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, the appropriate course of action is to conduct a detailed forensic investigation to identify the scope and nature of the suspected fraud, gather and preserve evidence, interview relevant personnel, and report findings to MSc 2 Ltd management. You should also advise MSc 2 Ltd to involve legal counsel and possibly notify law enforcement, given the potential criminal nature of the fraud. Additionally, since MSc 2 Ltd is not an audit client, you must ensure a formal engagement letter is signed specifying the scope and limitations of the forensic investigation before proceeding.
When approached by MSc 2 Ltd regarding suspected payroll fraud, the first step as a forensic expert is to understand the situation fully and outline a clear plan for investigation. MSc 2 Ltd has reported that after closing one factory and making 20% of its staff redundant, payroll expenses have only decreased by 3%, signaling possible ghost employees or payroll fraud.
The initial investigation by the finance director, Segun Peter, has revealed that payments continue to be made to redundant employees’ payroll accounts, which is a classic indicator of fraud—where someone may be creating or maintaining fictitious employee records to divert funds.
Since MSc 2 Ltd is not an existing audit client, it is essential to formalize the relationship by preparing an engagement letter that clearly defines the scope of work, fees, confidentiality, and legal responsibilities. This protects both your firm and the client.
Next, a structured forensic investigation should commence:
- Data Collection and Preservation: Obtain payroll records, employee contracts, bank payment records, and any relevant communications. Secure this data to prevent tampering.
- Analytical Procedures: Re-perform the analytical review of payroll expenses over several months, comparing employee numbers, payroll totals, and bank statements.
- Identification of Ghost Employees: Cross-check payroll lists with HR records and physical attendance records. Identify if payments have been made to employees who were supposedly redundant.
- Interviews: Interview key staff, especially those involved in payroll processing, including Segun Peter and attempt to locate or understand the absence of the senior accountant, Akeem Bello, whose absence raises suspicion.
- Documentation: Meticulously document findings, including any evidence of falsification, collusion, or procedural weaknesses that allowed the fraud to occur.
- Reporting: Prepare a clear, factual report outlining the scope, findings, impact, and recommendations for corrective action.
Given the potentially criminal nature of the fraud (misappropriation of funds), advise MSc 2 Ltd to consult legal counsel and consider law enforcement involvement.
Lastly, recommend strengthening internal controls around payroll and employee management to prevent recurrence.
In summary, the forensic investigation must be thorough, evidence-based, impartial, and follow professional and legal standards to ensure MSc 2 Ltd can take informed action based on the findings.
