{"id":22219,"date":"2023-04-21T15:10:44","date_gmt":"2023-04-21T09:40:44","guid":{"rendered":"https:\/\/gstguntur.com\/?p=22219"},"modified":"2023-04-21T15:10:44","modified_gmt":"2023-04-21T09:40:44","slug":"forensic-audit-laws-and-regulations-cs-professional-study-material","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/forensic-audit-laws-and-regulations-cs-professional-study-material\/","title":{"rendered":"Forensic Audit: Laws and Regulations &#8211; CS Professional Study Material"},"content":{"rendered":"<p>Chapter 4 Forensic Audit: Laws and Regulations \u2013 <a href=\"https:\/\/gstguntur.com\/cs-professional-forensic-audit-study-material\/\">Forensic Audit ICSI\u00a0Study Material<\/a> is designed strictly as per the latest syllabus and exam pattern.<\/p>\n<h2>Forensic Audit: Laws and Regulations &#8211; CS Professional Forensic Audit Study Material<\/h2>\n<p>Question 1.<br \/>\nJupiter Hospitals Ltd., (JHL) is a renowned corporate house owning a famous hospital called \u201cJupiter Hospitals\u201d. Two family groups (L and M) controlled the majority of the shareholdings in the company. The hospital is operated in Coimbatore, a non-metro city, where electronic and cheque transactions were not much high and patients mostly were making payments in cash.<br \/>\nThe management of the company facing problems because of some disturbing events taken place during the financial year 2018-19. All these events are summarized as under :<br \/>\n(i) Robbery in Pharmacy :<br \/>\nA robbery took place in the pharmacy in the night of 29-3-2019 and cash of around \u20b9 20 lakh was lost in the robbery. The robbers had entered through a window pane during 2 a.m. to 3 a.m. when none was present in the pharmacy. They decamped with all the cash in the cash chest, leaving nothing behind. No traces were found to have left behind by the robbers. Fingerprints were seen on the chest as they had not been wiped off. However, none belonged to an outsider (other than employees). The CC TV camera had turned defective a day earlier being 27-3-2019 and had been given for repairing and accordingly no help was available through CC TV recording.<\/p>\n<p>Two key personnel in the pharmacy, the manager and the cashier, were supposedly doing a good job, showing remarkable growth in the night sales of the pharmacy. It is further to be noted that in nights high priced medicines were sold in huge quantities. The sales in comparison during day time was found to be less. The increase in sales was also having issues and complaints from the patients that the bills issued by the pharmacy for the goods purchased by them and cash received when asked to be verified for onward transmission for making claims, were not authenticated by saying that the same were not issued by the pharmacy. It transpired to the management that the employees involved are being in the habit of issuing the duplicate bills. It was further reported by the internal stock auditor that there is collection of the expired goods in the pharmacy and why the same has not been got replaced or exchanged from the companies as per policy. The police who came for investigation hence concluded that the act of robbery might have been done by a North Indian gang who were committing similar crimes in the locality and area and thus closed the case file. Insurance policy for loss of cash in safe had expired on 20-3-2019 and was not been renewed, since it was felt that no robbery would take place in a hospital which is always having movement of patients. The management entrusted the work to a forensic auditor to investigate the issue.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>(ii) Related Party Transactions<br \/>\nThere were complaints put in the suggestion box by the various persons that some directors were making money from the purchase contracts which the hospital was entering into with the concerns in which these persons were interested. Till 15th March, 2019, the hospital had made purchases of around 22 crore from such related parties. However, on comparison with the earlier year, this was marginally higher by 5% and was thus not taken care by the management of hospital. The allegations were that the prices paid were higher than the market prices and that some of the concerns were not reputed and have been earmarked by the drug authorities also. There was a Purchase Committee which monitored the purchases and so the allegations were initially ignored. However, when they started pouring in, the Audit committee decided to investigate the matter and entrusted the job of ascertaining the correctness of the allegations to the forensic auditor.<\/p>\n<p>(iii) Drop in Hospital Revenues:<br \/>\nThere is an arrangement between the two groups of the shareholders that each group will administer the hospital for three years on a rotational basis. Group L\u2019s tenure had ended on 31 -3-2018 and during the current year, group M had taken over the administration. Despite the number of surgeries and of other patients had not been dropped, there was a sharp fall in the revenues of hospital in the year 2018-19, except from the pharmacy. The cashier desk was managed by a director or his relative for having control over the cash. Group \u2018L\u2019 desires a forensic audit of the affairs to be conducted and entrusts the same to an outside forensic auditor.<br \/>\nIn this backdrop you are being appointed as an \u2018Outside Forensic Auditor\u2019 to investigate all the three issues and required to give your report on the matters indicating:<br \/>\n(a) That it was not a robbery, but defalcation of goods camouflaged as cash sales and subsequent given shape of robbery. You are required to build up all such points from the details given on which you could have come to such conclusion. Make reasonable assumptions in this regard as being found necessary to draw.up the report in the matter of robbery as reported. (June 2019, 10 marks)<br \/>\n(b) In respect of the related party transactions, suggest a suitable strategy to be applied to carry out the forensic audit in an effective manner. (June 2019, 10 marks)<br \/>\n(c) How the forensic auditor should plan his course of action to investigate and find out the cause of drop in revenue of hospital ? (June 2019, 10 marks)<br \/>\n(d) What are the consequences under the Companies Act, 2013 and Income-tax Act, 1961 when the cause of drop in revenue is being proved ? State the steps to be taken by the company to remedy the situation so caused. (June 2019, 10 marks)<br \/>\nAnswer:<br \/>\n(a) Robbery in the Hospital:<br \/>\nVarious points are being build up by the forensic auditor to prove that it was not a robbery. Those points are discussed as below:<\/p>\n<ol>\n<li>The first suspicion is that no clue had been left behind by the robbers, which indicated that there is some collusion because there&#8217;s nothing like a perfect robbery.<\/li>\n<li>The Hospital area is reasonably guarded area. Therefore it seems that it is difficult for outsiders to enter the premises and commit a robbery by breaking in some window open for-making the entry.<\/li>\n<li>When a small cash chest is opened by fraudster using a duplicate key, it would have left some points or telltale evidence. In this perspective. it is inconceivable that there were none being found.<\/li>\n<li>Remarkable increase in night sales is hard to believe because in a hospital more sales take place during the day time.<\/li>\n<li>The system login details to be seen to find out that the manager and the cashier had logged in during the night hours on the days of purported high night sales, to invoice fictitious sales.<\/li>\n<li>The date of robbery is few days prior to 31 -3-2019, when stock taking would have been done and defalcation of stock would have been detected. To escape this, the manager and the cashier had punched in fictitious sales invoices and generate heavy cash available in the cash chest.<\/li>\n<li>It is worth to be noted that fraudsters had concentrated on high priced medicines, being sold in the nights &#8211;\n<ul>\n<li>For making their defalcation exercise easier and<\/li>\n<li>For generating cash balance, purported to be shown as being robbed, whereas the same was defalcated.