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
provide the correct answer and 300 words explanation
Correct Answer:
As a forensic expert, I would explain to Segun Peter that a forensic investigation involves a detailed, systematic, and evidence-based inquiry designed to uncover, analyze, and document fraudulent activity within MSc 2 Ltd. The investigation will focus on verifying the existence, scope, and perpetrators of the suspected payroll fraud. It will include data collection, employee interviews, tracing of payments, and use of forensic accounting techniques. Additionally, I would clarify that the investigation is separate from a regular audit and will provide evidence suitable for legal proceedings if necessary.
Detailed Explanation (300 words)
In response to Segun Peter’s request and the situation at MSc 2 Ltd, it is essential to clarify what a forensic investigation entails and how our department can assist.
A forensic investigation is a specialized, thorough examination aimed at detecting fraud, understanding its mechanisms, identifying those responsible, and quantifying any financial loss. Unlike a standard audit, which provides reasonable assurance on financial statements, forensic investigations are more detailed and evidence-focused with the possibility of supporting legal actions.
Given the facts—redundant employees still on the payroll with salary payments being made to a single bank account—there is a strong indication of payroll fraud. Our forensic investigation would start with:
- Planning and Scoping: Define the investigation’s objectives, identify key risk areas, and develop an investigation plan. This includes understanding internal controls and payroll processes.
- Data Collection and Analysis: Gather payroll records, bank statements, employee contracts, and any other relevant documents. Using forensic tools and analytical techniques, we will trace payments to confirm if salaries are indeed paid to redundant employees and who is receiving the funds.
- Interviews and Background Checks: Interview key personnel including Segun Peter, payroll staff, and other relevant employees to gain insight and identify inconsistencies. Special attention will be given to the senior accountant, Akeem Bello, who is currently absent and suspected of involvement.
- Evidence Preservation: Secure all data and documents to prevent tampering. This is critical if the case progresses to legal action.
- Reporting: Provide a clear, detailed report on findings including the nature of the fraud, those involved, financial impact, and recommendations for prevention and recovery.
Since MSc 2 Ltd is not a current audit client, it is important to inform them of the independent nature of this investigation and clarify the terms of engagement including confidentiality, scope, and timelines.
In conclusion, our department can provide MSc 2 Ltd with a comprehensive forensic investigation that will identify fraudulent payroll activities, support potential legal action, and advise on internal controls to prevent future fraud.