Fraud examination: definition and audit meaning

Definition

The ACFE describes fraud examination as a methodology for resolving fraud allegations from inception to disposition. It begins with predication, meaning facts that would lead a reasonable, trained professional to believe a fraud has occurred, is occurring or will occur. It then moves through evidence collection, document and data analysis, interviews, and a report. Examiners protect the chain of custody and avoid conclusions on guilt.

Why it matters in an audit or review

An auditor who suspects fraud under AU-C 240 communicates with the right level of management and those charged with governance, and considers the effect on the audit. A fraud examination goes further than an audit procedure and is usually performed by a separate team, often through counsel.

Example

Illustrative: payroll analytics flag three employees who share a bank account. Predication exists, so the examiner pulls personnel files, tests the payroll approvals and interviews the payroll supervisor last, after the documents are secured.

Common mistakes

Interviewing the suspect before securing documents.
Starting an examination with no predication.

Sources

ACFE, Fraud Examiners Manual, Investigation section, https://www.acfe.com/FEM
AICPA, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit

Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error

Related terms

Forensic accounting

Forensic accounting is the application of accounting, auditing and investigative skills to disputes and suspected wrongdoing, producing findings usable in litigation, arbitration or internal investigations.

Certified Fraud Examiner (CFE)

A Certified Fraud Examiner is a professional credentialed by the Association of Certified Fraud Examiners after meeting experience and education requirements and passing a four-section exam covering fraud schemes, law, investigation and prevention.

Fraud tree

The fraud tree is the ACFE's classification of occupational fraud into three branches: asset misappropriation, corruption and financial statement fraud, each divided into specific schemes.

Fraud risk factors

Fraud risk factors are events or conditions that indicate an incentive or pressure to commit fraud, an opportunity to do it, or an attitude that justifies it. They are red flags, not proof of fraud.

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Fraud examination