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CS Professional · Internal and Forensic Audit · Practices related to Internal Auditing

While testing payroll at Deccan Pharma Ltd, an internal auditor finds that salary is being credited monthly to three employee accounts with no attendance records, no leave records and identical bank account details differing by one digit. The HR head, who also approves payroll changes, dismisses it as a clerical issue. What is the most appropriate next step for the auditor?

The auditor should extend testing, preserve the evidence and escalate to the audit committee or senior management independent of the HR head. The red flags suggest possible ghost employees, and the HR head's dual role creates a conflict, so accepting the explanation or confronting staff would be inappropriate.

  1. AAccept the HR head's explanation since HR owns the payroll data
  2. BDelete the items from the sample and select others
  3. CDirectly confront the three employees before informing anyone
  4. DExtend testing, preserve the evidence and escalate to the audit committee or senior management independent of the HR head, as fraud indicators existCorrect

Explanation

Ghost-employee indicators with a conflicted approver require expanded procedures, evidence preservation and escalation outside the conflicted line. Accepting the explanation ignores the conflict. Dropping items hides exceptions, and confronting employees first risks tampering and may prejudice any investigation.

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