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 dregarding 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 to conduct a forensic investigation into the suspected payroll fraud at MSc 2 Ltd. This will involve:
- Engagement Acceptance and Planning:
- Confirm the terms of engagement in writing with clear objectives, scope, responsibilities, timelines, and reporting format.
- Conduct conflict checks since MSc 2 Ltd is not an audit client.
- Ensure that all team members maintain independence and objectivity.
- Investigation Procedures:
- Perform a detailed payroll analysis to identify all payments made after the factory closure.
- Trace payments made to redundant employees and determine the bank account details into which payments were made.
- Identify the individual(s) who authorized or processed the fraudulent payments.
- Recover deleted or hidden data from accounting systems if necessary using computer forensic tools.
- Interview relevant staff (e.g., payroll personnel, HR, Segun) and attempt to contact Akeem Bello for questioning.
- Review internal controls around payroll and redundancy procedures.
- Reporting:
- Provide a detailed report summarizing the findings, evidence gathered, responsible parties, financial impact, and recommendations for internal control improvements.
- The report must be suitable for potential use in legal proceedings.
As a forensic auditor, my role is to investigate the suspected payroll fraud reported by MSc 2 Ltd using specialized investigative techniques. Since MSc 2 Ltd is not an audit client, there are no independence threats, but professional ethics still require that we remain objective and impartial. The first step is to agree on the terms of the engagement, which ensures clarity of purpose and roles between our firm and MSc 2 Ltd.
The investigation will focus on identifying how the fraud was committed, who was involved, how long it lasted, and the total financial loss. Given the red flags—redundant employees still receiving salaries and all payments being directed to one bank account—it is likely that someone with access to payroll systems manipulated the records, possibly Akeem Bello, whose sudden absence raises suspicion.
A key part of the forensic approach includes collecting and preserving documentary and digital evidence that may be required in court. Interviews will help validate findings and identify other possible collusion. Tracing the flow of funds will help identify the beneficiary account, which could directly link the fraud to a perpetrator.
Finally, the investigation will culminate in a comprehensive report, detailing findings and recommending improvements to internal controls to prevent recurrence. This report may be used by management, legal counsel, or even law enforcement agencies, so it must be thorough, factual, and clearly presented.
