Fraud and Audit – CS Professional Study Material

Chapter 2 Fraud and Audit – Forensic Audit ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.

Fraud and Audit – CS Professional Forensic Audit Study Material

Question 1.
A multi-national software company (MNC) having operations globally received a series of allegations about Mr. AK, a manager in senior position at Mumbai. The allegation was that he was receiving bribes and for that he had been inflating certain payments to be made. The employment records of the manager were impeccable. He had been with the company for a decade and had helped his division of which he was the manager to reach higher levels and increase in company revenues. The complaints were initially ignored, but they were repeated month after a month, causing concern to the management. The Ethics Committee decided to look into the same and to have a forensic audit to look into the aspects involved. In this backdrop you are required to answer:
How should the forensic audit be conducted by an auditor to examine the various aspects of the allegations and of higher payments covering the:
(a) First level investigations of the allegations. (June 2019, 5 marks)
(b) Subsequent level investigation of suspected fraud of higher payments. (June 2019, 7 marks)
Answer:
(a) Bribery Complaint against Employee and First Level Investigation:
The forensic auditor (FA) should take into account the fact that the employee was driving growth despite a slowdown in the market. The Board of the company was extremely happy with his performance, there were possible strategies being employed by him for the increase in the revenue.
Data Collection – IT : email backups, company mobile devices as per the company policy and applicable law, electronic data from the computer device of the suspect.
Data Collection – Paper Based: suppliers documentation since pre-vendor creation stage-quotes, bids, invoices, payments, delivery, acknowledgments, revisions to contracts, etc. for the alleged suspects tenure with the company.
Data Analytics will help identify Relevant Statistics:

Significant increase in business or particular product line in that business.
Significant increase indicates most likely vendors who could have received business by paying kickbacks.
Scrutinizing procurement procedure as to ascertain disproportionate increase in Certain raw materials in comparison to corresponding revenues.
Review of vendor assessment procedure, analysis of vendor master for new vendors instead of old ones, or alternate vendor/supplier development for certain process or raw material.
Tracking irregular inventory movement or unnecessary procurement of raw material.

(b) Subsequent Level Investigation:

In order not to arise any suspicion in the minds of AK, the FA should take up cases of few other senior managers also. The management should spread the word around that it was a routine investigation.
FA should gather details of financial position and list of relatives of AK. These can be gathered from the statements and declarations periodically made by the employees with the company. Income tax (IT) returns filed by AK or his relatives in pervious years can be referred. Notice, assessment orders and any such communication with it Department can be verified from IT website or emails.
FA should conduct investigation into the financial affairs of the close relatives of AK. Normally, such employees do not buy assets in their own names, but in the name of the close relatives. If any new assets have been acquired during the last two or three years by them, FA should conduct a background check to see whether they possess the necessary means or qualifications to earn the alleged type of income disclosed by them. For example, if the earnings of the relatives are stated to be from commission, brokerage, tuition income, etc., then a closer scrutiny is required. Sometimes, in the name of wife or close relative, huge income is said to be earned from running beauty parlor. FA then should check whether there is actually such a parlor and if yes, whether the clientele is such that the alleged income can be earned therefrom.
If any immovable property had been acquired in the recent years, it should be seen whether any extra consideration besides the one stated in the registered deed of conveyance had been passed on or not. This is an easy way to siphon out bribes received. Search report in his name relating to properties owned by AK or relatives from legal department/lawyers of the company.
The lifestyle of AK should be investigated by FA to see whether the same is commensurate with the salary drawn from the company. Foreign trips or purchase of luxury cars in recent years can be tracked.
FA should find out whether the relatives of AK have vested financial interests in any company, which had been supplying work to or receiving any outsourced work of the MNC. This will give an indication of favoritism and close dealings between AK and these entities. In such case, certain bribes said to be padded on to these entities to get the work and accounted by MNC in some other manner, may not wholly flow out to these entities. AK may pocket a portion of it and the complaints could then be true.
FA should investigate the major cash outflows made through AK to see whether there are any fees paid for bogus referrals, commission, consultation fee, etc. or to see whether they could be inflated by carrying out comparative study of the earlier periods, industry trends, tests of reasonableness, etc.
An interview could be scheduled with the Target and presented these evidences to check for his response. Interview of targets is an important step undertaken in forensic investigation assignments wherein the targets breakdown and confess. Their confession statement is an important document in the court of law for initiating criminal proceedings against them.
Evidences obtained as part of Data Analytics and Disc Imaging have to be thoroughly checked.
The findings should be evaluated in an unbiased manner by the FA to determine the correctness of the complaints.

