COSO Principle 8: The entity considers the potential for fraud in assessing risks

COSO Principle 8 requires you to explicitly assess how fraud could occur in your in-scope services and then design controls that prevent, detect, and respond to those fraud scenarios. To operationalize it for SOC 2, run a documented fraud risk assessment tied to your risk assessment process, map fraud schemes to controls, and retain evidence that the assessment is performed and updated. ¹

Key takeaways:

• Treat fraud as a first-class risk category in your SOC 2 risk assessment, not a one-line checkbox. ¹
• Document plausible internal and external fraud scenarios, link each to preventive/detective controls, and assign accountable owners. ¹
• Keep auditor-ready artifacts: your fraud risk assessment, meeting records, control mapping, and proof of control operation. ¹

COSO Principle 8: the entity considers the potential for fraud in assessing risks requirement is where many SOC 2 programs become “real” for auditors. Auditors are not looking for a generic statement that “fraud is possible.” They expect a concrete, repeatable process that identifies how fraud could reasonably occur in your environment, how it would impact commitments to customers, and what controls you have in place to reduce the likelihood and impact. ¹

For a Compliance Officer, CCO, or GRC lead, the fastest path is to embed fraud risk into the same machinery you already use for enterprise/security risk assessment: scope, scenarios, likelihood/impact, control mapping, remediation, and periodic refresh. You should also treat “fraud” broadly: financial fraud, misuse of privileged access, falsified support actions, unauthorized disbursements, procurement fraud, data exfiltration for gain, and metrics/reporting manipulation can all matter in a service organization context. ¹

This page gives requirement-level implementation guidance: who owns what, the minimum steps to satisfy SOC 2 expectations, what evidence to retain, and the audit questions you will get.

Regulatory text

Requirement (SOC 2 / Trust Services Criteria): “COSO Principle 8: The entity considers the potential for fraud in assessing risks.” ¹

Operator interpretation: Your risk assessment process must explicitly evaluate fraud as a potential cause of failure, loss, misstatement, or harm. That means you (1) identify credible fraud schemes relevant to your services and processes, (2) assess their likelihood and impact, (3) implement controls to prevent/detect/respond, and (4) keep evidence that this work occurs on a defined cadence and when change happens. ¹

What an auditor typically expects to see from this sentence:

• Fraud is included as a distinct lens in risk identification, not buried under “other risks.” ¹
• Scenarios connect to your actual workflows (billing, support, access provisioning, SDLC, incident handling, procurement, payouts). ¹
• Controls are mapped to scenarios with clear ownership and operating evidence. ¹

Plain-English meaning (what you must achieve)

You must be able to answer: “If someone wanted to commit fraud here, how would they do it, and what would stop them or expose them?” Then you must prove you asked and answered that question in a structured way. ¹

Fraud considerations should cover:

• Internal fraud: employees/contractors misusing access, overriding controls, falsifying approvals, manipulating logs or reports, creating fake vendors/credits/refunds. ¹
• External fraud: social engineering, account takeover, abuse of customer support, payment fraud, fake customer onboarding, supply-chain/third party fraud. ¹
• Fraud enabled by control gaps: weak segregation of duties, insufficient review/approval, excessive privileged access, poor monitoring, lack of immutable logs. ¹

Who it applies to (scope and operational context)

This applies to service organizations pursuing or maintaining SOC 2 reports, across in-scope services and the systems that support them. ¹

In practice, COSO Principle 8 shows up in these teams and processes:

• Finance/billing and revenue operations: credits, refunds, pricing overrides, write-offs, invoicing changes.
• Customer support and operations: identity verification, account recovery, exception handling, data exports performed on behalf of customers.
• IT/security: access provisioning, privileged access, logging, incident response, vulnerability management.
• Procurement and third party management: onboarding, payment changes, invoice approval, and third party access to your environment.
• Engineering/DevOps (if in scope): CI/CD integrity, change management, release approvals, secrets management.

If your SOC 2 scope includes availability, confidentiality, or processing integrity commitments, fraud risk often overlaps directly with those commitments because fraud commonly exploits access, change, and exception paths. ¹

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

Use this as the minimum operational playbook.

Step 1: Define “fraud” for your environment (and write it down)

Create a short fraud risk assessment standard that states:

• Fraud includes intentional acts for unauthorized benefit, by insiders or outsiders. ¹
• Fraud assessment applies to in-scope services, systems, and material workflows.
• Outputs: scenario list, risk ratings, control mapping, remediation plan, and review cadence.

