Take not of this question for your CA You are a manager in the forensic auditing investigation department of the audit firm. The directors of a local manufacturing company, MSc 2 Ltd, have contacted your department regarding a suspected fraud, which has recently been discovered operating in the company, and you have been asked to look into the matter further. You have held a preliminary discussion with Segun Peter, the finance director of MSc 2 Ltd, the notes of this conversation are shown below:
Notes of discussion with Segun PeterFour month ago MSc 2 shut down one of its five factories, in response to deteriorating market conditions, with all staff employed at the factory made redundant on the date of closure.
While monitoring the monthly management accounts, Segun perform analytical procedures on salary expenses. She found that the monthly total payroll expenses has reduced by 3% in the months following the factory closure-not as much as expected jilven that 20% of the total staff of the company has been made redundant. Initial investigation performed last week by Segun revealed that many of the employees who had been made redundant had actually remained on the payroll records, and salary payments in respect of these individuals were still being made every month, with all payment going into the same bank account. As soon as she realised that there may be a fraud being conducted within the company, Segun stopped any further payments in respect of the redundant employees. He contacted our firm as she is unsure how to proceed, and would like our firm‘s specialised department to conduct an investigation.
Segun says that the senior accountant, Akeem Bello, has been absent from work since he conducted his initial investigation last week, and it has been impossible to contact him. Segun believes that he may have been involved with the suspected fraud.
Segun has asked whether your department would be able to provide a forensic investigation, but is unsure what this would involve. MSc 2 is not an audit client to your firm. As a forensic expert, what are you going to do
The Correct Answer and Explanation is:
Correct Answer:
As a forensic expert, I will accept the engagement, ensuring proper authorization and scope definition, and then plan and conduct a forensic investigation to identify and quantify the suspected payroll fraud, preserve evidence, and report findings to MSc 2 Ltd’s board of directors.
Explanation (300+ words):
As a forensic expert in the auditing firm, my first step would be to obtain a formal engagement letter from MSc 2 Ltd. This letter should clearly define the scope of the investigation, the objectives, responsibilities, deliverables, and the extent of access to documents, personnel, and systems. It should also establish the terms regarding confidentiality, independence, fees, and timelines. This is particularly important since MSc 2 Ltd is not an existing audit client of our firm.
Once the engagement is confirmed, the next step is to plan the investigation. Based on Segun’s preliminary findings, there is evidence of a payroll fraud scheme, possibly a form of ghost employee fraud, where salaries are still being paid to individuals who were terminated. Since all these payments went to the same bank account, it strongly suggests that a single person may have orchestrated the fraud to divert company funds. The disappearance of the senior accountant, Akeem Bello, after the discovery further supports suspicion of internal involvement.
The forensic investigation would typically involve:
- Data analysis and forensic accounting procedures: Review payroll records, termination notices, and bank statements to identify the scope and duration of the fraud.
- Digital forensics: Analyze electronic communications, audit logs, and employee access records to trace how the payroll system was manipulated.
- Interviewing relevant personnel: Including HR, finance, and IT staff who may have insight into the system’s controls or interactions with Akeem Bello.
- Evidence preservation: Secure digital and physical records to maintain the chain of custody for possible legal proceedings.
- Reporting: Provide a detailed forensic report outlining findings, financial impact, responsible parties, and recommendations for control improvements and legal action.
This process ensures that the company can take informed decisions, including disciplinary action, recovering stolen funds, and improving internal controls to prevent future fraud.