<\/li>\n<\/ul>\n<\/li>\n<li>In the cash chest, there were no fingerprints of an outsider, because no outsider was involved. A smart robber inside the organization would have wiped off all the fingerprints easily, but not an outsider. This is a case of purported employee collusion where they knew the loopholes in the internal control system which the fraudsters used to their advantage. (Internal Control System Effectiveness needs to be reviewed.)<\/li>\n<li>In addition to this process, the following factors needs to be looked into by the auditor for corroborating his or her investigation in the matter:\n<ul>\n<li>For Manager and Cashier, it has to be checked whether a background verification done on them when they were recruited. Auditors to check that.<\/li>\n<li>How many years of service, the Manager and Cashier has rendered to the hospital.<\/li>\n<li>Were there any previous records against them?<\/li>\n<li>They also need to be interviewed to get some details about them and their personal life.<\/li>\n<li>A market intelligence team could be deployed to check on their lifestyles to see if there is a sudden change.<\/li>\n<\/ul>\n<\/li>\n<li>The CCTV had not turned defective by its own. This was done by the two fraudsters deliberately and not got repaired immediately so that there is no evidence through the CCTV available for this act. Further, all the CCTV cameras needs to be checked to see if there was any trace of people entering the premises at the time of robbery.<br \/>\nIt is further to be seen by the auditor regarding the compliant of the customers as to the issue of duplicate bills. This indicates that the low price sale had been complying in high value sales by having duplicate bills. The modus operandi in this respect needs to be looked into under the light of following perspectives:<\/p>\n<ul>\n<li>On what basis duplicate bills were issued.<\/li>\n<li>How many duplicate bills were issued during the month?<\/li>\n<li>Was it issued only during night sales?<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<p>The increase in the items of the dead and expired goods in the pharmacy may attract the attention of the auditors to find out the reasons. It is also possible that the employees involved had purchased such goods from the market and piled up in pharmacy so that stock inventory gets tallied on 31-03-2019.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>(b) Related Party Transactions:<br \/>\nThe Forensic Auditor to investigate such transactions may adopt the following strategy:<\/p>\n<ol>\n<li>The register of contracts (form MBP-4) maintained under section 189 of the Companies Act, 2013 should be seen first. There is a specific query as to whether the transactions are at arm&#8217;s length. The reply for the same is to be seen carefully.<\/li>\n<li>The Minutes of the various Board meetings in which the said Register was placed for the approval of the Board must be looked into, in order to find out the number of directors who had voted against the transactions or directors remaining neutral. The Auditor should have conducted interviews with them to ascertain their views. The reasons for voting against or remaining neutral could be crucial to the issue on hand. The remarks column, if found filled up in MBP-4, then merits special attention of the Forensic Auditor.<\/li>\n<li>The manner of working of the Purchases Committee must be looked into. The minutes of meetings of Purchase committee to be referred to ascertain the procedure for selection of vendors. The criteria based on which the Committee had short listed the related party concerns must be seen. Whether aspects such as qualifications, experience, etc. were met with, are to be seen. Whether competitive quotations were obtained should be seen, including the aspect of whether bids were received from other reputed companies or not. Vendor comparison sheet should be reviewed.<\/li>\n<li>In respect of the quotes found higher, it is essential to ascertain as to who such parties were provided with higher quote. Whether there was collusive bidding to deliberately present a higher price, so as to make the prices of related party concerns lower, should be seen. In order to find out collusive bidding, one under to undertake the following activities:\n<ul>\n<li>Analyze the purchase contracts entered into in the last 5 years to comprehend since when contracts started getting awarded to related concerns.<\/li>\n<li>A disk imaging of the procurement\/ committee head and his team members should be performed. The emails and other communications needs to be reviewed to identify any red flags.<\/li>\n<li>Identify vendors who have been blacklisted or discontinued in the last 5 years and contact them to understand the reason for blacklisting or discontinuation.<\/li>\n<li>Is there any conflict of interest angle needs to be checked, i.e. any relationship exists between purchase committee members and the UBOs of the companies to whom contracts were awarded?<\/li>\n<\/ul>\n<\/li>\n<li>Since the value of contracts with related parties exceeds ? 20 crores, the domestic transfer pricing provisions of the Income-tax Act, 1961 will apply and be examined in this perspective. However, for the current year, domestic transfer pricing report of an auditor may not be available; the report of the earlier years will be useful.<\/li>\n<li>It should be seen how the Company had treated the related party transactions in the return of income. If the company had determined the arm&#8217;s length price (ALP) at lower prices and thereby voluntarily agreed for primary adjustments. This will be very good evidence to intricate collusion and loss.<\/li>\n<li>If any Income Tax Assessment of any earlier year in which domestic transfer pricing was involved has been concluded, the income-tax assessment order, including all assessment correspondences must be seen. Forensic auditor will get valuable information from the same.<\/li>\n<\/ol>\n<p>(c) Drop in Hospital Revenues<\/p>\n<ul>\n<li>Major avenues from which Jupiter Hospital derives income need to be examined such as from surgery and room rent, from laboratory and Scan &amp; X-Ray Unit and from OPD Patients.<\/li>\n<li>Hospital rate charts for last 3 years needs to reviewed and compared with current year to see if there is any major negative variance.<\/li>\n<li>The register of patients maintained at the three wings being surgical ward laboratory, scan and X &#8211; Ray and OPD must be verified. The same should be compared with the earlier year to compare the number of patients.<\/li>\n<li>Bank account in which payments get credited from patients&#8217; needs to be reviewed.<\/li>\n<li>Bank and revenue account needs to be reconciled to see payment received has been completely accounted.<\/li>\n<li>Invoices\/Bills to be reviewed to see if there are any red flags.<\/li>\n<li>Given that there is an.increase in the number of patients opting for surgery, visiting the laboratory and using the scan facilities has not diminished, it is unlikely that there will be a reduction in the surgery fees charged (It is most likely that there will be a hike).<\/li>\n<li>In this scenario, the only obvious thing is that the receipts are under invoiced\/ billed. Given that a director or his relative sits at the cash counter, this could easily happen.<\/li>\n<li>Reason for appointing a director or relative as Cashier needs to be checked.<\/li>\n<li>Auditor should interview some patients who had recently undergone surgery, visited the lab, etc., to ascertain how much they have actually paid and what amount was stated in the receipt issued to them. Further, the auditor can interview employees or former employees so as to get some insider information.<\/li>\n<li>The Auditor may found that for surgeries, a mere acknowledgement was issued to patients which merely stated that they had paid the amount. There was no issue of proper receipt. Later on the receipts were prepared for lower amounts by Group M. so as to lower down the revenue and deflection of cash.<\/li>\n<li>For the lab, receipts issued are to be looked into as no test took place prior to the issue of the receipts.<\/li>\n<li>Can arrange for some known persons to use the hospital facilities and gather live evidence as to payments and receipts issued and the modus operandi employed by the cashier.