Question 2.
Thrivikram Dazzlers (TD) is a reputed diamond jewellery merchants in existence for the past two decades. Their jewellery store was located at Chennai and the branch was also operated at Mumbai.
TD had been regularly dealing with a client at Delhi named Sunil Raina & Co., (SR). SR generally electronically transfers funds to TD for purchases. An employee “EM” of them then would visit TD and take delivery of the jewellery ordered. EM had become familiar to TD, having been visiting the shop for the last three years regularly. On 24-3-2019, there was an electronic transfer of funds from SR for a sum of ₹ 16 lakhs. EM produced a letter in the company’s letter head which stated that the articles purchased were gifts for special clients for certain services rendered and hence requested that invoice be made out in the name of EM for 3 necklaces and that the delivery be effected to EM. TD mailed to SR and asked for a confirmation regarding supply of goods in the name of EM. A mail was received in reply confirming the same. TD hence complied with the same after receipt of mail from SR. On 30-3-2019, TD received a phone call from SR asking them why the goods had not yet been delivered despite the payment being made on 24-3-2019. Only then it transpired that EM had defrauded SR and TD.
Both TD and SR approach you, a leading forensic auditor, to conduct a joint forensic audit and submit a report. Both are willing to cooperate with you in providing details and information and records.
(a) Outline the aspects to be considered of the transaction by the Forensic Auditor for taking course of action in detecting the truth of the employee EM. (June 2019, 8 marks)
(b) What would have been the course of action, taken by the Forensic Auditor, in case TD is a dealer in consumer products like costly refrigerators, TV sets, etc., and the goods delivered to EM were six costly TV sets ? (June 2019, 4 marks)
Answer:
(a) Defalcation by employee of customer Sunil Raina & Co., Delhi:
Following aspects are to be looked into by the forensic auditor for taking his course of action in detecting the truth.

TD and SR should be asked to lodge a complaint with police about the incident taken place of taking delivery of goods by EM from TD by having invoice being made in his name.
The employment records of EM available with SR should be seen and must bie looked into by whom he was referred for employment.
EM’s immediate reporting manager needs to be interviewed to understand EM’s general conducts during his employment and if there were any issues against him. In order to understand his general conduct, following concerns must be looked into:
- Did EM keep his Manager in loop when conducting company related transactions?
- EM’s residence needs to be visited to interview few people staying in that area if they know him and his family and their social image.
is previous employment certificate should also be verified so as to analyze his conduct.
Enquiries should be made to ascertain the service records with the earlier employees of EM in a secret way. It is possible that the earlier employer certificate given by EM to SR is a fake document.
If the employer really existed, then it should be investigated whether EM had any history of proved or unproved allegations against him during his employment and why he had left the job.
If the previous employer had not given a clean chit to the auditor then find as how the Human Resource Department of SR had hired him. There could be a collusion here with the HR.
The authorization letter in SR’s letter head should be deeply looked into to find out that whether it is in legitimate company stationery or not? If yes, then a deeper scrutiny of the trial to find out as how EM could get hold of the same, should be investigated. Who signed the same must be seen and authenticity of signature of the person to be verified. If someone other than EM (forged), then here is an accomplice, which should be brought out of records.
TD sent a mail to SR asking for confirmation of delivery of goods to EM. This shows that a reasonable precaution was taken by TD prior to supply.
Forensic Auditor should find out whether TD send such mail to the official email id of SR or to some other email id mentioned in the “authorization letter” produced by EM. If it is an official email id, then TD is not at fault. If it was be the latter, then it could be a case of sheer negligence on the part of TD, or there could be an accomplice for EM in TD shop. These aspects merit attention and deeper scrutiny.
If TD had sent the mail to SR to the official mail id and got back a confirmation mail, who sent it must be investigated. This person is clearly an accomplice of EM. In case of common id, IP address of device from where it is sent to be identified.
If this employee gave confirmation based on a superior’s order, then it is SR which is at fault. In such cases, any act done by any of its employee (EM) will be construed to be act done by an agent, which is binding on the principal SR. TD cannot be held liable in such a situation.
Checking mobile call logs to ascertain whether he has contracted any other employee in either of the companies.
The Forensic Auditor by applying the aforesaid course of action can find
out the truth of the case for making out a report for TD and SR.

