Principle 8: Assesses fraud risk

“Assessing fraud risk” under COSO Principle 8 means you can’t rely on a generic enterprise risk assessment and call it done. You must show that fraud is explicitly considered, documented, and translated into control decisions that are owned and operating. COSO positions Principle 8 within the Control Environment component, so your fraud risk assessment is not just a risk exercise; it is part of internal control design and governance ¹.

For a CCO, Compliance Officer, or GRC lead, the fastest path is to make this requirement executable: define scope, assign an accountable owner, run a structured fraud risk workshop, document scenarios tied to your processes and systems, and produce a control mapping with measurable follow-ups. Examiners and auditors will look for traceability. They will ask: “What fraud risks did you identify, what changed because of that assessment, and can you prove you did it on a recurring basis?”

This page provides requirement-level implementation guidance you can put into production: step-by-step execution, evidence to retain, exam questions to prepare for, and common failure modes that cause findings during audits and customer due diligence aligned to COSO ².

Regulatory text

Framework excerpt (provided): “COSO internal control principle 8 implementation expectation.” ³

Plain-English operator interpretation:
You must formally assess fraud risk as part of your internal control system. Practically, that means you identify plausible fraud schemes, evaluate where and how they could happen, consider incentives/pressures/opportunities, include risks of management override, and use the output to design, prioritize, or adjust controls ⁴.

What auditors expect to see is not the “perfect” fraud model. They expect a living, owned process that produces decisions: control changes, monitoring enhancements, training, approvals, and remediation tickets with closure evidence.

Plain-English requirement: what “assesses fraud risk” means

Assessing fraud risk under Principle 8 is a structured answer to five questions:

1. Where could fraud happen in your processes? Think revenue, procurement, payroll, expenses, inventory/usage, financial reporting close, and customer onboarding.
2. Who could commit it or enable it? Employees, managers, contractors, and third parties with access or influence.
3. How would it be executed? Specific methods: falsified documentation, unauthorized approvals, data manipulation, collusion, kickbacks, side agreements, or access abuse.
4. What controls should prevent or detect it? Segregation of duties, approval workflows, exception reporting, access controls, reconciliations, audit trails, and monitoring.
5. What changed as a result of the assessment? If the answer is “nothing,” you probably did not meet the intent.

Who it applies to (entity and operational context)

Applies to: Organizations using the COSO Internal Control–Integrated Framework to design, assess, or attest to internal control ¹.

Most relevant operational contexts:

• Financial reporting and close: journal entries, estimates, reconciliations, revenue recognition judgments.
• Procure-to-pay and vendor management: supplier onboarding, invoice approval, payment runs, changes to bank details.
• Order-to-cash and customer lifecycle: discounts, credits, refunds, chargebacks, returns.
• Payroll and HR: new hire setup, termination processing, pay changes, time/attendance.
• IT and security access: privileged access, logging, system change management, integrations.
• Third parties: outsourced accounting, payment processors, claims administrators, agents, and service providers who can initiate or approve transactions.

If you have regulated operations, audits, or customer due diligence (SOC-style requests), Principle 8 becomes a practical expectation: show your fraud risk assessment process, outputs, and how those outputs drive control design and oversight ³.

What you actually need to do (step-by-step)

1) Create a “control card” for the requirement (make it runnable)

Build a one-page runbook that makes execution and evidence predictable:

• Objective: Identify and address fraud risks that could impact operations, reporting, or compliance.
• Owner: A named role (often Compliance, Internal Audit, or Finance Controls) with authority to assign actions.
• Participants: Finance, AP/AR, HR, IT, Security, Legal/Compliance, and key business owners.
• Trigger events: Org restructures, new systems, new products, M&A, new third parties with transaction authority, or significant control failures.
• Cadence: Define your internal cadence based on change and risk tolerance. Keep it consistent and defensible.
• Exception rules: What happens if key stakeholders cannot attend, or if systems data is unavailable.
  This is the fastest way to avoid the common gap where teams “did the work” but cannot show ownership, frequency, or evidence of operation ¹.

