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:
As a forensic expert and manager in the forensic auditing investigation department, my immediate response would be to accept the engagement to conduct an independent forensic investigation into the suspected payroll fraud at MSc 2 Ltd. The following steps outline the appropriate response:
Correct Answer:
- Engagement Acceptance & Planning
Formally accept the engagement through an engagement letter clearly outlining the scope, objectives, confidentiality terms, and deliverables of the investigation. Ensure independence and absence of conflicts of interest, since MSc 2 Ltd is not an audit client. - Initial Risk Assessment & Information Gathering
Meet with Segun Peter and other key personnel to understand the suspected fraud, gather preliminary data, and obtain payroll records, bank statements, redundancy letters, HR records, and internal emails. - Forensic Examination
- Compare the list of terminated employees to current payroll records.
- Identify discrepancies and trace salary payments made post-redundancy.
- Conduct a detailed bank account analysis to determine who controls the account receiving the unauthorized payments.
- Digital Forensics & Interviews
- Access and preserve electronic evidence such as emails, login histories, and accounting system logs.
- Interview relevant personnel including HR staff, payroll clerks, and supervisors.
- Attempt to contact or trace Akeem Bello for questioning, as his absence is suspicious.
- Reporting
Prepare a comprehensive forensic report detailing findings, fraud mechanisms, amounts involved, responsible individuals, control failures, and recommendations for internal control improvements. - Liaison with Legal Authorities
If criminal conduct is confirmed, advise the company to report the matter to law enforcement. Assist legal counsel with evidence needed for prosecution or recovery.
Explanation:
A forensic investigation is a highly specialized audit aimed at uncovering fraud, financial misconduct, or criminal activity through detailed examination of financial records, digital evidence, and employee behavior. In the case of MSc 2 Ltd, the red flag is the insignificant drop (3%) in payroll expenses despite a 20% staff reduction. This anomaly, uncovered through analytical procedures, suggests manipulation of payroll records.
The most likely fraud involves ghost employees—redundant staff whose salary payments continue but are funneled into a single suspicious bank account. This indicates intentional manipulation likely by someone with access to payroll systems—pointing to Akeem Bello, who is now absent and uncontactable.
As forensic experts, our role is to uncover the fraud scheme, identify how it was perpetrated, quantify the financial loss, identify the individuals responsible, and document findings in a report that can be used in court if necessary. We also help strengthen internal controls to prevent recurrence.
This investigation requires a structured approach: gathering and analyzing payroll and banking records, comparing termination dates with payment dates, performing digital forensics on accounting software, and interviewing relevant staff. Objectivity, confidentiality, and chain-of-custody for evidence are critical.
Since MSc 2 Ltd is not an audit client, there’s no threat to independence, and we can proceed without regulatory conflicts. The outcome will provide MSc 2 Ltd with clarity, legal recourse, and recommendations for improving corporate governance and internal controls.