(b) Where the goods delivered were costly TV sets instead of Jewelry In such case, apart from the course of action stated in Answer 3 (a) of this paper, the forensic auditor should also look into the following aspects:

How the delivery of goods were taken of?
Was it in TD’s vehicle or was it arranged by EM?
If TD’s vehicle, place of delivery is easy to track, if latter, the vehicle owner should be found out and place of delivery be ascertained the said place can be visited to find out if there is a nearby market for such goods.
E-way Bills are required under GST law for transportation, since the value of the products exceed ₹ 50,000. The e-way bills should also be studied for clues, if any.

Question 3.
Write a Short Note on Directors’ Responsibility.
Answer:
Directors’ Responsibility:

Liability under the Companies Act 2013 (the 2013 Act); and
Liability under other Indian statutes.

For instance:

Penalties under the erstwhile 1956 Act that were seen as ineffective have been significantly amplified under the 2013 Act.
The 2013 Act also provides statutory recognition to the duties of a director, such as exercise of due and reasonable care, skill, diligence, and independent judgment.
One of the key concepts of the Companies Act is the meaning of the term “officer who is in default.” Under the act, liability for default by a company has been imposed on an officer who is in default.
By virtue of their positions in the company, the managing director, the whole-time director, and the company secretary directly fall within the scope of this term.
Under the erstwhile 1956 Act, certain key employees such as the chief executive officer and chief financial officer did not directly come within the ambit of the term, which raised serious concerns because these personnel were viewed as key officials in any company.
The 2013 Act corrects this anomaly and significantly expands the scope of the expression “officer in default.” The term also includes the following;
1. any individual who, under the superintendence, control, and direction of the board of directors, exercises the management of the whole, or substantially the whole, of the affairs of a company;
2. any person on whose advice, directions, or instructions.the board of directors is accustomed to act, other than persons giving advice in a professional capacity; and
3. Every director aware of wrongdoing by virtue of knowledge of or participation in proceedings of the board without objection.

This way, under Companies Act, 2013, the scope of Director Responsibility has been expended to stop the tendencies of fraud in the Corporates. Directors can be held liable both jointly and collectively, for any and every act, commission or omission which is prejudicial to the interests of the company and violates any of the duties to be discharged by them.

Question 4.
Write short note on Director Personal Liability.
Answer:
Director’s Personal Liability: As a general rule, since the company and its Director are separate entities, the Director has no personal liability on behalf of the company. However, under certain circumstances, a Director may be held liable on behalf of the company. These circumstances are:

Liability for Tax
Debts of the Company
Liability for company’s Contracts
Refund of Share application Money
Liability to pay for qualification shares
Mis-statement in the Prospectus
Fraudulent Conduct of Business: A Director may be held personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company if he or she was knowingly party to the fraudulent carrying on of business.
Unlimited Liability: The liability of any or all of the Directors of a limited company can be unlimited if so provided by the Memorandum, or can be so done if approved by a special resolution as authorized by the Articles.

Criminal-Liability:

Dishonored Cheque
Mis-statement in the Prospectus
Offences under the Income Tax Act
Offences under Labour Laws
Corporate Frauds

Lifting of Corporate Veil:
Lifting the veil under the Companies Act:
If, in the course of winding up, it appears that any business of the company has been carried on with an intent to defraud the creditors of the company or any other person, or for any fraudulent purpose, the persons who were knowingly parties to the carrying on of the business in such fraudulent manner shall be personally responsible without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.

