Create effective countermeasures against fraud using checklists. Learn everything you need to know about fraud risk assessments and how to use a digital tool for them.
Use this fraud risk assessment template to evaluate the organization’s vulnerability to any threat or fraud risk.Download template
Use this checklist to monitor the effectiveness of anti-fraud processes controls in place, and if the culture of honesty and ethics are being practiced by employees.Download template
Review with this fraud risk assessment checklist template the effectiveness of your organization's existing anti-fraud controls.Download template
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Fraud risk assessment is a process used to study how vulnerable a program, system, or entity is against exploitations. It also involves analyzing the existing fraud countermeasures against changing business circumstances and new security challenges.
Fraud risk assessments are done by specialists who have a wide range of knowledge of fraud opportunities and enablers and various techniques and methods to manage fraud risks.
Since fraud involves the whole system or program, effective fraud risk assessments collaborate with the entire team. This way, every possible aspect and avenue used for exploitation are scrutinized and protected accordingly.
According to the fraud risk assessment template from the U.S. Government Accountability Office, a practical fraud risk assessment is composed of five key elements. These fundamental elements will ensure that all of an entity’s goals will be achieved while protecting its assets. And each element is centered on detection, prevention, and responding to all possible fraud attempts.
The first key element in a fraud risk is identifying all the possible fraud or exploitations in the system. Team discussion shouldn’t be constrictive during this identification process and should be kept free-flowing and creative to cover all possible aspects.
During the discussion, take it as a positive sign when an inherent fraud risk is found. Remember that the goal is to identify all risks, not to cover them up.
It is also wise to consult team members with a deep understanding of the system processes and procedures. Conducting interviews with long-term customers and partners can also help identify risk from a different perspective. Looking into the most common fraud risk assessment examples like contracts, beneficiaries, payrolls, and financial reports can also shed light on inherent risks.
After identifying all of the inherent fraud risks, the following key element is to determine how significant is its impact and how likely it is to happen. Knowing its effects and frequency will give an idea of what to prioritize when creating countermeasures.
The process of analyzing this will vary depending on the entity or the system. For example, business impacts can be assessed qualitatively by using statistics and historical data to show how significant the loss will be and how frequent these fraud incidents can be.
But in some cases, it’s not possible to use quantitative analysis like disaster relief programs and government financial aid. So, using risk scoring is also a viable option. Risk scoring can be simple as rating a fraud risk depending on a set category to visualize and understand the impact a fraud risk has.
After carefully analyzing the impact of every inherent risk, the following key element is to set how much risk tolerance a program or system is willing to take. In technical terms, risk tolerance refers to how much variation is acceptable in a system’s performance to achieve a specific goal.
To put it in a clearer perspective, creating a fraud-free system is too costly both in terms of workforce and financial resources. That is why setting a risk tolerance is essential to know the baseline in which a system is willing to accept possible losses due to fraud.
Inspection for disaster relief was used in the fraud risk assessment example. There may be fraudulent applications for financial assistance in the case presented, but checking the individual houses and damages will take up a lot of time and resources. But people need to receive financial aid. So, it’s up to the manager to balance and decide between the urgency and fraud risks involved.
After removing the risks below the tolerance, it is now time to carefully study the existing fraud risk controls and check whether they can mitigate the inherent risks. This involves carefully connecting and simulating each control to every risk and the impact it will make. In some cases, there will be some remaining risks and are called residual risks.
To deal with residual risks, a manager can enhance or improve the existing control policies. If improvement is not possible or the residual risk can’t be removed, another countermeasure is to create a control that mitigates the consequences or the impact it generates.
Last on the key elements is documentation. Documenting practical fraud risk assessments will ensure that every key finding and conclusion are well-recorded and used for future studies and improvements. Documentation is also an essential requirement when aiming for standard certifications like ISO.
Aside from the key elements needed, below are three helpful strategies that can significantly improve your fraud risk assessment. These are referenced from the fraud risk assessment template of Australia’s Commonwealth Fraud Prevention Centre.
When conducting a fraud risk assessment, a leader needs to show genuine commitment to mitigate fraud. This will ensure that enough resources and time will be allotted to this endeavor. Also, it will significantly impact the attitude of the team towards fraud prevention.
This attitude shift will, in turn, start a culture centered around fraud risk prevention. And this will bring forth benefits like better cooperation and more straightforward implementation of fraud risk controls.
When conducting a fraud risk assessment, it will significantly help out to think like a fraudster. This will prevent being too optimistic about how frauds can happen and their impact on the company or an entity.
To think like a fraudster, you’ll need to study and understand the common tactics used by fraudsters, like looking for system vulnerabilities and loopholes. A fraudster also uses different personas, so it will help to know each persona and create countermeasures against them.
Depending on the scale of the company or an entity, having a dedicated fraud risk committee can significantly help create effective countermeasures for fraud risks. Another of their essential functions is to provide strategic oversight on the appropriateness of the proposed countermeasures.
It is recommended that the committee be made up of senior employees who have a deep understanding of the processes in the system and relevant stakeholders that can provide a different perspective for fraud risk assessments.
Paper-based fraud risk assessment forms are tedious and time-consuming for auditors. Data must be collected from multiple sources, sorted, and then manually analyzed to create a successful action plan.
Lumiform is a digital checklist and forms tool. It allows digitizing the entire assessment process. The integration of digital audits in the process improves the assessment processes. Reporting mechanisms can be made more efficient through a digital application. In addition, the online dashboard provides the ability to track using real-time results to see to what extent the actions are taken help reduce the risk of fraud.
Take advantage of a digital solution for your fraud scores by implementing the following: