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:
As a forensic expert, I will initiate a forensic investigation into the suspected payroll fraud at MSc 2 Ltd. This process involves a systematic approach to uncover, analyze, and document evidence of fraudulent activity. The investigation will follow several key steps:
- Engagement and Planning:
First, I will formalize the engagement with MSc 2 Ltd. Although they are not an audit client, a signed engagement letter will define the scope of work, responsibilities, and objectives of the investigation. The scope will focus on payroll records, personnel files, bank account analysis, and internal controls. - Information Gathering:
I will collect relevant documentation such as payroll records, redundancy letters, bank statements, employee files, and access logs. This will help verify who was supposed to be removed from the payroll and identify discrepancies. I will also examine digital trails (email records, accounting software logs, etc.). - Data Analysis and Investigation:
Using forensic data analysis tools, I will review the payroll data for anomalies, particularly focusing on salary payments after the factory closure. The fact that payments continued to a single bank account is a red flag. Tracing the account owner and identifying any links to company staff (e.g., Akeem Bello) will be a priority. - Interviews and Evidence Corroboration:
I will conduct interviews with relevant personnel (including HR and finance staff) and attempt to locate or obtain information about the missing senior accountant, Akeem Bello. His sudden absence is suspicious and may be linked to the fraud. - Reporting and Recommendations:
After gathering and analyzing the evidence, I will provide a forensic report summarizing findings, identifying individuals involved, quantifying financial loss, and suggesting internal control improvements to prevent recurrence. If criminal activity is confirmed, I will advise MSc 2 on involving law enforcement or legal counsel.
Explanation (300 words):
The role of a forensic auditor in this situation is to investigate suspected fraud using accounting, auditing, and investigative skills. The fraud at MSc 2 Ltd appears to be a payroll fraud, where redundant employees were kept on payroll and their salaries diverted to one bank account. This indicates possible ghost employee fraud, often orchestrated by insiders who manipulate records to benefit financially.
The forensic investigation begins by establishing the scope and formal agreement since MSc 2 is not a regular audit client. It’s important to define what the investigation will cover and ensure confidentiality and objectivity throughout.
Next, I will gather documentation and evidence related to staffing changes, payroll transactions, and bank account details. Analytical procedures, such as comparing payroll trends before and after the factory closure, will help quantify the financial impact. I will also trace the bank account receiving the fraudulent payments to identify the beneficiary.
A crucial part of the investigation involves examining the role of employees, especially Akeem Bello, whose absence raises suspicion. Interviews with staff will provide insight into internal processes and possible collusion. I will also look for weaknesses in internal controls, such as lack of segregation of duties, which may have enabled the fraud.
Finally, the investigation will result in a detailed forensic report, outlining findings, parties involved, financial impact, and control recommendations. The company may use this report for internal action or to pursue legal/criminal proceedings. This proactive approach not only addresses current issues but also helps safeguard the company from future fraud.