Lifting of Veil as recognized by courts:
The scope of this principle as applied by Indian courts is broad and largely dependent on the facts of an individual case. The corporate veil may be lifted where:

a statute itself contemplates this;
where fraud or improper conduct is intended to be prevented;
where a taxing statute or a beneficial statute is sought to be evaded; or
where associated companies are inextricably connected as to be, in reality, part of one concern.

The nature of the impugned conduct, the involvement of the public interest and the effect on the affected parties are all relevant considerations while determining whether or not to lift the corporate veil.

Ultra Vires:
A shareholder may bring an action against the company and its Directors in respect of matters which are ultra vires the Memorandum or the Articles of the company and which no majority shareholders can sanction. For example, Directors of the company sanctioning an action that is contrary to the objects of the company.

Fraud on Minority:
Directors and the company would also be liable if the conduct of the majority of the shareholders constitutes a “fraud on minority”, i.e., a discriminatory action., For example, where the shareholders have passed a special resolution with an effect of discriminating between the majority shareholders and minority shareholders, so as to give the former an advantage of which the latter were deprived.

Actions against Directors by SEBI:
In the case of listed companies, SEBI may proceed against the Director(s) where the Directors of a listed public company fail to make certain disclosures as stipulated under the SEBI (Acquisition of Shares & Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading) Regulations, 1992, in respect of their shareholdings in the company.

Liability under Prevention of Money Laundering Act, 2002 (PMLA):
Further, Through the Finance Bill, 2018, the government amended the * Prevention of Money Laundering Act, 2002 (PMLA). The handling of proceeds from corporate frauds will now be a money- laundering offence. As the PMLA gives Enforcement Directorate the power to attach and confiscate property determined to be proceeds of crime, the amendment will help authorities to prevent the dissipation of proceeds from corporate frauds. However, the unintended repercussion of the amendment will be innocent parties being questioned about their dealings with a company where fraud is discovered and potentially having their assets seized or directors arrested. Therefore, it is critical for directors and officials of companies to now maintain high vigil.

Question 5.
Discuss the fundamentals of Forensic Audit.
Answer:
Fundamentals of Forensic Audit:
Forensic Auditing in general is referred as a discipline of detecting frauds in the organizations and gathering and presenting financial information in a form of evidences that will be accepted by a court of jurisprudence against perpetrators of economic crimes.
The integration of accounting, auditing, and investigative skills and evidences yields the specialty known as Forensic Auditing which focuses very closely on detecting or preventing financial fraud.

“Forensic”, according to the Webster’s Dictionary means, “Belonging to, used in or suitable to courts of judicature or to public discussion and debate.”
The word “Auditing” is defined as the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organization.

With India being ranked as the 81st in the Global Corruption Perception |ndex5, the needs for forensic audit become all the more profound to strengthen the corporate culture with the vibes of good governance in the country.
The term forensic auditing’ refers to financial fraud investigation which includes the analysis of various books of accounts to prove or disprove financial fraud and serving as an expert witness in Court to prove or disprove the same.
Thus, basically, the forensic auditing is the use of accounting or secretarial skills for legal purposes.

Major Fundamentals of Forensic Audit involves:
1. Forensic Audit: An examination of evidence regarding an assertion to determine its correspondence to establish criteria carried out in a manner suitable to the court. An example would be a Forensic Audit of sales records to determine the quantum of rent owing under a lease agreement, which is the subject of litigation.

2. Forensic Investigation: The utilization of specialized investigative skills in carrying out an inquiry conducted in such a manner that the outcome will have application to a court of law. A Forensic Investigation may be grounded in accounting, medicine, engineering or some other discipline.

3. Agreed Upon Procedural Engagement: As the purpose of the forensic audit is ensure that there is no financial deception in the organizations and it collects evidences after the examination of accounts and its records, therefore, it is required that forensic audit is done under the agreed procedures of Audit and Evidences.

4. Predicting the Unpredictable – A Proactive Search: A Proactive search for fraud comprises a Forensic Audit Thinking. Forensic Audit Thinking involves:

The critical assessment throughout the audit
Of all evidential matter and
Maintaining a higher degree of professional skepticism
That fraud may have occurred, is Occurring, or will occur in the future.

