Take not of this question for your CA 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 department regarding 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 initiate a forensic audit investigation to determine the extent, methods, and individuals involved in the suspected payroll fraud at MSc 2 Ltd. This will involve:
- Planning and Scoping the Investigation: Understanding the objectives of the investigation, identifying relevant departments, records, and systems to be reviewed.
- Data Collection and Analysis: Obtaining access to payroll records, HR data, bank account information, redundancy notices, and employment contracts. This includes reviewing changes in payroll post-closure and tracing payments made to redundant employees.
- Conducting Interviews: Interview key personnel, including HR staff, payroll officers, and anyone involved in processing salary payments. Efforts should be made to contact Akeem Bello and understand his role.
- Digital Forensics: Analyze computer and email systems used by Akeem Bello and other relevant staff for evidence of fraudulent activity or communication.
- Quantifying the Fraud: Determine how much money was fraudulently paid out, for how long, and whether the amounts were siphoned off into personal or third-party accounts.
- Reporting: Prepare a detailed forensic report outlining the findings, individuals involved, how the fraud was committed, its financial impact, and recommendations for internal control improvements.
- Liaising with Legal Authorities: Assist the company’s legal team or law enforcement if prosecution is pursued.
Explanation:
A forensic investigation is a specialized audit aimed at uncovering fraud, misconduct, or other financial irregularities. In the case of MSc 2 Ltd, the suspected payroll fraud involves continued salary payments to employees who were officially made redundant. The issue came to light when the finance director observed only a marginal drop (3%) in payroll expenses despite a 20% workforce reduction.
As a forensic expert, my first step is to define the scope of the investigation in collaboration with MSc 2’s directors. This includes identifying relevant documentation and access to systems. I will examine payroll data to identify the fraudulent transactions, trace the bank accounts that received the unauthorized payments, and evaluate internal controls that allowed the fraud to occur.
Interviews will be conducted with key staff, particularly in HR and payroll. Akeem Bello’s disappearance raises a red flag and requires investigation. I will also analyze his access to payroll systems and any digital footprints he may have left, such as emails or login activity.
The ultimate goal is to determine the full extent of the fraud, identify all perpetrators, and quantify the financial loss. The investigation’s findings will be presented in a forensic report, which may be used for disciplinary action, civil recovery, or criminal prosecution. I will also recommend improvements in controls to prevent future fraud.
Importantly, since MSc 2 is not an audit client of our firm, there is no conflict of interest, and we can proceed independently and objectively with the forensic audit.
