likelihood or impact.
• Assume the risk – accept the risk where the cost of control exceeds the potential loss, with documented approval.
Cost-benefit analysis is central: controls should not cost more than the risk they address.
Reporting the Results
Results must be reported objectively to the sponsor, senior management and the board or audit committee. Reporting should be clear, tailored to the audience, and should explain the methodology, the identified risks, their likelihood and significance, control gaps, residual risks and the recommended responses. The ACFE advises reporting honestly even when results are uncomfortable; sugar-coating defeats the purpose.
Making an Impact: Acting on the Assessment
The assessment creates value only when its results are used. Key points include:
• Begin with the end in mind – design the process so that actionable results are produced.
• Assign ownership of each identified risk and each remediation action to a specific manager with a timeline.
• Use the results to inform the internal audit plan, so audit resources are focused on the highest fraud risk areas.
• Use the results to improve the fraud risk management program, including training, hotline promotion and control enhancements.
• Build the assessment into an ongoing process: it should be refreshed at least annually and whenever there are significant changes such as mergers, new systems, restructuring, new products, new regulations or leadership changes.
Common Pitfalls Tested on the Exam
• Treating the assessment as a one-time project rather than a continuous process.
• Having a single person perform the assessment instead of a team with diverse knowledge of the business.
• Focusing only on financial statement fraud and ignoring asset misappropriation, corruption and reputational risks.
• Ignoring the risk of management override.
• Confusing inherent risk with residual risk.
• Believing the goal is to eliminate all fraud risk; the realistic goal is to reduce residual risk to an acceptable level.
• Failing to act on or report the results.
Exam Tips: Answering Questions on Conducting the Fraud Risk Assessment
Tip 1 – Memorize the sequence of steps. The CFE Exam frequently asks which step comes first, next or last. The order is: identify inherent fraud risks → assess likelihood → assess significance → evaluate people, departments and methods → identify and map existing preventive and detective controls → evaluate control effectiveness → identify and evaluate residual risks → respond to residual risks → report results. A classic question asks what the team should do before considering controls; the answer is to identify inherent risks.
Tip 2 – Know the two key risk definitions cold. Inherent risk = risk assuming no controls exist. Residual risk = risk remaining after considering existing controls. If a question describes a risk that remains after controls are considered, the answer is residual risk.
Tip 3 – Learn the rating scales. Likelihood: remote, reasonably possible, probable. Significance: inconsequential, more than inconsequential, material. Questions may present a scenario and ask you to classify the risk, or may present one category and ask which dimension (likelihood or significance) it belongs to.
Tip 4 – Remember the four responses to residual risk. Avoid, transfer, mitigate, assume. Purchasing insurance is transfer; adding a control is mitigate; discontinuing a risky activity is avoid; deciding to accept a low-value risk is assume. If a question says the responses are mutually exclusive, that is false – they can be combined.
Tip 5 – Distinguish preventive from detective controls. If the control stops fraud before it happens (segregation of duties, approvals, access restrictions), it is preventive. If it finds fraud after the fact (reconciliations, analytics, surprise audits, hotlines), it is detective. Expect scenario questions that describe a control and ask you to classify it.
Tip 6 – Watch for absolute language in true/false items. Statements such as a fraud risk assessment should be performed once when the anti-fraud program is established, the assessment should be led by one individual to ensure consistency, the assessment should focus exclusively on financial statement fraud or the objective is to eliminate all fraud risk are false. The ACFE position is ongoing, team-based, comprehensive and focused on reducing risk to an acceptable level.
Tip 7 – Know the factors that influence likelihood. Past instances, industry prevalence, control environment, management support, ethical standards, unexplained losses, complaints, transaction volume and complexity, and the number of people involved. If asked which factor is not relevant to likelihood, look for a factor that really relates to significance (such as the value of the asset or reputational impact).
Tip 8 – Know the factors that influence significance. Financial statement and monetary impact, financial condition of the organization, value of threatened assets, criticality to operations, revenue impact, reputational harm and legal or regulatory consequences. Remember that significance is more than dollars.
Tip 9 – Remember who should be involved. The team should include people from accounting and finance, non-financial business units, risk management, legal, compliance and ethics, internal audit and, where appropriate, external consultants. Sponsorship should come from senior management or the board. Questions that suggest the assessment should be kept secret from employees, or that employees should not be involved, are testing the ACFE principle that the organization should be educated about and engaged in the process.
Tip 10 – Always consider management override. If a question asks which risk must be considered in every fraud risk assessment regardless of the organization, the risk of management override of controls is a strong answer.
Tip 11 – Apply the cost-benefit principle. When a scenario asks whether a control should be implemented, remember that the cost of the control should not exceed the expected benefit. A low-likelihood, inconsequential risk may appropriately be assumed rather than mitigated.
Tip 12 – Connect the assessment to the audit plan. Questions may ask how the fraud risk assessment relates to internal audit. The correct view is that the assessment informs and focuses the audit plan on higher-risk areas; it does not replace the audit, and the audit does not replace the assessment.
Tip 13 – Read scenario questions for the stage being described. If the scenario mentions brainstorming schemes, it is Step 1. If it mentions rating how likely a scheme is, it is Step 2. If it mentions linking controls to risks, it is Step 5. If it mentions testing whether controls work, it is Step 6. If it mentions deciding to purchase insurance, it is the response stage. Matching the action to the stage will quickly eliminate wrong answers.
Quick Review Summary
• Purpose: proactively identify and address fraud vulnerabilities; improve awareness; focus resources; satisfy regulatory expectations.
• Nature: ongoing, tailored, simple, team-based, sponsored by senior leadership, objective.
• Steps: identify inherent risks → likelihood → significance → people and methods → map controls → test effectiveness → residual risk → respond → report.
• Likelihood scale: remote / reasonably possible / probable.
• Significance scale: inconsequential / more than inconsequential / material.
• Responses: avoid, transfer, mitigate, assume.
• Key distinction: inherent risk (no controls) versus residual risk (after controls).
• Always consider management override and non-financial impacts such as reputation and regulatory exposure.
• Results must be reported objectively and acted upon with assigned ownership, and the assessment must be refreshed regularly.
Test mode:
CFE - Conducting the Fraud Risk Assessment Example Questions
Test your knowledge of Conducting the Fraud Risk Assessment
Question 1
A fraud examiner holds separate fraud risk sessions with HR onboarding staff, timekeeping supervisors and payroll processors. Each group concludes that its own segment is well controlled. The examiner notices that no group has considered how a ghost employee record or an altered pay rate could move undetected from one segment to the next. Which technique would BEST close this gap in risk identification?
Question 2
A fraud examiner is assessing corruption risk in a business unit that obtains customs clearances and operating permits through third-party agents. So far, all input has come from accounting staff, who record the agent fees but have no contact with the agents or the officials. Which step would BEST strengthen the identification of bribery schemes in this unit?
Question 3
When conducting a fraud risk assessment, anonymous surveys can elicit candid information from employees who might be reluctant to discuss fraud risks openly in interviews or facilitated group sessions.
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