Question 6.
What is the contemporary scenario of Corporate Frauds in India and How Forensic Adit is significant in preventing the same.
Answer:
CORPORATE FRAUDS : AN INSIGHT
Internal Fraud: Internal fraud, also called occupational fraud, can be defined as: “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets.” Simply stated, this type of fraud occurs when an employee, manager, or executive commits fraud against his or her employer.

External Fraud: External fraud against a company covers a broad range of schemes. Dishonest vendors might engage in bid-rigging schemes, bill the company for goods or services not provided, or demand bribes from employees. Likewise, dishonest customers might submit bad checks or falsified account information for payment, or might attempt to return stolen or knock-off products for a refund. In addition, organizations also face threats of security breaches and thefts of intellectual property perpetrated by unknown third parties.

As reported time and again with various incidents like that of Nirav Modi in the early month of 2018, of Vijay Mallya, of Sahara Subrato Rao, of Satyam Computers, of 2G and alike, Corporate Scams are affecting the economic health of the companies time and again. With nearly over 250 scams in India since 1947, an approximate of 20.23 Trillion US Dollar loss has been reported in Corporate Scams in India.

Deccan Chronicle in its latest article 9 reported that India has seen a significant rise in incidence of fraud, cyber and security related incidents, which according to a private survey is higher than the global average. Around 89 percent of the respondents in India who participated in the Kroll global fraud survey report said that they had experienced a fraud incident in the past one year. Respondents in India reported one of the world’s highest incidences of theft of physical assets or stock, with two-fifths saying they had experienced this type of fraud, second only to those in Canada. Theft of intellectual property and market collusion are also high on the list of incidents of fraud in India. What is more interesting is that a higher proportion of respondents (45 per cent) in India cited joint venture partners as the main reason for increased exposure to fraud while 43 per cent attributed the role of junior employees for the likely occurrence of frauds.

Internal financial fraud, IP theft, piracy, and counterfeiting were also significantly higher than the global averages. However, the survey noted that Indian corporates are becoming more aware of the risks and are implementing preventive measures such as financial controls and physical security systems. Coming to cyber related frauds, 84 per cent of the respondents said they experienced a cyber-attack in the last one year. Nearly half of these respondents experienced email-based phishing attacks. Virus/worm attacks were the second most common type of incident reported. The most common targets for cyber-attacks in India were employee records, trade secrets or intellectual property and customer records.

Henceforth, there seems an urgent need to implement the tool of forensic audit, which would be a great check oh these frauds and in turn would boost the economy of the nation.

LIVE CASES:
Forensic Audit on PNB Scam: Punjab National Bank appointed a BDO to conduct a forensic audit of jeweler Nirav Modi’s companies, according to people directly briefed on the matter.
The bank issued a formal appointment letter to the Belgium-headquartered audit frm on February 27, 2018 to conduct a forensic audit in the scam wherein Modi, his uncle Mehul Choksi and their companies have been accused of defrauding the bank of as much as ₹ 12,700 crore.
In the starting of January, 2018, PNB informed the BSE (Bombay Stock Exchange) that it has detected some “fraudulent and unauthorized transactions” in one of its branches in Mumbai to the tune of $ 1771.69 million (approx.). Following the announcement, the share price of the state-owned bank plunged 10%.

Meanwhile, the Central Bureau of Investigation (CBI) received two complaints from PNB against billionaire diamantaire Nirav Modi and Jewelry Company alleging fraudulent transactions worth about ₹ 11,400 crores, the Press Trust of India reported. This is in addition to the ₹ 280 crore fraud case that he is already under investigation for, again fled by PNB.
Nirav Modi, the billionaire in the middle of this controversy, is a luxury diamond jewelry designer who was ranked #85 in the Forbes list of India’s billionaire in 2017.

