Fraud Risk Assessment Flashcards

A Certified Fraud Examiner is leading a new fraud risk assessment for a retail company that has never performed one before. According to the ACFE's guidance, which of the following is the most appropriate first step in this process?

Answer: Identifying the potential inherent fraud risks relevant to the company's operations, industry, and locations.

The first step in any fraud risk assessment is to identify the universe of potential fraud risks that could apply to the organization before any controls are considered. [7, 12] This involves understanding the business and its environment to brainstorm where and how fraud could occur. Subsequent steps involve assessing the identified risks, evaluating the controls in place, and then making recommendations.

After a fraud risk assessment identifies a significant risk of check tampering in the accounts payable department, management decides to eliminate paper checks and move all vendor payments to a third-party electronic payment platform that requires dual authentication. This action is an example of which type of risk response?

Answer: Transferring the risk

Transferring risk involves shifting the risk to a third party. By using a third-party payment platform, the company is transferring some of the processing risk and control responsibility. Mitigation involves reducing risk by implementing internal controls. Avoidance means ceasing the activity causing the risk. Acceptance means taking no action.

What is the primary objective of conducting a fraud risk assessment within an organization?

Answer: To proactively identify specific fraud schemes the organization is susceptible to and evaluate the controls mitigating those risks. [1]

The primary goal of a fraud risk assessment is to be a proactive tool that helps an organization identify its unique vulnerabilities to internal and external fraud. [5] By understanding these specific risks, management can then evaluate, design, and implement the most effective anti-fraud controls. [1] It is not primarily for assigning blame (investigation), and it cannot guarantee the prevention of all fraud.

During a fraud risk assessment, the team has identified over fifty potential fraud schemes. Which of the following factors are MOST crucial for prioritizing these identified risks for further action and resource allocation?

Answer: The likelihood of the scheme occurring and its potential significance or impact. [3, 4, 6]

Risk prioritization is a critical step in the assessment process. To effectively allocate limited resources, organizations must evaluate each identified fraud risk based on its likelihood (probability of occurrence) and its potential significance or impact (financial, reputational, etc.). [3, 5, 6] Risks with high likelihood and high impact are prioritized for the strongest response.

A fraud examiner facilitates a brainstorming session with the sales department to identify potential fraud risks. The examiner asks the team, "If you wanted to inflate your sales numbers to get a bigger bonus, and you couldn't get caught, how would you do it?" This risk identification technique is best described as:

Answer: Thinking like a fraudster.

The technique of 'thinking like a fraudster' involves putting participants in the mindset of a perpetrator to brainstorm how they might exploit vulnerabilities or override controls. [18] This is a highly effective method for identifying specific, relevant fraud scenarios during the risk identification phase of a fraud risk assessment. [10, 14]

Which of the following is a primary benefit of formally documenting the organization's fraud risk assessment process and its results?

Answer: It provides a rational basis for management to design, implement, and evaluate its anti-fraud controls. [1, 2]

Formal documentation creates a clear record of the identified risks, the assessment of their likelihood and impact, and the evaluation of existing controls. This documentation provides the foundation and rationale for management's decisions regarding where to invest in new or enhanced anti-fraud controls and serves as a baseline for future assessments. [1, 22]