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.
The Correct Answer and Explanation is:
Correct Answer: Initiate a forensic investigation to determine the nature, extent, and individuals involved in the payroll fraud scheme.
Explanation
As the forensic audit manager, the immediate priority is to initiate a formal forensic investigation to uncover the details of the suspected payroll fraud at MSc 2 Ltd. The finance director, Segun Peter, has identified suspicious activity in the company’s payroll expenses following the closure of one of the five factories. Despite a 20% reduction in staff due to redundancies, payroll expenses decreased by only 3%, indicating a discrepancy that warranted further examination.
Segun’s initial investigation revealed that several redundant employees remained on the payroll, with salaries still being paid monthly into a single bank account. This pattern strongly suggests the presence of ghost employees — individuals who are no longer employed but whose salaries are fraudulently claimed by someone within the organization. The fact that all payments go into a single account points to collusion or direct action by an internal party, potentially someone with payroll access or control.
Our investigation will involve gathering and reviewing payroll records, bank account details, employee termination documentation, and internal controls related to payroll processing. We will use forensic data analysis to track anomalies and identify who authorized these payments and who benefited from them. Interviews with HR and payroll staff will also be crucial.
Furthermore, the investigation should assess weaknesses in internal controls that allowed the fraud to occur undetected for several months. Recommendations will then be made to strengthen controls, such as stricter payroll authorizations, routine audits, and better segregation of duties.
It is essential that we proceed systematically and discreetly to preserve evidence and prevent further tampering. The findings will be compiled in a detailed forensic report, which may be used for internal disciplinary action, criminal prosecution, or civil recovery proceedings if necessary.