Question 7.
What are the various kinds of Fraud? Discuss.
Answer:
Kinds of Frauds:
1. Fraud as a Civil Wrong, is a tort. While the precise definitions and requirements of proof vary among jurisdictions, the requisite elements of fraud as a tort generally are the intentional misrepresentation or concealment of an important fact upon which the victim is meant to rely, and in fact does rely, to the harm of the victim. Proving fraud in a court
of law is often said to be difficult. That difficulty is found, for instance, in that each and every one of the elements of fraud must be proven, that the elements include proving the states of mind of the perpetrator and the victim, and that some jurisdictions require the victim to prove fraud by clear and convincing evidence.

The remedies for fraud may include rescission (i.e., reversal) of a fraudulently obtained agreement or transaction, the recovery of a monetary award to compensate for the harm caused, punitive damages to punish or deter the misconduct, and possibly others.
In cases of a fraudulently induced contract, fraud may serve as a defense in a civil action for breach of contract or specific performance of contract.
Fraud may serve as a basis for a court to invoke its equitable jurisdiction.

2. Fraud as a Criminal offence, takes many different forms, some general (e.g., theft by false pretense) and some specific to particular categories of victims or misconduct (e.g., bank fraud, insurance fraud, forgery). The elements of fraud as a crime similarly vary. The requisite elements of perhaps the most general form of criminal fraud, theft by false pretense, are the intentional deception of a victim by false representation or pretense with the intent of persuading the victim to part with property and with the victim parting with property in reliance on the representation or pretense and with the perpetrator intending to keep the property from the victim.6 In Indian Law, Implications of fraud is found in these following sections of I PC namely, 421,422,423 and 424.

Fraudulent removal or concealment of property to prevent distribution among creditors
Fraudulently preventing debt being available for creditors.
Fraudulent execution of deed of transfer containing false statement of consideration.
Fraudulent removal or concealment of property.

Kinds of Fraud in specific to Economy and Financial Transactions: In specific to the impact on economy and financial transactions, frauds could be categorized as below:

Bank frauds
Corporate frauds
Insurance frauds
Cyber frauds
Securities frauds

1. Bank Frauds : Bank fraud is a big business in today’s world. The number of bank frauds in India is substantial. It is in increasing with the passage of time in all the major operational areas in banking. There is different area in Bank Deposits, loan, inter branch, accounting, transaction etc.

2. Corporate Frauds: In India, Corporate Frauds from leading Indian business are shaking the economy time and again. From Satyam Computers stunned the national financial world in 2009, when Satyam’s Founder B. Ramalingan Raju declared he had inflated proft and jacked up the company’s Balance Sheet by more than one billion dollars to the recent incident of PNB Fraud in year 2017, Frauds are apparent in the corporates. This needs to be checked strictly to ensure financial stability and emerging economy.

3. Insurance Frauds: There is different type of frauds in insurance sectors. E.g. health insurance, claims fraud, false claims, insurance speculations, application frauds etc.

4. Cyber Frauds: Cyber Frauds are the frauds done with the help of the internet targeting the unauthorized use of digital instruments like credit card, ATM card, cyber equipment’s at home etc.

5. Securities Frauds: Apart from Corporate Frauds, Frauds in the Securities and Securities Market are also affecting many people time and again. From the perspective of frauds in securities, investor community could not forget the under truncate ₹ 4000 crore of Harshad Metha scam and over ₹ 1,000 Crore of Ketan Parekh scams which duped the shareholder with the loss of their wealth in the big markets. In addition to this, the instances of Insider trading are also considered securities fraud in many circumstances.

Question 8.
Discuss the fraud related concept.
Answer:
Fraud is an independent civil as well as a criminal offence, but it also appears in different contexts as the means used to gain legal advantage or accomplish a specific crime. For example, it is fraud for a person to make a false statement on a license application in order to engage in the regulated activity. A person who did so would not be convicted of fraud. Rather, fraud would simply describe the method used to break the’ law or regulation requiring the license.
Fraud must be proved by showing that the defendant’s actions involved five separate elements:

A false statement of a material fact,
Knowledge on the part of the defendant that the statement is untrue,
Intent on the part of the defendant to deceive the alleged victim,
Justifiable reliance by the alleged victim on the statement, and
Injury to the alleged victim as a result.