<\/li>\n<\/ul>\n<p>The cumulative effect of the above leads to the inescapable conclusion, to be taken by the Forensic Auditor in his report that Group M had been suppressing the receipts of the hospital and same being drawn by them through the cashier&#8217;s desk which was managed by their relative and to falsify, the drop in the revenue.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>(d) Consequences of the Detection of Fraud Under the Companies Act, 2013 Considering the consequence of corporate frauds on the growth of Corporates and Economy, the Companies Act, 2013 lists down frauds and prescribe penalties and punishments for violations.<br \/>\nSuppressing the sales is clearly an act of fraud committed on the company.<br \/>\nSection 447 of the Companies Act, 2013 deals with provisions relating to punishment for fraud.<br \/>\nThe Section reads that &#8216;Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:<\/p>\n<p>Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.&#8217; The Companies Act, 2013 has provided punishment for fraud as provided under Section 447 in around 20 sections of the Act e.g. u\/s 7(5), 7(6), 8(11), 34, 36, 38(1), 46(5), 56(7), 66(10), 75,140(5), 206(4), 213,229,251 (1), 266(1), 339(3), 448 etc. for directors, key managerial personnel, auditors and\/or officers of company. Under the Income-Tax Act, 1961:<br \/>\nSuppression of revenues will result in concealment of income by way of under reporting and negative reporting of the income.<br \/>\nConcealment will lead to levy of penalty u\/s 270 of the Income Tax, 1961, which may be of 300% of the tax on such income.<br \/>\nProsecution may also be launched on all the officers involved.<\/p>\n<p>Remedial Measures:<br \/>\nSince the financial year has not yet ended or assuming that returns have not been filed with ROC, remedial measures can be taken. A series of remedial actions, which could be taken in this matter are listed as below:<\/p>\n<ul>\n<li>JHL may rewrite the books of account of the company, after due correction of the necessary record like the cash receipts issued and draw up the financial statements reflecting the true and correct state of affairs of the company.<\/li>\n<li>The annual statements should reflect the true and correct state of affairs. In the notes on accounts, there should be a clear note to the effect that the accounts have been rewritten \/recast to rectify the position emerging as a consequence of suppression of revenues of the hospital.<\/li>\n<li>The return of income filed for the AY 2019-20 should be based on the redrafted financial statements. In such a situation, the company may escape from the penal provisions of section 270A of Income Tax Act, 1961 and prosecution proceedings.<\/li>\n<li>Forensic Audit Report findings could be published in the Annual Accounts along with remedial action performed or planned to be performed.<\/li>\n<li>Action taken against fraudsters need to be mentioned.<\/li>\n<li>Total fraud amount needs to quantified and published accordingly.<\/li>\n<\/ul>\n<p>Question 2.<br \/>\n(a) You have been appointed to investigate a suspected embezzlement of cash receipts in a departmental store. What are the steps you would take in this regard? (Nov 2012, 6 marks) [CA Final Gr I]<br \/>\nAnswer:<br \/>\nInvestigation of suspected embezzlement of cash receipts: While doing investigation of suspected embezzlement of cash receipts of a departmental store, the following steps should be taken<br \/>\n1. The investigating accountant should ascertain the exact duties of the person concerned who is suspected to have committed a fraud; such an enquiry would give a clue to avenues of investigation. Greater the authority of the individual suspected of a fraud, wider would be the field which would have to be covered by the investigation. He should also examine the line of responsibility between the various members of the staff.<\/p>\n<p>2. Internal control: He should have a look at the system of internal control in operation relying on the above study, he should direct his enquiry towards those aspects of the business where there has been excessive control in the hands of single persons, without any supervision by any other person or any other inherent weakness that may be in existence in the system.<\/p>\n<p>3. On the assumption that cash may have been diverted before being entered in the books, evidence as regards income received from different sources should be scrutinized, e.g., stock, sales summaries, rental registers, correspondence with customers, advices of travelling salesmen and counter foils or receipts.<\/p>\n<p>4. Carbon copies of receipts marked \u2018duplicate\u2019, should be scrutinised to confirm that they are in fact copies of receipts issued earlier.<\/p>\n<p>5. By recalling paying-in-slips from the bank the details of cash deposited on each day should be compared with those shown in the Cash Book.<\/p>\n<p>6. The record of sales of scrap of waste paper, that of collection of rents from labourers temporarily accommodated in the company\u2019s quarters, that of refunds of amounts deposited with the electric supply co., and other Government authorities should be examined for finding out if any of these amounts have been misappropriated.<\/p>\n<p>7. Cash sales should be vouched in detail. Recoveries from customers and sundry parties should be checked with the copies of receipts issued to them; deductions made on account of cash discounts should be reviewed.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 3.<br \/>\nWhat will be your approach in investigation under Sec. 210 and 213 into the affairs of the company registered under Companies Act, 2013? (May 2014, 4 marks) [CA Final Gr I]<br \/>\nAnswer:<br \/>\nGeneral Approach in Investigation under Sec. 210 and 213 into the affairs of company registered under Companies Act, 2013: The general approach for investigation under Sections 210 and 213 of the Companies Act, 2013 is conditioned by the legal requirements in these regards. The affairs of the company may include everything such as goodwill, profit and loss, contracts, investments, assets, shareholding in subsidiaries, decision making, etc. Also the specific circumstances mentioned in these sections like fraud, mismanagement, oppression of any shareholder etc. come within the term \u201caffairs of the company.\u201d<\/p>\n<p>Investigation under Sections 210 and 213 do not call for any special approach. Approach\/Steps for pursuing the investigation are:<br \/>\n1. Clarity of Terms of Reference: The approach to any investigation is determined on a consideration of the nature of the investigation and the terms of reference. However, the inspector should ensure that the terms of reference are clear, unambiguous and in writing. If he has any doubt about any item in the terms, he should obtain clarification in writing. It should also be, seen that the terms of reference are not too general, because that may frustrate the whole objective of the investigation; the scope of the investigation will become unwieldy and ill defined. An investigation order to investigate into the affairs of the company would be an instance at point. Therefore, the inspector should ask for reframing of the order specifying the exact matters to be investigated. He should also take into consideration the possible effect of limitations, if any, put in the terms of reference and should keep the Central Government informed in writing about their effect on the investigation.<\/p>\n<p>2. Scope of Investigation: The next point for consideration of the inspector would be the determination of the scope of the investigation on the basis of the terms of reference. At this stage, it may be useful for the inspector to go into the history of the company and its affiliates or associates. He should evaluate the terms of reference in sketching the scope of investigation; this will enable him to locate the limitation, if any, in the terms of reference, not clearly mentioned. For a purposeful investigation, he may need to stretch his inquiry into the books and records of allied and associated persons and concerns and may require to arm himself with the powers given under the Companies Act.