You are a manager in the forensic auditing investigation department of the audit firm.

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:

Direct Answer (Summary)

As a forensic expert, the next steps involve planning and conducting a detailed forensic investigation into the suspected payroll fraud at MSc 2 Ltd. This would include:

Understanding the context and scope of the investigation based on the preliminary information.
Gathering and securing evidence, including payroll records, bank statements, employee lists, and system logs.
Performing detailed data analysis to identify ghost employees, unauthorized payments, or manipulation of payroll records.
Interviewing key personnel, including Segun Peter, other finance staff, and attempting to locate Akeem Bello.
Evaluating internal controls over payroll and identifying weaknesses exploited to perpetrate the fraud.
Documenting findings and quantifying the fraud loss.
Providing recommendations for corrective actions and controls to prevent future occurrences.
Reporting to management with clear, objective findings, and, if required, preparing evidence for possible legal proceedings.

Because MSc 2 Ltd is not an audit client, a forensic investigation must be conducted with an agreed engagement letter outlining the scope, confidentiality, and legal parameters.

Detailed Explanation

1. Initial Understanding and Planning

The first step is to clearly understand the background and scope of the suspected fraud. The information from Segun Peter highlights:

A factory closure with 20% staff redundancy.
Payroll expense reduction of only 3%, which is suspiciously low.
Payments continuing to be made to redundant employees’ bank account.
Suspicion surrounding the senior accountant, Akeem Bello, who has been absent and unreachable since the discovery.

Given this, the investigation will focus on payroll fraud involving “ghost employees” or payments to non-existent or redundant staff.

Before commencing, a formal engagement agreement should be signed with MSc 2 Ltd, clarifying the scope, roles, confidentiality, and legal implications of the investigation. Since MSc 2 is not a client of the audit firm, clarity on independence and contractual terms is critical.

2. Evidence Gathering and Preservation

Forensic investigations rely heavily on data and evidence integrity. Early action should focus on:

Securing payroll records from before and after the factory closure, including employee master files, salary payment records, timesheets, and bank remittance advices.
Obtaining bank statements for all payroll accounts and any relevant company accounts where payments might have been diverted.
Extracting HR records showing employee status changes, redundancies, and terminations.
Collecting IT system logs for payroll software to detect any unauthorized access or alterations.
Ensuring data preservation to prevent tampering, including making forensic copies of electronic records.

Evidence must be handled carefully to maintain the chain of custody for potential legal use.

3. Detailed Analytical Procedures and Data Analysis

With the data secured, the forensic team would:

Perform reconciliation of payroll records against HR employee lists to identify discrepancies, such as payments made to employees no longer on the payroll.
Conduct variance analysis on payroll expenses over time to detect unusual trends.
Use data analytics tools to:
Identify duplicate bank accounts receiving salary payments.
Match employee bank details to detect if multiple salaries go to the same account.
Analyze patterns in payment dates, amounts, and changes in payroll master data.
Review payment approvals and segregation of duties within payroll processing.

This phase aims to detect fraudulent payments, quantify losses, and uncover manipulation or collusion.

4. Interviews and Personnel Investigation

Interviews form a critical part of gathering evidence and understanding the fraud context. The forensic team should:

Interview Segun Peter to understand how she conducted her initial review, what records she accessed, and her concerns.
Interview other finance and HR staff for explanations on payroll procedures and controls.
Attempt to locate and interview Akeem Bello to establish his role and involvement.
Interview other staff who may provide leads or corroborate facts.

The aim is to obtain admissions, identify possible collusion, and evaluate internal control weaknesses.

5. Assessment of Internal Controls and Process Weaknesses

A forensic investigation includes assessing how the fraud was possible. The team should evaluate:

How payroll redundancies were handled administratively.
Controls over updating employee status and payroll master files.
Authorization procedures for payroll changes and payments.
Supervision and review processes.
IT security controls around payroll systems.

Identifying control gaps is essential to recommend measures preventing recurrence.

6. Documentation and Reporting

Throughout the investigation, meticulous documentation of findings, evidence collected, and analysis performed is necessary. The final report should:

Clearly describe the nature of the fraud.
Quantify the financial impact.
Identify responsible parties where possible.
Detail weaknesses exploited.
Provide recommendations for remediation.

If legal proceedings are anticipated, the report must be factual, clear, and defensible.

7. Recommendations and Follow-Up

Based on findings, the forensic team should recommend:

Strengthening controls around payroll and HR coordination.
Regular reconciliations and analytical reviews.
Improved segregation of duties.
IT system access controls.
Employee fraud awareness and whistleblowing mechanisms.

The team might also assist MSc 2 Ltd in implementing these controls and monitoring improvements.

8. Legal Considerations and Confidentiality

Since fraud investigations can lead to legal action, the forensic team must:

Maintain strict confidentiality.
Avoid actions that could compromise evidence admissibility.
Work closely with legal counsel regarding evidence handling and disclosure.
Prepare to present evidence in legal or disciplinary proceedings if required.

Summary of What the Forensic Investigation Will Involve

Engagement and planning: Define scope, terms, and objectives.
Data gathering: Secure payroll, HR, bank, and IT records.
Analysis: Use data analytics and reconciliations to identify ghost payments.
Interviews: Obtain testimonies from finance, HR, and key suspects.
Internal controls review: Identify weaknesses enabling fraud.
Reporting: Document evidence, quantify losses, and recommend corrective actions.
Legal readiness: Maintain evidence integrity and confidentiality.

Final Note

Your role as a forensic expert is not just to detect fraud but to provide MSc 2 Ltd with actionable intelligence and help them strengthen their processes. Given the seriousness of the allegations and the missing senior accountant, the investigation must be thorough, objective, and professional, ensuring that the company has the evidence and recommendations needed to address the issue comprehensively.