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:
As a forensic expert, I will accept the engagement and initiate a forensic investigation, ensuring that proper terms of reference (TOR) are agreed upon with MSc 2 Ltd. The first steps would include:
- Formal engagement and planning: Obtain written authorization from MSc 2 Ltd’s board of directors to perform a forensic investigation, defining the scope, objectives, responsibilities, timeline, and expected outcomes of the investigation.
- Evidence gathering and analysis: Secure and analyze payroll records, employee files, bank account details, and audit trails from the payroll system. Investigate the payments made post-redundancy and trace where the funds were directed.
- Identify perpetrators: Identify any individual(s) who created, approved, or failed to detect the fraudulent transactions—particularly investigating Akeem Bello, the senior accountant.
- Preserve evidence: Use proper chain-of-custody procedures to ensure the integrity of digital and physical evidence for potential legal proceedings.
- Report findings: Prepare a forensic report detailing the fraud’s extent, methods, financial loss, and potential culprits, which could be used in court or by regulatory bodies.
- Liaise with legal authorities: Where necessary, advise MSc 2 Ltd to report the fraud to law enforcement or regulatory authorities.
Explanation (300+ words):
Forensic accounting is a specialized field involving investigation of financial fraud and irregularities with the aim of uncovering the truth and supporting legal action. Since MSc 2 Ltd is not an audit client of the firm, there is no conflict of interest. This allows the forensic department to accept the engagement without independence issues.
The first priority is to formally agree on the engagement. This involves setting clear terms of reference, which outlines what the investigation will cover, what MSc 2 Ltd expects from the forensic team, and what deliverables will be provided. Clear TOR is critical to avoid scope creep and ensure legal validity of the work performed.
Afterward, the forensic team will begin gathering and analyzing evidence. In this case, the anomaly in payroll expense indicates potential “ghost employees”—individuals who no longer work at the company but are still being paid. Since all salaries were being paid into the same bank account, it suggests deliberate manipulation, likely by someone with access to the payroll system—possibly Akeem Bello.
Evidence such as payroll reports, HR records, and bank statements will be reviewed, and interviews may be conducted with relevant staff. Given that fraud is suspected, care must be taken to preserve all evidence correctly, maintaining a clear chain of custody so it can be admissible in court.
A detailed forensic report will be presented to MSc 2 Ltd, and the company will be advised to report the fraud to the police or other appropriate authorities. The forensic team may also be called to provide expert witness testimony if legal proceedings follow.
This structured approach ensures the fraud is properly uncovered, documented, and legally supported for appropriate action
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