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:
As a forensic expert in the auditing investigation department, I would begin by confirming to Segun Peter that our department is well-equipped to conduct a forensic investigation into the suspected payroll fraud at MSc 2 Ltd. A forensic investigation involves a thorough and systematic examination of financial records to uncover evidence of fraud, quantify the financial loss, identify those responsible, and assist in any potential legal proceedings.
Steps in the Forensic Investigation:
- Engagement and Planning:
Formally engage with MSc 2 Ltd through a signed letter of engagement outlining the scope, objectives, confidentiality, and responsibilities. Plan the investigation with a focus on payroll processes, especially related to the redundancy and payments after the factory closure. - Data Collection and Preservation:
Secure access to all relevant payroll records, bank statements, redundancy documents, employee records, and system logs. Ensure data integrity by preserving electronic and paper evidence to maintain a proper audit trail. - Analytical Review:
Perform detailed analytical procedures comparing pre- and post-closure payroll expenses. Recalculate redundancy costs and match employee records with payroll disbursements to identify anomalies. - Investigative Procedures:
Trace salary payments made to redundant employees and identify the common bank account receiving these funds. Interview relevant staff, including HR and payroll personnel, and attempt to contact Akeem Bello, whose sudden absence raises suspicion. - Reporting:
Prepare a detailed forensic report outlining the nature and extent of the fraud, who may be responsible, the estimated financial loss, and recommendations to strengthen internal controls. - Liaison with Legal Authorities:
If criminal activity is confirmed, assist MSc 2 Ltd in presenting the findings to the police or regulators, and provide expert witness support if legal proceedings arise.
This forensic investigation will not only identify the fraud but also help MSc 2 Ltd recover losses and prevent future occurrences.