In order to understand the fraud in clarity, one must go through the frauds related concepts which are described as below:

First, not all false statements are fraudulent. To be fraudulent, a false statement must relate to a material fact.
It should also substantially affect a person’s decision to enter into a contract or pursue a certain course of action.
A false statement of fact that does not bear on the disputed transaction will not be considered fraudulent.
Second, the defendant must know that the statement is untrue. A statement of fact that is simply mistaken is not fraudulent.
To be fraudulent, a false statement must be made with intent to deceive the victim.
This is perhaps the easiest element to prove, once falsity and materiality are proved, because most material false statements are designed to mislead.
Third, the false statement must be made with the intent to deprive the victim of some legal right.
Fourth, the victim’s reliance on the false statement must be reasonable.
Reliance on a patently absurd false statement generally will not give rise to fraud; however, people who are especially gullible, superstitious, or ignorant or who are illiterate may recover damages for fraud if the defendant knew and took advantage of their condition.
Finally, the false statement must cause the victim some injury that leaves her or him in a worse position than she or he was in before the fraud. A statement of belief is not a statement of fact and thus is not fraudulent.
Further, the relationship between parties can make a difference in determining whether a statement is fraudulent. A misleading statement is more likely to be fraudulent when one party has superior knowledge in a transaction, and knows that the other is relying on that knowledge, than when the two parties possess equal knowledge.
A statement need not be affirmative to be fraudulent. When a person has a duty to speak, silence may be treated as a false statement. This can arise if a party who has knowledge of a fact fails to disclose it to another party who is justified in assuming its nonexistence. For example, if a real estate agent fails to disclose that a home is built on a toxic waste dump, the omission may be regarded as a fraudulent statement.
Fraud resembles theft in that both involve some form of illegal taking, but the two should not be confused. Fraud requires an additional element of False Pretenses created to induce a victim to turn over property, services, or money. Theft, by contrast, requires only the unauthorized taking of another’s property with the intent to permanently deprive the other of the property. Because fraud involves more planning than does theft, it is punished more severely.

Fraud and Audit Notes

Fundamentals Of Forensic Audit:
Forensic Auditing in general is referred as a discipline of detecting frauds in the organizations and gathering and presenting financial information in a form of evidences that will be accepted by a court of jurisprudence against perpetrators of economic crimes.

Major Fundamentals of Forensic Audit involves

Forensic Audit: An examination of evidence regarding an assertion to determine its correspondence to establish criteria carried out in a manner suitable to the court. An example would be a Forensic Audit of sales records to determine the quantum of rent owing under a lease agreement, which is the subject of litigation.
Forensic Investigation: The utilization of specialized investigative skills in carrying out an inquiry conducted in such a manner that the outcome will have application to a court of law. A Forensic Investigation may be grounded in accounting, medicine, engineering or some other discipline,
Agreed Upon Procedural Engagement: As the purpose of the forensic audit is ensure that there is no financial deception in the organizations and it collects evidences after the examination of accounts and its records, therefore, it is required that forensic audit is done under the agreed procedures of Audit and Evidences.
Predicting the Unpredictable: A Proactive Search: A Proactive search for fraud comprises a Forensic Audit Thinking. Forensic Audit Thinking involves
- The critical assessment throughout the audit
- Of all evidential matter and
- Maintaining a higher degree of professional skepticism
- That fraud may have occurred, is occurring, or will occur in the future

Fraud Related Concept:
Fraud must be proved by showing that the defendant’s actions involved five separate elements:

A false statement of a material fact,
Knowledge on the part of the defendant that the statement is untrue,
Intent on the part of the defendant to deceive the alleged victim,
Justifiable reliance by the alleged victim on the statement, and
Injury to the alleged victim as a result.

Kinds of Frauds:
1. Fraud as a Civil Wrong, is a tort. While the precise definitions and requirements of proof vary among jurisdictions, the requisite elements of fraud as a tort generally are the intentional misrepresentation or concealment of an important fact upon which the victim is meant to rely, and in fact does rely, to the harm of the victim. Proving fraud in a court of law is often said to be difficult. That difficulty is found, for instance, in that each and every one of the elements of fraud must be proven, that the elements include proving the states of mind of the perpetrator and the victim, and that some jurisdictions require the victim to prove fraud by clear and convincing evidence.

