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:
As a forensic expert, my role in this situation would be to conduct a comprehensive forensic investigation into the suspected payroll fraud at MSc 2 Ltd. The investigation will involve gathering, analyzing, and evaluating financial and non-financial evidence to determine the nature, extent, and individuals involved in the alleged fraud. Since MSc 2 Ltd is not an audit client of our firm, we can maintain independence and objectivity, making our findings more credible for potential legal proceedings.
Key Steps to Take:
- Initial Planning and Engagement:
- Formally agree on the scope of work, objectives, and deliverables with MSc 2 Ltd.
- Ensure confidentiality agreements are in place and obtain authorization to access necessary records.
- Evidence Gathering and Review:
- Secure and analyze payroll records for the past six months, especially focusing on payments made after the factory closure.
- Identify all payments made to redundant employees and trace them to the receiving bank account(s).
- Obtain employee termination lists and match them with active payroll data to identify discrepancies.
- Interviews and Investigations:
- Interview relevant staff, including HR personnel and payroll processing staff.
- Attempt to reach and question Akeem Bello, the senior accountant suspected to be involved.
- Digital Forensics:
- Examine computer systems and email records for manipulation of payroll data or any evidence of collusion.
- Reporting and Recommendations:
- Prepare a detailed forensic report outlining the findings, individuals involved, estimated financial loss, and evidence.
- Advise MSc 2 Ltd on legal options, internal control improvements, and potential recovery steps.
Explanation:
Forensic auditing is a specialized area of accounting that involves the investigation of financial fraud or manipulation using auditing, accounting, and investigative skills. In this case, MSc 2 Ltd has identified suspicious payroll activity involving payments to redundant staff. Despite 20% staff redundancy, payroll only reduced by 3%, signaling a red flag. Preliminary internal investigation revealed ongoing salary payments to former employees, all directed to the same bank account—strongly indicating fraud.
As a forensic auditor, I would first establish the scope and obtain authorization to access financial and HR records. My role involves identifying the methods used to commit the fraud, the amount misappropriated, and the individuals responsible. This includes reviewing payroll transactions, termination documentation, and comparing employee databases. Tracing the payments to a single bank account is a key lead that will help in identifying the beneficiary.
I would also interview relevant staff to gather context and confirm facts, particularly those involved in payroll processing and HR. Given that Akeem Bello, the senior accountant, is missing and uncontactable after the issue was discovered, he becomes a primary suspect and efforts should be made to locate and question him.
Finally, I would compile a comprehensive report for MSc 2 Ltd detailing the findings, supporting evidence, and internal weaknesses exploited. This report could be used for internal disciplinary action, insurance claims, or criminal prosecution. Additionally, I would provide recommendations to prevent future fraud, such as strengthening payroll controls, segregation of duties, and implementing whistleblower policies.