<\/p>\n<p>3. Period for Investigation: He should also have regard to the period over which the investigation should stretch. The evaluation of terms of reference and the consequential determination of the scope of investigation are the twin props on which the entire investigation would rest and, therefore, the inspector appointed under Sections 210 and 213 should devote careful attention to these.<\/p>\n<p>4. Framing of Programme: The next step is the investigator\/inspector should frame his programme for investigation in a systematic manner. He should keep adequate working notes and papers with references and cross references in a proper and methodical way to aid him in the preparation of the report. The actual process of investigation would be essentially an evidence gathering procedure and, at every step, he should have regard to the procedures laid down in these sections regarding production of documents and evidence, examination on oath and seizure of documents. He should also keep his mind open to the revelations he comes across in the process of evidence collection and should assess whether the programme of investigation needs amendment or modification.<\/p>\n<p>5. Using the work of Experts: He should also consider whether assistance of other experts like engineers, lawyers, etc., is necessary in the interest of a comprehensive and full proof examination of the documents and information.<\/p>\n<p>6. Legal requirements and investigation Report: Only after he has completed the steps in the investigation programme and has marshaled all the information that he needed should he prepare his report. He, however, can also make interim report. The findings should be completed and exhaustive. Before he makes his final report he should obtain and keep on record the evidences relied upon by him. By the nature of things, such evidence should be as conclusive as possible depending on circumstances of the case. He should make his report in accordance with the provisions of the Companies Act, 2013.<br \/>\nThe general approach for investigations under Sections 210 and 213 should, therefore, be formulated having regard to the terms of reference, scope, the period, the programme and procedure of the investigation and the attending legal requirements specified above.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 4.<br \/>\nWhat steps needs to be taken to investigate frauds of Cash Receipts? (Nov 2o15, 4 marks)<br \/>\nAnswer:<br \/>\nThe following areas need to be verified in this regard :<\/p>\n<ul>\n<li>Issuing a receipt for full amount collected, entering only a lesser amount on the counterfoil.<\/li>\n<li>Showing a larger cash discount than actually allowed.<\/li>\n<li>Adjusting a fictitious credit in the account of a customer for goods returned.<\/li>\n<li>Cash sales entered as credit sales with debit to customer.<\/li>\n<li>Writing off a good debt as bad and irrecoverable to cover up misappropriation of amount collected.<\/li>\n<li>Short-debiting customer\u2019s ledger account and withdrawing the difference on collection of full amount.<\/li>\n<li>Under-casting the receipts side of cash book; carrying over a shorter total of the receipts from one page of the cash book to the next so as to cover up short banking misappropriated.<\/li>\n<li>Over-casting the payment side of the cash book; over-carrying the total of the payments from one page of the cash book to the next so as to cover up misappropriation of a part of the amount withdrawn from the bank.<\/li>\n<\/ul>\n<p>Question 5.<br \/>\nThe Central Government is of the view that there are certain interested members and companies who are financially interested in the success or failure of the company or who have been able to control or to materially influence the policy of the company.<br \/>\nHence the Central Government wants to investigate the ownership of the company.<br \/>\nDescribe the scope and extent of investigation by an Investigator\/Chartered Accountant on behalf of Central Government under Companies Act, 2013. (Nov 2016, 4 marks) [CA Final Gr I]<br \/>\nAnswer:<br \/>\nWhere it appears to the Central Government that there is a reason so to do, it may appoint one or more inspectors to investigate and report on matters relating to the company, and its membership for the purpose of determining the true persons.<br \/>\n(i) Who are or have been financially interested in the success or failure, whether real or apparent, of the company; or<br \/>\n(ii) Who are or have been able to control or to materially influence the policy of the company.<\/p>\n<ul>\n<li>When a CA is appointed to carry out an investigation under section 210, 213 or 216 of Companies Act, 2013, the scope and extent of enquiry, the objective of the investigation and other matters asked for investigation are specified in the order of investigation issued by the appointing authority.<\/li>\n<li>On the basis of terms of investigation, the investigating accountant should determine the areas of accounts to be investigated and the extent to which the enquiry is to be made.<\/li>\n<li>In case of a company having subsidiaries or where one or more directors are interested in one or more entities, all the dealings with these entities should be examined.<\/li>\n<li>Any breach of duty for purposes of investigation would be material only if it has resulted in a loss to the company, hi such a case, tie factors responsible for the losses, besides the amount thereof, shaB have to be investigated. Negligence would be culpable only if it was in relation to a duty cast by the Act, Articles of Association or by a resolution of the shareholders or that of the Board of Directors.<\/li>\n<li>Any negligence in the discharge of duty of a director or any other managerial personnel must be construed very broadly. As such, it is their duty to safeguard the property of the company and protect the interest of the shareholders.<\/li>\n<li>An investigating may interrogate directors, officers, agents, and others concerned with matters under his enquiry, if appears necessary.<\/li>\n<li>If the Invest gating accountant is required to report on the efficiency of the management, he should be discreet in expressing his opinion.<\/li>\n<li>The inspector or must ensure that the persons who figure in the investigation get the fullest opportunity to explain their action and conduct.<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 6.<br \/>\nThe Board of Directors of XYZ Ltd. is concerned with decreasing operating efficiency in material consumption. As an Auditor entrusted with investigating the causes for this poor state, what may be the areas of your focus in this respect. (Nov 2018, 5 marks) [CA Final Gr I]<br \/>\nAnswer:<br \/>\nFor decreasing operating efficiency in material consumption, while investigating the causes for this poor state following areas needs to be focused as an operational auditor.<\/p>\n<ol>\n<li>Productivity: In the area of productivity, the operational auditor can undertake such tests as input-output ratios for materials and labour in quantitative terms.<\/li>\n<li>Personnel: Personnel is perhaps the most important factor in performance evaluation. Unless the organisation has a sound personnel policy consistent with its requirements, the facilities, materials and equipment that are available in the organisation may not be utilised property to obtain optimum performance.<\/li>\n<li>Work load measurement: It can be another significant area where operational auditor can be of use because of ready of quantitative data. There can be measures like volume or quantity of work handled and\/or performed volume of new work, backlog of work etc.<\/li>\n<li>Quality of work: It is a matter which is not directly amenable to operational audit scrutiny, Nevertheless, it is an important aspect of performance of an organisation. Therefore, some quantitative measures are often devised to judge the quality of work. These can be number of customers\u2019 complaints, rejections by quality control department, number of workers\u2019 grievances, number of errors in invoicing or recording transactions, quantity of scrap and wastages etc.