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:
Agree to undertake the forensic investigation and explain the scope, process, and objectives of forensic auditing to MSc 2 Ltd’s directors.
Explanation (300+ Words):
As a forensic auditor and manager in the forensic auditing investigation department, the appropriate course of action is to agree to conduct a forensic investigation and clearly explain what this involves to the directors of MSc 2 Ltd. Since the company is not currently an audit client, there is no conflict of interest, and the forensic work can be accepted, subject to proper engagement terms.
A forensic audit is a detailed, independent investigation that focuses on fraud, corruption, or financial misconduct. In this case, there is clear suspicion of payroll fraud: redundant employees were kept on the payroll, and their salaries were allegedly paid into a single bank account—an indicator of possible embezzlement or ghost employees.
As part of this process, you should begin by:
- Issuing an engagement letter that outlines the scope, objectives, responsibilities, reporting lines, and confidentiality terms.
- Explaining the process to the directors, such as:
- Reviewing internal controls over payroll processes.
- Analyzing payroll records before and after the factory closure.
- Tracing salary payments and identifying the bank account where redundant staff salaries were deposited.
- Identifying whether there was collusion or a breakdown in segregation of duties.
- Interviewing relevant staff and securing electronic records (e.g., emails, logs, financial software audit trails).
- Preserving evidence in accordance with legal standards, especially if criminal charges or civil litigation may follow.
- Reporting findings in a way that is suitable for legal proceedings, if necessary.
Segun’s suspicion that the senior accountant, Akeem Bello, is involved—especially given his sudden disappearance—needs to be investigated objectively. The forensic audit would help determine the full scope of the fraud, quantify the losses, identify the individuals involved, and recommend improvements to prevent recurrence.
By taking this professional and structured approach, your department will provide MSc 2 Ltd with the necessary insight and legal support to address the suspected fraud effectively.