What is a fraud risk assessment?

A fraud risk assessment (FRA) asks a simple question in a disciplined way: if someone inside or outside this organisation wanted to commit fraud, how would they do it, and would we notice? It moves fraud prevention away from generic controls towards specific schemes that fit the organisation's business, people and systems.

The ACFE estimates in its Occupational Fraud 2026 report that organisations lose 5% of revenue to fraud each year, and that a typical fraud runs for 12 months before detection. An FRA is the main tool for narrowing that gap.

How is a fraud risk assessment carried out?

A practical FRA usually follows these steps:

1. Set the scope. Business units, geographies, processes and fraud types, including occupational fraud, external fraud, bribery and financial reporting fraud.
2. Identify schemes. Workshops and interviews with process owners, supported by past incidents, audit findings and whistleblower complaints received through the vigil mechanism.
3. Consider pressure, opportunity and rationalisation. The fraud triangle helps identify where incentives and weak oversight coincide, including the risk of management override.
4. Assess inherent risk. Rate likelihood and impact before controls.
5. Map controls. Link each scheme to the preventive and detective internal controls that address it, and test whether they work.
6. Determine residual risk and respond. Accept, strengthen controls, add data analytics or monitoring, or change the process.
7. Report and refresh. Present results to the audit committee or board and update the assessment regularly.

A simple risk register, listing scheme, owner, likelihood, impact, controls, residual rating and action, is often enough to start.

What frameworks guide fraud risk assessment?

The Fraud Risk Management Guide published jointly by COSO and the ACFE (2nd edition, 2023) sets out five principles: fraud risk governance; fraud risk assessment; fraud preventive and detective control activities; investigation and corrective action; and monitoring the fraud risk management programme. These align with the five components of COSO's 2013 internal control framework, and the 2nd edition adds emphasis on data analytics.

What is the regulatory context in India?

• Companies Act 2013: directors of listed companies confirm under s. 134(5)(e) that internal financial controls, including those for preventing and detecting fraud, are adequate and operating effectively. Auditors report on IFC under s. 143(3)(i). A credible FRA is the evidence behind these statements.
• Auditing standards: ICAI's SA 240 sets out the auditor's responsibilities relating to fraud in an audit of financial statements, including assessing fraud risks.
• Banking: RBI's Fraud Risk Management Directions, 2026 for commercial banks, which replaced the 2024 Master Directions, require a board-approved fraud risk policy covering prevention, detection, investigation, staff accountability and an early warning signals framework.

Common gaps in fraud risk assessments

• Treating it as a one-off compliance exercise copied from a template.
• Ignoring management override and senior-level fraud.
• Omitting bribery, third-party and cyber-enabled fraud such as business email compromise.
• Rating controls as effective without testing them.
• No link between identified risks and actions or owners.

How does it differ from related terms?

An FRA is broader than a review of segregation of duties or any single control. It is distinct from an enterprise risk assessment, which covers all business risks, and from a forensic audit, which investigates suspected fraud that may already have happened.

Our view on a fraud risk assessment that changes decisions covers what a useful one looks like. For the wider governance structure, see how to build a fraud risk management framework. Our forensic accounting and data analysis service covers scheme-based risk reviews and data analytics.