<\/li>\n<li>Cost: Cost is perhaps the most cogent indicator of performance costs are classified and recorded for a proper assimilation of their implications on performance.<\/li>\n<\/ol>\n<p>Question 7.<br \/>\nYou have been appointed as a forensic accountant in M\/s Secure Ltd. to carry out various analysis as a part of your assignment to arrive at a particular result. Specify the various analysis which might have to be carried out by you to arrive at your result. (May 2019, 5 marks) [CA Final Gr I]<br \/>\nAnswer:<br \/>\nThe following are the various analysis which might have to be carried out as a forensic accountant in M\/s Secure Ltd. to arrive at a result.<\/p>\n<ul>\n<li>Calculating economic damages;<\/li>\n<li>Summerizing a large number of transactions;<\/li>\n<li>Performing present value calculations utilizing appropriate discount rates;<\/li>\n<li>Performing a regression or sensitivity analysis;<\/li>\n<li>Utilizing a computerized application such as a spread sheet, database or computer model; and<\/li>\n<li>Utilizing charts and graphics to explain the analysis.<\/li>\n<\/ul>\n<p>Question 8.<br \/>\nWrite a short note on UNCAC.<br \/>\nAnswer:<br \/>\nUnited Nations Convention Against Corruption (UNCAC):<br \/>\nThe United Nations Convention against Corruption \u201cUNCAC\u201d is a multilateral treaty or agreement that has been negotiated by member states of the United Nations, \u201cUN\u201d, and promoted by the UN Office on Drugs and Crime, \u201cUNODC\u201d. It is one of the several legally binding international anti-corruption agreements that require state parties to abide by the treaty to implement several anti-corruption measures and mainly focus on five main areas as follows:<br \/>\nThe UNCAC\u2019s comprehensive approach and the mandatory character of many of its provisions act as evidences of this development. Most importantly, the UNCAC tackles the forms of corruption that had not been covered by many of the earlier international instruments, such as trading under influence, abuse of function, and various other types of corruption in the private sector. A further important significant development is the specific inclusion of a provision dealing with the recovery of stolen assets, which is a major concern for countries.<\/p>\n<p>OECD Guidelines for Multinational Enterprises? relating to Combating Bribery:<br \/>\nThe Guidelines for Multi-National Enterprises (MNEs) prescribed by the OECD are the most wide-ranging set of government-supported recommendations on responsible business conduct in existence today. The Governments adhering to the guidelines aim to encourage and maximize the positive impact of the MNEs for sustainable development and enduring social progress. It provides guidance for responsible business conduct in areas, such as, labour rights, human rights, environment, information disclosure, combating bribery, consumer interests, competition, taxation, and intellectual property rights.<br \/>\nThe Integrity Pact (IP):<br \/>\nThe Integrity Pact is a tool developed and launched by the Transparency International to help different businesses, governments and civil societies in order to equip them to fight corruption in the field of public procurements and public contracting. The Transparency International had established mutual contractual rights and obligations to reduce the high cost and corruption involved in the public contracts.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 9.<br \/>\nWrite a brief note on ICSI Anti &#8211; Bribery Code.<br \/>\nAnswer:<br \/>\nICSI Anti Bribery Code:<br \/>\nIndeed, we have plethora of legislations to fight against the menace of corruption and bribery, yet, if we hold a comparative analysis of legal measures India hold in effectively combating corruptions and bribery with the international practices of the related area, we find that though India has various anti-corruption legislations and anti-corruption institutions, yet the main legislation \u2018Prevention of Corruption Act, t988\u2019 does not contain any provision directly dealing with the offence of giving bribe. In the Companies Act, 2013, also the offence of corruption or bribery is not specified. It is only a matter of time that India will have a specific legislation (Act) to deal with bribery in the private sector. In international legislations like the Foreign Corrupt Practices Act, 1977 (FCPA) of USA and the United Kingdom Bribery Act, 2010 both, mandate corporate and other business entities to formulate and adopt anti-bribery policies in accordance with its requirements and provide protection to senior management if they have Anti-Bribery policy in place.<\/p>\n<p>Need for the Code:<br \/>\nThe main legislation \u2018Prevention of Corruption Act, 1988\u2019 dealing with corruption at present does not provide a definition of \u2018Corruption\u2019 itself. Also, in any corrupt transaction, there are two parties: the bribe-giver and the bribe-taker, but as per Section 24 of the Act, a statement made by a bribe-giver in any proceeding against a public servant for an offence, shall not subject him to prosecution under Section 12. This Act, also does not contain any provision directly dealing with active domestic bribery, i.e., the offence of giving bribe. The Code seeks to curb the supply side of corruption prevalent in the private sector and also covers surrogate corrupt practices.<\/p>\n<p>Scope:<br \/>\n\u2018Corporate Anti-Bribery Code\u2019 (The Code), may be adopted voluntarily by the Corporates. The Code, once adopted by the Company, shall be applicable to the company and its:<\/p>\n<ul>\n<li>Board of Directors,<\/li>\n<li>Employees (full time or part-time or employed through any third party contract),<\/li>\n<li>Agents, Associates, Consultants, Advisors, Representatives and Intermediaries, and<\/li>\n<li>Contractors, Sub-contractors and Suppliers of goods and\/or services.<\/li>\n<\/ul>\n<p>ICSI Anti-Bribery Code: A Way Ahead<br \/>\nIn the present scenario, when with a view to eradicate corruption from its core, people of the nation are called upon to leave the attitude of \u201cChalta hai\u201d and to adopt the attitude of \u201cBadal Sakta hai\u201d for the inclusive growth of nation by 2022, a step forward would surely be a great association in the governments\u2019 fight against black money and corruption while establishing transparent governance at an upper end. It is beautifully said that everyone with their core strength hold the sky, then a sky of malicious act would never fall on the good of the people. In this line this Code would be a step forward in acquainting the stakeholders about the deep effect and impact of corruption on the growth of corporates along with the laws to check and regulate the practices of bribery and corruption in the corporates. This would surely advance their proficiencies in assisting the government\u2019s initiative towards building a corruption free New India by 2022.<\/p>\n<p>Question 10.<br \/>\nWhat are provisions in Information Technology to prevent and regulate Corporate Frauds in India?<br \/>\nAnswer:<br \/>\n1. Indian Laws : Information Technology and Business Laws Companies Act, 2013<br \/>\nConsidering the consequence of corporate frauds on the growth of Corporates and Economy, the Companies Act, 2013 lists down frauds and prescribes penalties and punishments for violations.<br \/>\nSection 447 of the Companies Act, 2013 often now referred to as one of the draconian provision of the new Act deals with provision relating to punishment for fraud.<br \/>\nSection 447: \u201cWithout prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the amount involved in the fraud:<br \/>\nWhere the fraud in question involves public interest, the term of imprisonment shall not be less than 3 years\u201d.<\/p>\n<p>Fraud Reporting under Companies Act, 2013:<br \/>\nThe new act casts onerous responsibility on the part of statutory auditor\/cost auditor\/secretarial auditor to report fraud to Board and Central Government. It would mean that even for a small fraud involving say ? 