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, my next step would be to propose a structured forensic investigation plan for MSc 2 Ltd, outlining the scope, objectives, and methodology of the investigation. This would include:
- Engagement Terms: Since MSc 2 is not an audit client, we would first issue a formal engagement letter, clearly stating the terms of the forensic investigation, its independence from statutory audit services, and the agreed objectives, such as identifying and quantifying the fraud and determining those involved.
- Initial Fraud Risk Assessment: Conduct a risk assessment based on the preliminary findings. This includes understanding internal controls related to payroll and how they may have failed or been overridden.
- Data Collection and Analysis:
- Obtain payroll records from before and after the factory closure.
- Analyze bank account details where redundant employees’ salaries were deposited.
- Perform employee headcount reconciliations.
- Use data analytics to identify patterns, anomalies, and potential ghost employees.
- Interviews and Evidence Gathering: Interview staff, especially payroll personnel and HR, and collect digital and physical evidence, such as emails or access logs.
- Liaison with Legal Counsel: Coordinate with the company’s legal team to ensure any evidence collected is admissible should the case be pursued in court.
- Reporting: Prepare a comprehensive forensic report outlining the findings, those potentially responsible, the amount of loss, and recommendations for control improvements.
Explanation
A forensic audit differs from a statutory audit in that it is investigative in nature and focused on identifying fraud or financial misconduct. In this case, MSc 2 Ltd has discovered that salary payments continued to be made to individuals who were officially terminated, with all funds going into the same bank account. This is a strong indication of payroll fraud, potentially involving creation of ghost employees or misappropriation of funds.
The first step in this situation is to establish the scope and legal basis for our work, which is done through a formal engagement letter since MSc 2 is not an audit client. This also ensures independence and sets professional boundaries.
Following this, a structured forensic investigation must be initiated. Analytical review techniques, such as variance analysis, will help determine the financial impact of the fraud. Electronic payroll records will be cross-referenced with termination notices, bank transfer data, and employment records to identify discrepancies.
Given that the suspected perpetrator, Akeem Bello, has gone missing, it is crucial to secure digital evidence (e.g., emails, payroll access logs) immediately to prevent data loss or tampering. All investigative work must follow chain-of-custody protocols to maintain the integrity of evidence, especially if the matter proceeds to court.
Ultimately, the forensic team will provide a report that not only quantifies the loss and identifies responsible individuals but also offers recommendations to strengthen payroll controls and prevent future fraud.