2) Define scope and fraud taxonomy tied to processes

Start with a process map, then build a fraud scheme list per process. Keep it concrete:

• Procure-to-pay: fake vendor, duplicate invoices, vendor bank account change fraud, collusion with approver.
• Expense & T&E: fabricated receipts, policy circumvention, split transactions to avoid thresholds.
• Revenue: unauthorized discounts, side agreements, channel stuffing, refund abuse.
• Payroll: ghost employees, pay rate manipulation, termination timing abuse.
• Financial close: inappropriate journal entries, estimate bias, manual adjustments without support.

Include management override scenarios explicitly: bypassing approvals, pressuring staff, or directing manual entries that circumvent controls ⁴.

3) Run a structured fraud risk assessment workshop (and document it)

Use a consistent template. Minimum fields that stand up in audits:

• Fraud scenario description
• Process/system in scope
• Actors (internal, external, third party)
• Preconditions (access, approval rights, data fields)
• Existing controls (preventive/detective)
• Residual gaps and proposed actions
• Owner and target completion criteria

Make the output “control-ready.” A fraud risk assessment that ends as a slide deck with no control mapping usually fails in practice.

4) Score and prioritize (simple beats complex)

Pick a scoring model your stakeholders will actually use. Many teams use:

• Likelihood: based on access, incentives, history of issues, and control strength
• Impact: financial, regulatory, operational, reputational
• Detectability: how quickly monitoring would catch it

Record assumptions. Auditors commonly challenge undocumented scoring changes across cycles.

5) Map fraud risks to control activities and monitoring

For each material scenario:

• Confirm preventive controls exist (segregation of duties, approvals, system validations).
• Confirm detective controls exist (exception reports, reconciliations, post-transaction reviews).
• Confirm data and logging exist to support detection and investigations.

Where controls are missing or weak, create remediation actions:

• Control design changes (workflow, SoD redesign, access restriction)
• Monitoring (alerts, exception reporting)
• Training (targeted to high-risk roles)
• Third-party requirements (contract clauses, attestations, audit rights)

6) Create and retain the minimum evidence bundle (non-negotiable)

Define what “passing evidence” looks like each cycle:

• Inputs: process inventory, org chart, system list, prior assessment, incident log, hotline summaries (if applicable)
• Working papers: workshop notes, scenario register, scoring rationale
• Outputs: fraud risk register, control mapping, remediation plan
• Approvals: sign-offs by accountable leaders
• Follow-through: tickets, change records, updated procedures, test results

Store evidence in a known location with consistent naming. The most common audit failure is not lack of activity; it is scattered evidence that cannot be tied to a specific assessment period ¹.

7) Run control health checks and close the loop

Principle 8 is easiest to defend when you can show that identified fraud risks drove real changes and that those changes were verified:

• Track remediation to validated closure (not “implemented” without proof).
• Run periodic control health checks on high-risk fraud controls (for example, access reviews, exception report reviews, approval adherence).
• Feed incidents and near-misses back into the next assessment cycle.
  This supports sustained operation, which is a common expectation in COSO-aligned internal control programs ¹.

Required evidence and artifacts to retain (audit-ready list)

Keep these artifacts together for each assessment cycle:

• Principle 8 control card/runbook (owner, scope, triggers, cadence, steps)
• Fraud risk assessment plan (scope, participants, systems, processes)
• Fraud scenario inventory with scoring and rationale
• Control mapping (risk → control(s) → control owner → evidence source)
• Meeting records (agenda, attendance, minutes, decisions)
• Approvals (sign-off and date)
• Remediation tracker with closure evidence (change tickets, screenshots, approvals)
• Control health check results and follow-up actions

If you need to answer customer diligence quickly, this bundle is the difference between a clean response and a scramble.

Common exam/audit questions and hangups

Expect variants of:

• “Show me your fraud risk assessment for the last period and the prior period. What changed and why?”
• “Which fraud scenarios include management override, and what controls address them?” ⁵
• “How did you consider third parties that can initiate, approve, or influence transactions?”
• “Prove that remediation items were completed. Who validated closure?”
• “Where is the evidence stored, and how do you prevent gaps when staff changes?”