1000 in a large multi-location enterprise would cast reporting fraud responsibility on the part of auditing professionals including CS\/CA\/CMA. This provision has mandated that the professionals like CS\/CA\/CMA appointed by the company under Section 139\/148\/204 to do direct reporting of frauds (to the Central Government) in addition to their existing responsibilities of reporting requirement to the shareholder\/Board of company.<\/p>\n<p>Fraud Reporting:<br \/>\nSection 143(12) Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.<\/p>\n<p>Action of Fraud Reporting in good faith:<br \/>\nSection 143 (13) No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good faith.<br \/>\nSimilar Provisions applicable to Cost Auditor and Secretarial Auditor: Section 143(14) the provisions of this section shall mutatis mutandis apply to- .<\/p>\n<ul>\n<li>The Cost Accountant in practice conducting cost audit under section 148; or<\/li>\n<li>The Company Secretary in practice conducting secretarial audit under section 204.<\/li>\n<\/ul>\n<p>Punishment for default:<br \/>\nSection 143 (15) If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12), he shall be punishable with fine which shall not be less than 1 lakh rupees but which may extend to ? 25 lakh rupees.<br \/>\nRule 13 of The Companies (Audit and Auditors) Rules, 2014 contains the operational procedure of Reporting of Fraud prescribed in Section 143(12) of the Act.<\/p>\n<p>Reporting of fraud by auditor:<br \/>\nRule 13(1) For the purpose of sub-section 12 of Section 143, in case the auditor has sufficient reason to believe that an offence involving fraud, is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government immediately but not later than 60 days of his knowledge and after following the procedure indicated herein below:<\/p>\n<p>First Fraud Report to Board\/Audit Committee:<br \/>\na. Auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within 45 days;<br \/>\nFinal Fraud Report to Central Government on receipt of First Fraud Report<br \/>\nb. on receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within 15 days of receipt of such reply or observations;<br \/>\nFinal Fraud Report to Central Government on failure of receipt of First Fraud Report<br \/>\nc. in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he failed to receive any reply or observations within the stipulated time.<\/p>\n<p>Authority and Mdde\/Format of dispatching Final Fraud Report to Central Government<\/p>\n<ul>\n<li>Rule 13(2): The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed post followed by an e-mail in confirmation of the same.<\/li>\n<li>Rule 13(3): The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact number and be signed by the auditor with his seal and shall indicate his Membership Number.<\/li>\n<li>Rule 13(4): The report shall be in the form of a statement as specified in Form ADT-4. This Form of Report is available as an annexure to The Companies (Audit and Auditors) Rules, 2014.<\/li>\n<\/ul>\n<p>SEBI Act, 1992:<br \/>\nRegulation 11 C of the SEBI Act, 1992 empowers the SEBI to direct any person to investigate the affairs of intermediaries or brokers associated with the securities market whose transactions in securities are being dealt with in a manner detrimental to the investors or the securities market.<\/p>\n<p>Information and Technology Act, 2000:<br \/>\nSection 43 and 44 of the IT Act, 2000- lays down penalty for the following<\/p>\n<ul>\n<li>Unauthorized copying of an extract from any data.<\/li>\n<li>Unauthorized access and downloading files.<\/li>\n<li>Introduction of viruses or malicious programmes.<\/li>\n<li>Damage to a computer system or computer network.<\/li>\n<li>Denial of access to an authorized person to a computer system.<\/li>\n<li>Providing assistance to any person to facilitate unauthorized access to a computer.<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 11.<br \/>\nExplain the Procedure of Indian Penal Code, 1860.<br \/>\nAnswer:<br \/>\nIndian Penal Code, 1860:<br \/>\nSection 168 of the IPC &#8211; Public servant unlawfully engaging in trade: \u201cWhoever, being a public servant, and being legally bound as such public servant not to engage in trade, engages in trade, shall be punished with simple imprisonment for a term which may extend to one year, or with fine, or with both.\u201d<\/p>\n<ul>\n<li>Section 171 B &#8211; Bribery, read with Section 7 of the PC Act \u201cWhoever commits the offence of bribery shall be punished with imprisonment of either description for a term which may extend to one year, or with fine, or with both. Provided that bribery by treating shall be punished with fine only\u201d as per Section 171E.<\/li>\n<li>Section 403 &#8211; Dishonest Misappropriation of property<\/li>\n<li>Section 405 &#8211; Criminal Breach of Trust: \u201cWhoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both\u201d according to Section 406.<\/li>\n<li>Section 417 &#8211; Cheating<\/li>\n<li>Section 463 &#8211; Forgery \u201cWhoever commits forgery shall be punished with imprisonment of either description for a term which may extend to two years, or with fine or with both\u201d Penalties under Prevention of Money Laundering Act, 2002.<\/li>\n<li>Section 4 &#8211; Punishment for money-laundering<br \/>\nWhoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees.<\/li>\n<\/ul>\n<p>Question 12.<br \/>\nWrite a details note on The United Kingdom Bribery Act, 2010.<br \/>\nAnswer:<br \/>\nThe United Kingdom Bribery Act, 2010:<br \/>\nThe Bribery Act, 2010 is an Act of the Parliament of the United Kingdom that covers the criminal law relating to bribery. The Act defines all the previous statutory and common law provisions in relation to bribery, the bribery of foreign public officials and the failure of a commercial organisation to prevent bribery on its behalf,<br \/>\nThe objective of the Act is to provide a modern legislation that effectively deals with the increasingly sophisticated, cross-border use of bribery, and carry out the prosecution of bribery by individuals and organizations both within the UK and overseas easier. It applies to the United Kingdom of Great Britain and Northern Ireland.<br \/>\nSalient features of the Act:<\/p>\n<ul>\n<li>It will criminalise both active and passive bribery, i.e., both bribing and being bribed.<\/li>\n<li>It will criminalise not just bribery of public officials, but also bribery entirely in the private sphere.<\/li>\n<li>It does not require proof of dishonesty or corruption.<\/li>\n<li>It will criminalise the failure to prevent bribery.<\/li>\n<li>It will, effectively, require those carrying on business in the UK to have in place \u201cadequate procedures\u201d to prevent bribery taking place, even if the bribery is unconnected with the UK.<\/li>\n<li>The offences will have extensive extra-territorial reach, criminalising activities which may take place entirely outside the UK.<\/li>\n<li>Committing offences could lead to imprisonment for up to 10 years (for individuals) and\/or unlimited fines (for individuals and corporate bodies).<\/li>\n<li>There is no exception for \u201cfacilitation payments\u201d.<\/li>\n<li>\u201cLocal customs and practices\u201d will not necessarily provide a defence.<\/li>\n<li>The Act creates four offences of bribery such as:<\/li>\n<\/ul>\n<p>1. Bribing: Section 1 of the Act provides that it is an offence for a person to offer, promise or give a financial or other advantage for the purpose of bringing about an improper performance of a function or activity.<\/p>\n<p>2. Being bribed: Section 2 of the Act provides that it is an offence to request, agree to or receive a f inancial or other advantage for the purpose of bringing about an improper performance of a function or activity or to request, agree to or receive a reward for having done so.<\/p>\n<p>3. Bribery of Foreign Public Official: Section 6 of the Act provides that it is an offence to offer, promise or give a financial or other advantage to a foreign public official where such advantage is not permitted under th\u201e written law applicable to that foreign official. Further, the bribery giver must intend that the advantage given or offered would influence the foreign official in the performance of his\/her duties as a public official and must .intend to secure business, or to obtain a business advantage. However, the defence is available if the local laws of the country of the foreign official permit or require them to be influenced in that way.