2. Fraud as a Criminal offence, takes many different forms, some general (e.g., theft by false pretense) and some specific to particular categories of victims or misconduct (e.g., bank fraud, insurance fraud, forgery). The elements of fraud as a crime similarly vary. The requisite elements of perhaps the most general form of criminal fraud, theft by false pretense, are the intsntional deception of a victim by false representation or pretense with the intent of persuading the victim to part with property and with the victim parting with property in reliance on the representation or pretense and with the perpetrator intending to keep the property from the victim. In Indian Law, Implications of fraud is found in these following sections of IPC namely, 421,422,423 and 424.

Bank Frauds: Bank fraud is a big business in today’s world. The number of bank frauds in India is substantial. It is in increasing with the passage of time in all the major operational areas in banking.
There is different area in Bank Deposits, loan, inter branch, accounting, transaction etc.
Corporate Frauds: In India, Corporate Frauds from leading Indian business are shaking the economy time and again. From Satyam Computers stunned the national financial world in 2009, when Satyam’s Founder B. Ramalingan Raju declared he had inflated profit and jacked up the company’s Balance Sheet by more than one billion dollars to the recent incident of PNB Fraud in year 2017, Frauds are apparent in the corporates. This needs to be checked strictly to ensure financial stability and emerging economy.
Insurance Frauds: There is different type of frauds in insurance sectors. E.g. health insurance, claims fraud, false claims, insurance speculations, application frauds etc.
Cyber Frauds: Cyber Frauds are the frauds done with the help of the internet targeting the unauthorized use of digital instruments like credit card, ATM card, cyber equipment’s at home etc.
Securities Frauds: Apart from Corporate Frauds, Frauds in the Securities and Securities Market are also affecting many people time and again. From the perspective of frauds in securities, investor community could not forget the under truncate ₹ 4000 crore of Harshad Metha scam and over ₹ 1,000 crore of Ketan Parekh scams which duped the shareholder with the loss of their wealth in the big markets. In addition to this, the instances of Insider trading are also considered securities fraud in many circumstances.

CORPORATE FRAUDS : AN INSIGHT
Fraud against a company can be committed either internally by employees, managers, officers, or owners of the company, or externally by customers, vendors, and other parties. Other schemes defraud individuals, rather than organizations.
Internal Fraud: Internal fraud, also called occupational fraud, can be defined as: “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets.” Simply stated, this type of fraud occurs when an employee, manager, or executive commits fraud against his or her employer.
External Fraud: External fraud against a company covers a broad range of schemes. Dishonest vendors might engage in bid-rigging schemes, bill the company for goods or services not provided, or demand bribes from employees. Likewise, dishonest customers might submit bad checks or falsified account information for payment, or might attempt to return stolen or knock-off products for a refund. In addition, organizations also face threats of security breaches and thefts of intellectual property perpetrated by unknown third parties.

Directors Responsibilities:
The ubiquitous issue of corruption and the high risk of internal fraud raise serious concerns about the liability of corporate directors. India has learned a lot in recent years, and its laws have gradually evolved in this context. 14 Director liability in India can be divided into two principal are as:

Liability under the Companies Act 2013 (the 2013 Act); and
Liability under other Indian statutes.

Director’s Personal Liability:
As a general rule, since the company and its Director are separate entities, the Director has no personal liability on behalf of the company. However, under certain circumstances, a Director may be held liable on behalf of the > company. These circumstances are:

Liability for Tax
Debts of the Company
Liability for company’s Contracts
Refund of Share application Money
Liability to pay for qualification shares
Mis-statement in the Prospectus
Fraudulent Conduct of Business: A Director may be held personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company if he or she was knowingly party to the fraudulent carrying on of business.
Unlimited Liability: The liability of any or all of the Directors of a limited company can be unlimited if so provided by the Memorandum, or can be so done if approved by a special resolution as authorized by the Articles.

Criminal Liability:

Dishonored Cheque
Mis-statement in the Prospectus
Offences under the Income Tax Act
Offences under Labour Laws
Corporate Frauds

Fraud and Audit – CS Professional Forensic Audit Study Material

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