Fraud Risk Assessment: What Auditors Look for During Your Audit

An audit is designed to give reasonable assurance that a company’s financial statements are fairly presented and free from material misstatement. Finding fraud isn’t the primary purpose of an audit, but if an auditor comes across signs of fraud during the engagement, they are required to bring it to your attention.

What Does Fraud Risk Assessment Involve?

Auditing standards require auditors to identify and assess the risk of material misstatement due to fraud, then determine how they’ll respond to those risks. This process, known as a fraud risk assessment, happens before fieldwork even begins.

Before your audit team steps into your office, they meet to talk through potential risks specific to your company and your industry. This planning session helps them decide which areas need extra attention and which accounts carry higher risk. Because fraud risks can shift from year to year, auditors can’t rely on last year’s assessment. They start fresh every time.

Certain elements of the audit, like reviewing management override of controls and evaluating revenue recognition, are built in specifically to help surface potential fraud, even though catching fraud isn’t the audit’s main goal.

Under Statement on Auditing Standards Section 240, auditors ask specific questions as part of this process. That includes whether management is aware of any actual, suspected, or alleged fraud, how management identifies and monitors fraud risk, and which transactions, account balances, or disclosures are most likely to carry that risk. Auditors may also ask how management communicates expectations around ethical behavior to employees and to those charged with governance.

These questions aren’t limited to company leadership. Auditors may also speak with those charged with governance, internal auditors, in-house counsel, or employees who handle complex or unusual transactions.

Why Do Auditors Prefer Face-to-Face Conversations?

Auditors prefer meeting in person whenever possible during a fraud risk assessment. Nonverbal cues, like tone, pacing, and body language, provide context that words alone can’t capture. Long pauses or an interviewee restarting an answer are the kinds of signals an auditor is trained to notice. When an in-person meeting isn’t an option, a video call or phone conversation is the next best choice, since it still allows some of these cues to come through.

How Can I Prepare for the Fraud Risk Assessment Process?

It’s worth remembering that an audit doesn’t guarantee your company is free of fraud. Even so, it remains one of the most effective external controls available for detecting and deterring it. You can help the fraud risk assessment process go smoothly by anticipating the kinds of questions your audit team will ask and the documentation they’ll need to support their review.

Some clients find these questions uncomfortable, since they can feel personal or probing. That reaction is normal. Understanding why the questions are being asked, and how they fit into the bigger picture of protecting your business, can make the process feel less like an interrogation and more like a partnership. Prompt, honest responses to your audit team’s questions help keep your audit on schedule and reduce unnecessary delays. 

If you have questions about what to expect during your next fraud risk assessment, reach out to us. We’re happy to walk you through the process before fieldwork begins.