<\/p>\n<p>4. Corporate offence of failing to prevent bribery: Section 7 of the Act provides that a commercial organisation commits an offence under the Act if a person associated with it bribes another person with an intention of obtaining or retaining either business or a business advantage for that organization. However, the commercial organisations will have an absolute defence to liability if they can show that they have put in place \u201cadequate procedures\u201d to prevent bribery. The personal liability can be put in place on senior company officers who turn a blind eye to such board-level bribery.<\/p>\n<p>Adequate procedures to prevent bribery: The UK Bribery Act also specifies what could be considered as adequate procedure put in place to prevent bribery. This will include:<\/p>\n<ul>\n<li>Proportionate procedures &#8211; the procedures adopted should be proportionate to the risk faced.<\/li>\n<li>Top-level commitment &#8211; the company should adopt a culture of zero tolerance through a commitment by senior management.<\/li>\n<li>Risk assessment &#8211; the company should identify its bribery risks and priorities its actions in high risk areas.<\/li>\n<li>Due diligence &#8211; the company should take appropriate care when entering into relationships or markets where there is a risk of bribery.<\/li>\n<li>Communication &#8211; the company\u2019s policy should be clearly communicated to all relevant parties, supported by appropriate training and \u201cspeak up\u201d procedures.<\/li>\n<li>Monitoring and review &#8211; the procedures put in place should be reviewed and updated as the company\u2019s risks change over time.<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 13.<br \/>\nWrite a brief note on Foreign Corrupt Practices Act, 1977.<br \/>\nAnswer:<br \/>\nForeign Corrupt Practices Act, 1977 (U.S.A.):<br \/>\nThe Foreign Corrupt Practices Act, 1977 \u201cFCPA\u201d is a United States\u2019 federal law that contains two main provisions, i.e., addresses accounting transparency requirements under the Securities Exchange Act of 1934 and concerning bribery of foreign officials. The Act was amended in 1988 and further in 1998. It includes both bribery and accounting provisions. Applicability of the Act:<\/p>\n<ul>\n<li>Any person who has a certain degree of connection with the United States and engages in foreign corrupt practices.<\/li>\n<li>Any act by U.S. businesses, foreign corporations trading securities in the U.S., American nationals, citizens, and residents acting in furtherance of a foreign corrupt practice whether or not they are physically present in the U.S.<\/li>\n<li>In the case of foreign natural and legal persons, the Act covers their deeds if they are in the U.S. at the time of the corrupt conduct.<\/li>\n<\/ul>\n<p>The ideology of the FCPA is to make it illegal for companies and their supervisors to influence foreign officials with any personal payments or rewards. This Act was passed to make it unlawful for certain classes of people and entities to make payments to foreign government officials in order to assist in obtaining or retaining business. Further, the Act governs not only payments to foreign officials, candidates, and parties, but any other recipient if part of the bribe is ultimately attributable to a foreign official, candidate, or party. These payments are not restricted to monetary forms and may include anything of value. This is considered the territoriality principle of the Act.<\/p>\n<p>Accounting Provision: The FCPA also requires the companies whose securities are listed in the U.S. to meet its accounting provisions. These accounting provisions operate in tandem with the anti-bribery provisions of the FCPA, and requires respective corporations to prepare and keep books and records that accurately and fairly reflect the transactions of the corporation, and to devise and maintain an adequate system of internal accounting controls. An increasing number of corporations are taking additional steps to protect their reputation and reduce their exposure by employing the services of due diligence companies tasked with vetting third party intermediaries and identifying easily overlooked government officials embedded in otherwise privately held foreign firms.<\/p>\n<p>Bribery and facilitation payment: With reference to payments to foreign officials, the act draws a distinction between bribery and facilitation or \u201cgrease payments\u201d, which may be permissible under the FCPA, but may still violate local laws. The primary distinction is that grease payments or facilitation payments are made to officials to expedite their performance of the routine duties which they are already bound to perform. The exception focuses on the purpose of the payment rather than on its value.<\/p>\n<p><strong>Forensic Audit: Laws and Regulations Notes<\/strong><\/p>\n<p>A forensic audit is an examination and evaluation of a frm\u2019s or individual\u2019s financial information for use as evidence in the court of law. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims.<br \/>\nIn order to understand the legal consequences that a person attracts on being caught in a forensic audit, it is necessary to know about the various statutes that talk about the implementation of forensic audits in India.<\/p>\n<p>1. Indian Laws : Information Technology and Business Laws Companies Act, 2013<br \/>\nConsidering the consequence of corporate frauds on the growth of Corporates and Economy, the Companies Act, 2013 lists down frauds and prescribes penalties and punishments for violations.<br \/>\nSection 447 of the Companies Act, 2013 often now referred to as one of the draconian provision of the new Act deals with provision relating to punishment for fraud.<br \/>\nSection 447: \u201cWithout prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the amount involved in the fraud:<br \/>\nWhere the fraud in question involves public interest, the term of imprisonment shall not be less than 3 years&#8221;.<\/p>\n<p>Fraud Reporting<br \/>\nSection 143(12) Notwithstanding anything contained in this section, if dn auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Punishment for default<br \/>\nSection 143 (15) If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12), he shall be punishable with fine which shall not be less than 1 lakh rupees but which may extend to 25 lakh rupees.<\/p>\n<p>SEBI Act, 1992<br \/>\nRegulation 11 C of the SEBI Act, 1992 empowers the SEBI to direct any person to investigate the affairs of intermediaries or brokers associated with the securities market whose transactions in securities are being dealt with in a manner detrimental to the investors or the securities market.<\/p>\n<p>Information and Technology Act, 2000<br \/>\nSection 43 and 44 of the IT Act, 2000- lays down penalty for the following<\/p>\n<ul>\n<li>Unauthorized copying of an extract from any data.<\/li>\n<li>Unauthorized access and downloading files.<\/li>\n<li>Introduction of viruses or malicious programmes.<\/li>\n<li>Damage to a computer system or computer network.<\/li>\n<li>Denial of access to an authorized person to a computer system.<\/li>\n<li>Providing assistance to any person to facilitate unauthorized access to a computer.<\/li>\n<\/ul>\n<p>Insurance Act, 193d<br \/>\nSection 33 of the Act empowers the IRDA to direct any person (Investigating Authority) to investigate the affairs of any insurer.<\/p>\n<p>The Companies (Auditor\u2019s Report) Order, 2016<br \/>\nThe Act requires the auditor to report to the effect that if a substantial part of fixed assets have been disposed of during the year, whether it has affected the going concern status.<br \/>\nIn light of these statutory authorities, the following penalties may be faced by a person, if he\/she is caught in a forensic audit, by way of white-collar penalties.<\/p>\n<p>Penalty under the Prevention of Corruption Act, 1988 (PC Act)<br \/>\nPrevention of Money-Laundering Act, 2002 &#8211; Section 3 of the Act defines the offence of money laundering as the involvement of a person in any process or activity connected with the proceeds of crime and projecting it as untainted property, where the scope of integrating forensic audits can be clearly seen.