You are an audit manager in Hasibu and Co. working on the audit of Safari Group (The Group), whose financial year ended on 31 March 2015. This is the first time you have worked on group audit. The draft consolidated financial statements recognise profits before tax of Sh.600 million (2014 – Sh.900 million) and total assets of Sh.900 million (2014 – Sh.820 million). The group manufactures equipment used in telecommunication industry.
Goodwill of Sh. 100 million is recognised in the group statement of financial position having arisen on several business combinations over the last few years. An impairment review was conducted in March 2015 by the group finance director, from which an impairment of Sh.5, 000,000 is to be recognised in respect of goodwill.
The group finance director has prepared a file documentation to support the results of the impairment review, including notes on the assumptions used, his calculations and conclusions. He made the following comment:
“1 don’t think you need any evidence other than that contained in my file. The assumptions used are straightforward, so you need to look into them in detail. The assumptions are consistent with how we conducted impairment reviews in previous years and your firm has always agreed with the assumptions used: so you can check that back to last year’s audit file. All of the calculations have been checked by the-head of group internal audit department”.
The group finance director has also informed you that two members of the sales team are suspected of paying bribes in order to secure lucrative customer contracts. The internal audit team were alerted of this when they were auditing cash payments and found significant payments to several new customers being made prior to the contract being signed. The Director has asked if Hasibu & Co. could perform a forensic investigation into the alleged bribery payments.
Recommend two procedures to be used in performing a forensic investigation on alleged bribery payments.
Two procedures to be used in performing a forensic investigation on alleged bribery payments
Special investigation commissioned to identify type of fraud, perpetrators and extent of loss suffered by the company. Procedures
- Interrogation of suspected fraudsters
- Evaluate systems of controls put in place in running the activities
- Chances of override of systems
- Critical examination of documents that support the payment of frauds
- Nature of customer contracts entered by staff
- Review reports given by internal auditors used to uncover the fraud
Steps in forensic investigation
- Determine whether to accept the engagement or not.
- Determine scope of investigation (terms of reference) – reflected in engagement letter
- Planning for the work — resources needed, special skills, methodology
- Gather evidence testing, inquiries, inspection of documents, discussion with the management, substantive procedures on balances, interview employees, get information from third parties, police in case objective is to prosecute.
- Give report of the findings — touch forms of reference, standards applied and report on findings, addressed to appropriate recipients.
- Court proceedings if necessary, auditors to act as expert witnesses.
- Recommendations for improvements e.g. weak controls.
Six months ago, Shupavu Ltd, shut down one of its four factories as a result of deteriorating market conditions. All staff at the factory were declared redundant on the date of closure.
While monitoring the monthly management ‘accounts, John Muga, the internal auditor performed analytical procedures on salary expenses and established that the monthly total payroll expenses had reduced by 3% in the months following the closure of the factory. This was lower than the expected reduction given that 25% of the total staff of the company had been declared redundant.
Initial investigations by the internal auditor revealed that many of the employees who had been declared redundant had actually remained on the payroll records and salary payments in respect of these individuals were still being made every month. All the payments were being credited into the same bank account.
As soon as the internal auditor realized that there was a possibility of fraud, he in formed the managing director who immediately stopped any further payments in respect of the redundant employees. Shupavu Ltd has contacted your audit firm to conduct an investigation.
You are further informed that the senior accountant has been absent from work and has not been traced since the commencement of the initial investigations. It is believed that he might have been involved in the suspected fraud.
Shupavu Ltd. Are not audit clients of your firm of auditors, They have enquired whether your firm could provide a forentlk; invostigation
- Describe three objectives of a forensic investigation.
- Forensic investigation can be used to assess financial data with intention of identifying fraud.
- Assists in legal proceedings by testifying as expert witnesses
- It can also be used in making written valuation on financial or economic loss suffered by a firm.
- . Forensic auditing can be used as a basis of educating firms regarding measures to prevent fraud.
- Using examples of procedures that could be used to gather evidence, explain the: steps you would follow in undertaking the forensic investigation.
- A list of all employees before the factory was closed down should be obtained. This list should include the salaries that were paid to them before closure.
- The mathematical accuracy of the above should be confirmed including bank accounts and the actual amounts transferred to the accounts.
- The payroll should be reviewed to ascertain that these employees were included. iv. Their details should be extracted from the payroll including salaries made to them
- Request the bank to provide information for amounts transferred from the company’s bank account to other bank accounts for the last 9 months. The purpose for doing so is to check if there are any trends that are not usual as regards movement of cash to other account.
- Interrogate the persons responsible for authorizing salary payments including those in charge of salary processing. Find out from them if they were aware of any irregularities during this time.
Define forensic auditing and describe its application to fraud investigations.
- b) Forensic auditing
This is the process of gathering, analysis, and reporting on data, in a pre-defined context, for the purpose of finding facts and/or evidence in the context of financial or legal disputes and/or irregularities and giving preventative advice in this area.
Application to fraud investigations are;
- Litigation support
This includes assisting counsel in investigating and assessing the integrity and amount relating to such areas as loss of profits, construction claims, product liability shareholder disputes, bankruptcies, and breach of contract
- Insurance claims
A forensic accountant may be called upon to assist in the preparation and subsequent assessment of insurance claims on behalf of the insured and the insurer. The more significant areas relate to the calculation of loss arising from business interruption and personal injury matters,
- Fraud investigation.
Forensic auditing can be applied in fraud investigation cases, for instance, tracing funds, asset identification and recovery, due diligence reviews.
- Criminal matters.
In criminal matters_ accountants and auditors as expert witnesses are increasingly important in court cases.
- Corporate investigations.
The forensic accountant assists in addressing allegations ranging from kickbacks and wrongful dismissals to internal situations involving allegations of management or employee wrongdoing.
The Companies Act 1989 requires the Recognized Supervisory Bodies (such as the Association of Chartered Certified Accountants) to have rules and practices as to the technical standards to be applied in company audit work and as to the manner in which these standards are to be applied in practice.