Keep it short. Auditors want clarity more than length.

Step 2: Build a fraud scenario inventory tied to real workflows

Run a workshop (or structured interviews) with process owners. Use a simple template per scenario:

• Scenario name
• Actor: insider, customer, third party, unknown attacker
• Entry point: support channel, admin console, API keys, procurement workflow
• Method: override approval, social engineering, privilege escalation, fake identity, invoice manipulation
• Asset impacted: customer data, funds, service integrity, audit logs, financial reporting
• Business impact narrative: what fails and who is harmed
• Existing controls
• Gaps and remediation

Scenario examples that map cleanly to SOC 2 evidence:

• Support agent performs an unauthorized customer data export after weak identity verification.
• Engineer uses broad production access to alter logs to conceal unauthorized actions.
• Finance operator changes banking details for a third party payee without independent verification.
• Sales ops applies unauthorized discounts or credits by bypassing approvals.

Step 3: Rate fraud risks using your existing risk method

Use the same likelihood/impact scale your risk register uses so the fraud assessment is not an orphan process. Record rationale, not just scores. ¹

Minimum fields:

• Inherent risk rating
• Control strength assessment (qualitative is fine)
• Residual risk rating
• Risk owner
• Target remediation date (if gaps exist)

Step 4: Map each fraud scenario to preventive, detective, and response controls

Auditors look for “risk to control” traceability. Build a mapping table:

Fraud scenario	Preventive controls	Detective controls	Response controls	Control owner
Unauthorized refund/credit	Approval workflow; role-based access	Refund/credit exception report review	Investigation playbook; corrective action	Finance lead

Control types that frequently satisfy Principle 8 expectations when they are real and evidenced:

• Segregation of duties for sensitive actions (create/approve/pay).
• Access controls and privileged access management.
• Dual approval for payment changes, refunds, or high-risk support actions.
• Immutable logging and alerting for privileged actions.
• Periodic reconciliation and exception review.

Step 5: Decide what is “must fix before report” vs “track as residual risk”

For SOC 2 readiness, you need an explicit decision record:

• Which fraud risks are accepted, and why.
• Which require remediation, and by when.
• Which are mitigated by compensating controls.

This is where many teams fail audits: they identify fraud scenarios but do not close the loop with ownership and decisioning. ¹

Step 6: Operationalize cadence and change triggers

Define triggers that force an out-of-cycle fraud risk refresh:

• New product or major feature that changes authorization paths.
• New payment/refund model or pricing changes.
• New support channel or outsourcing support to a third party.
• M&A, major re-org, or executive turnover in key control owner roles.
• Material incident involving suspected abuse or policy evasion.

Tie the refresh to your broader risk assessment calendar so it is easy to run and evidence. ¹

Step 7: Retain operating evidence (auditor-ready)

Do not rely on verbal walkthroughs. Keep artifacts that show the process ran and resulted in decisions and controls. ¹

Required evidence and artifacts to retain

Minimum evidence set that usually satisfies SOC 2 audit testing for CC3.3 (Principle 8): ¹

• Fraud risk assessment procedure/standard (versioned, approved).
• Fraud risk assessment output (scenario inventory + ratings + owners).
• Meeting records (agenda, attendees, minutes, action items) or equivalent interview notes.
• Risk-to-control mapping (matrix/table) showing each fraud scenario covered by controls.
• Remediation tracker for identified gaps (tickets, due dates, closure evidence).
• Evidence of control operation for key controls (approvals, access reviews, exception reports, reconciliations, alert reviews), aligned to the audit period.

Practical tip: store artifacts in a single “Fraud Risk Assessment” audit folder by period, with a one-page index. Daydream is useful here because you can assign owners, attach evidence to the control, and keep a clean audit trail without chasing screenshots across chat threads. ¹

Common exam/audit questions and hangups

Expect these questions in walkthroughs and testing:

1. “Show me how you consider fraud in your risk assessment.” They want the procedure plus the latest completed assessment. ¹
2. “What fraud scenarios did you identify for customer support/admin actions?” Support exceptions are a frequent weak point.
3. “How do you address management override?” If one role can both initiate and approve sensitive actions, explain compensating controls.
4. “How do third parties factor into fraud risk?” Auditors will ask about outsourced support, contractors, payment processors, and consultants with access.
5. “What changed since last assessment?” If the answer is “nothing,” be ready to show why that is reasonable (release history, org changes, incident history). ¹

Hangups that slow audits:

• Scenarios are generic and not tied to your systems or workflows.
• No clear control mapping, or mapping exists but controls are not evidenced.
• Risks identified but no remediation decisions or owners.