Common hangup: teams produce a risk register but cannot demonstrate control linkage (which control mitigates which fraud scenario) or operational proof (who reviewed what, when, and what exceptions were handled).

Frequent implementation mistakes and how to avoid them

1. Mistake: treating fraud risk as a generic ERM category.
   Fix: document specific fraud schemes by process and system, then map to controls.

2. Mistake: ignoring management override.
   Fix: include explicit override scenarios and test whether approvals, logs, and monitoring would detect them ¹.

3. Mistake: no third-party angle.
   Fix: list third parties with transaction authority or data access, and include their fraud enablement scenarios in the assessment.

4. Mistake: evidence is ad hoc.
   Fix: define a minimum evidence bundle and a retention location upfront ¹.

5. Mistake: remediation has no closure discipline.
   Fix: track actions to validated closure with a named validator and retained proof.

Enforcement context and risk implications

Public enforcement case references were not provided in the source catalog for this requirement, so this page does not cite specific cases. Practically, weak fraud risk assessment increases the likelihood that fraud becomes a “control failure” narrative during audits, external assurance, or customer diligence, especially when management override or third-party access is involved ³.

Practical 30/60/90-day execution plan

Use this as an operator plan. Adjust to your change rate and audit calendar.

First 30 days (stand up the mechanism)

• Assign Principle 8 owner and executive sponsor.
• Publish the Principle 8 control card (objective, scope, triggers, cadence, evidence).
• Inventory processes, systems, and third parties in scope for fraud scenarios.
• Create templates: scenario register, scoring rubric, control mapping, remediation tracker.

Days 31–60 (run the assessment and produce outputs)

• Conduct fraud risk workshops by process (start with highest-risk transaction flows).
• Populate the fraud risk register with scenario scoring and rationale.
• Map each high-priority scenario to preventive and detective controls.
• Open remediation items with owners and defined closure evidence.

Days 61–90 (close gaps and make it durable)

• Implement priority control improvements and monitoring changes.
• Validate remediation closure with evidence.
• Run a control health check on the highest-risk fraud controls.
• Package the evidence bundle for audit/customer diligence requests.
• Set the next reassessment trigger schedule and change-driven review gates.

Where Daydream fits naturally: Daydream can store the Principle 8 control card, automate evidence bundle checklists by cycle, and track remediation items to validated closure so you can answer audits without reconstructing work from email and meeting notes.

Frequently Asked Questions

Do we need a separate fraud risk assessment if we already have an enterprise risk assessment?

Yes, in practice you need fraud-specific scenarios tied to processes and controls, with documented outputs and follow-through. ERM summaries rarely provide the control mapping and evidence trail auditors expect under COSO ¹.

How do we treat third parties in the fraud risk assessment?

Include third parties anywhere they can initiate, approve, process, or influence transactions, or where they hold privileged access to systems or data. Document scenarios such as collusion, bank detail changes, and outsourced processing weaknesses, then map them to contract, access, and monitoring controls.

What evidence is “enough” to prove we assessed fraud risk?

Retain inputs, working papers, outputs, approvals, and remediation closure proof as a single evidence bundle per cycle. Auditors typically reject a slide deck without traceable decisions and operational evidence ¹.

Who should own Principle 8: compliance, internal audit, or finance?

Any of those can work if the owner has authority to convene stakeholders and drive remediation. Many organizations place operational ownership in Finance/Controllership with Compliance or Internal Audit providing facilitation and challenge.

How do we address management override without accusing leadership?

Treat it as a control design scenario, not a character judgment. Document where override could occur (manual journal entries, approval bypass, privileged access) and require controls that produce audit trails, independent review, and monitoring ⁵.

What’s the fastest way to fail this requirement during an audit?

Having no clear owner, no defined cadence or trigger events, and no retained evidence that links fraud scenarios to controls and remediation. Fix this with a control card and a standardized evidence bundle ¹.

Footnotes

1. COSO IC framework overview

2. COSO Internal Control guidance page; Weaver summary of COSO 17 principles

3. COSO Internal Control guidance page

4. COSO IC framework overview; Weaver summary of COSO 17 principles

5. Weaver summary of COSO 17 principles