Frequent implementation mistakes (and how to avoid them)

1. Mistake: treating fraud as only financial statement fraud.
   Fix: include operational and cyber-enabled fraud paths such as support abuse, access misuse, and log tampering. ¹

2. Mistake: listing “fraud” as a single risk with no scenarios.
   Fix: require scenario-level documentation that maps to a process and control.

3. Mistake: no coverage of insider threats and privileged access.
   Fix: include at least one scenario involving privileged access misuse and one involving exception handling.

4. Mistake: controls exist but are informal.
   Fix: document the control, define frequency, define evidence, and show operation during the audit period. ¹

5. Mistake: failing to include third parties.
   Fix: extend scenarios to include third party access, outsourced operations, and payment flows; include your due diligence and access controls as mitigations.

Enforcement context and risk implications

No public enforcement cases were provided in the supplied source catalog for this requirement, so you should treat it as a SOC 2 auditability and customer trust issue rather than tie it to a specific regulator action here. ¹

Risk implications are still concrete:

• Weak fraud assessment increases the chance you miss high-impact abuse paths (support exceptions, payment changes, privileged actions).
• During SOC 2, lack of evidence can lead to control exceptions, scope limitations, or delays if you have to retrofit artifacts mid-audit. ¹

Practical 30/60/90-day execution plan

Days 0–30: Stand up the process and get a first pass completed

• Assign an accountable owner (often GRC with Finance/Security co-owners).
• Publish a short fraud risk assessment procedure aligned to your SOC 2 risk assessment method. ¹
• Run interviews/workshops with Finance, Support, Security, and Engineering to capture scenarios.
• Produce v1 fraud scenario inventory, ratings, and owners.
• Build the risk-to-control mapping table.

Deliverables: procedure, v1 assessment, mapping matrix, meeting minutes. ¹

Days 31–60: Close obvious gaps and harden evidence

• Identify top fraud scenarios with weak mitigation and open remediation items.
• Formalize controls that are happening informally (approvals, reconciliations, access reviews).
• Define evidence standards per control (what artifact, where stored, who signs off).
• Start collecting operating evidence on the normal cadence so you have an audit period trail.

Deliverables: remediation tracker, updated control narratives, first month(s) of evidence. ¹

Days 61–90: Prove repeatability and integrate with change management

• Run a mini-refresh of the fraud risk assessment based on product/process changes since day 0.
• Test traceability: pick a scenario and walk it to controls and operating evidence.
• Train process owners on what auditors will ask and where evidence lives.
• If you use Daydream, set up recurring tasks and evidence requests so owners attach proof as they operate controls, not at audit time. ¹

Deliverables: refreshed assessment, evidence completeness check, audit-ready index. ¹

Frequently Asked Questions

Do we need a separate “fraud risk assessment,” or can we fold it into our normal risk assessment?

Folding it into your normal risk assessment is fine if fraud scenarios are explicitly identified and documented, with clear control mapping and ownership. Auditors still expect evidence that fraud was considered, not implied. ¹

What’s the minimum set of fraud scenarios we should document for SOC 2?

Document scenarios that reflect your actual workflows: privileged access misuse, support exception abuse, and financial/payment manipulation where relevant. The goal is credible coverage of how fraud could occur in-scope, not an exhaustive encyclopedia. ¹

How do we address “management override” in a startup where founders have broad access?

Acknowledge the risk directly, document compensating controls (logging, independent review of sensitive actions, audit trails), and record acceptance decisions where segregation of duties is not feasible. Then retain evidence those compensating controls operate. ¹

Does this requirement apply if we don’t process payments or handle refunds?

Yes. Fraud in a service organization can target data access, system behavior, customer accounts, reporting, and operational integrity even without direct money movement. Scope your scenarios to your service commitments and system boundaries. ¹

What evidence is strongest for auditors?

A dated fraud risk assessment with attendees, scenario-to-control mapping, and operating evidence for the mapped controls during the audit period. Evidence wins over narratives. ¹

How often should we refresh the fraud assessment?

Set a defined cadence aligned to your broader risk assessment cycle, and also refresh on material change (new products, new third parties with access, major workflow changes, or relevant incidents). Document the trigger logic so refreshes are explainable. ¹

Related compliance topics

• 2025 SEC Marketing Rule Examination Focus Areas
• Access and identity controls
• Access Control (AC)
• Access control and identity discipline
• Access control management

Footnotes

1. AICPA TSC 2017