<\/p>\n<p>Highlights of the The Prevention of Corruption (Amendment) Act, 2018<br \/>\nDefnition of \u2018Undue Advantage\u2019: The Amendment Act provides that any public servant who accepts or attempts to accept from any person, any \u2018undue advantage\u2019, either for himself Or for any other person, in lieu of performance of a public duty, shall be punishable with imprisonment for a minimum term of 3 (three) years and maximum of 7 (seven) years. The Amendment Act has defined \u2018undue advantage\u2019 to mean any gratification other than legal remuneration that a public servant is permitted to receive. Further, \u2018gratification\u2019 is not limited to pecuniary gratifications or to gratifcations estimable in money. By virtue of such an expansive definition, even non-monetary considerations such as a better posting, post-retirement benefts, gifts and favours not estimable in money can also be covered under the ambit of undue advantage.<\/p>\n<p>Income Tax Act, 1961<br \/>\nThough Income Tax Act does not deal with corruption directly but contains number of provisions which deal with ill-gotten money by an assessee.<br \/>\nCash Credits [Section 68]: As per the provision of Section 68 of the Act, any sum found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.<br \/>\nUnexplained investments [Section 69]: As per the provision of Section 69 of the Act, where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.<br \/>\nUnexplained Money [Section 69A]: As per the provision of Section 69A of the Act, where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or the valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and\u2019 the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jeweilery or other valuable article may be deemed to be the income of the assessee for such financial year.<br \/>\nUnexplained Expenditure [Section 69C]: As per the provision of Section 69C of the Act, where in any financial year an assessee has incurred any expenditure and offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him }s not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, deemed to be the income of the assessee for such financial year.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Indian Penai Code, 1860<\/p>\n<ul>\n<li>Section 168 of the IPC &#8211; Public servant unlawfully engaging in trade: \u201cWhoever, being a public servant, and being legally bound as such public servant not to engage in trade, engages in trade, shall be punished with simple imprisonment for a term which may extend to one year, or with fine, or with both.\u201d<\/li>\n<li>Section 171 B &#8211; Bribery, read with Section 7 of the PC Act \u201cWhoever commits the offence of bribery shall be punished with imprisonment of either description for a term which may extend to one year, or with fine, or with both. Provided that bribery by treating shall be punished with fine only\u201d as per Section 171E.<\/li>\n<li>Section 403 &#8211; Dishonest Misappropriation of property<\/li>\n<li>Section 405 &#8211; Criminal Breach of Trust: \u201cWhoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both\u201d according to Section 406.<\/li>\n<li>Section 417-Cheating<\/li>\n<li>Section 463 &#8211; Forgery \u201cWhoever commits forgery shall be punished with imprisonment of either description for a term which may extend to two years, or with fine or with both\u201d Penalties under Prevention of Money Laundering Act, 2002.<\/li>\n<li>Section 4 &#8211; Punishment for money-laundering &#8211; Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees<\/li>\n<\/ul>\n<p>\u201cInternational Laws\u201d<br \/>\nCorruption is a political, social and economic issue at the global level. The issue of corruption cuts to the heart of modern ideas about politics, culture and democracy. Despite continuing concern and a multi-million dollar international industry committed to fighting it, corrupt practices often seem impervious to change. Today it is a major cause of global crises of poverty, human rights violation, injustice and insecurity.<\/p>\n<p>OECD Guidelines for Multinational Enterprises relating to Combating Bribery<br \/>\nThe Guidelines for Multi-National Enterprises (MNEs) prescribed by the OECD are the most wide-ranging set of government-supported recommendations on responsible business conduct in existence today. The Governments adhering to the guidelines aim to encourage and maximize the positive impact of the MNEs for sustainable development and enduring social progress.<\/p>\n<p>The Integrity Pact<br \/>\nThe Integrity Pact is a tool developed and launched by the Transparency International to help different businesses, governments and civil societies in order to equip them to fight corruption in the field of public procurements and public contracting. The Transparency International had established mutual contractual rights and obligations to reduce the high cost and corrpption involved in the public contracts.<\/p>\n<p>Foreign Corrupt Practices Act, 1977 (U.S.A.)<br \/>\nThe Foreign Corrupt Practices Act, 1977 \u201cFCPA\u201d is a United States\u2019 federal law that contains two main provisions, i.e., addresses accounting transparency requirements under the Securities Exchange Act of 1934 and concerning bribery of foreign officials. The Act was amended in 1988 and further in 1998. It includes both bribery and accounting provisions.<\/p>\n<p>The United Kingdom Bribery Act, 2010<br \/>\nThe Bribery Act, 2010 is an Act of the Parliament of the United Kingdom that covers the criminal law relating to bribery. The Act defines all the previous statutory and common law provisions in relation to bribery, the bribery of foreign public officials and the failure of a commercial organisation to prevent bribery on its behalf.<br \/>\nThe objective of the Act is to provide a modem legislation that effectively deals with the increasingly sophisticated, cross-border use of bribery, and carry out the prosecution of bribery by individuals and organizations both within the UK and overseas easier. It applies to the United Kingdom of Great Britain and Northern Ireland.<\/p>\n<p>ICSI Anti Bribery Code<br \/>\nIndeed, we have plethora of legislations to fight against the menace of corruption and bribery, yet, if we hold a comparative analysis of legal measures India hold in effectively combating corruptions and bribery with the international practices of the related area, we find that though India has various anti-corruption legislations and anti-corruption institutions, yet the main legislation \u2018Prevention of Corruption Act, 1988\u2019 does not contain any provision directly dealing with the offence of giving bribe. In the Companies Act, 2013, also the offence of corruption or bribery is not specified. It is only a matter of time that India will have a specific legislation (Act) to deal with bribery in the private sector. In international legislations like the Foreign Corrupt Practices Act, 1977 (FCPA) of USA and the United Kingdom Bribery Act, 2010 both, mandate corporate and other business entities to formulate and adopt anti-bribery policies in accordance with its requirements and provide protection to senior management if they have Anti-Bribery policy in place.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Forensic Audit: Laws and Regulations - CS Professional Study Material\" width=\"123\" height=\"13\" \/><\/p>\n<p>Need for the Code<br \/>\nThe main legislation \u2018Prevention of Corruption Act, 1988\u2019 dealing with corruption at present does not provide a definition of \u2018Corruption\u2019 itself. Also, in any corrupt transaction, there are two parties: the bribe-giver and the bribetaker, but as per Section 24 of the Act, a statement made by a bribe-giver in any proceeding against a public servant for an offence, shall not subject him to prosecution under Section 12. This Act, also does not contain any provision directly dealing with active domestic bribery, i.e., the offence of giving bribe. The Code seeks to curb the supply side of corruption prevalent in the private sector and also covers surrogate corrupt practices.<\/p>\n<p>Scope<br \/>\n\u2018Corporate Anti-Bribery Code\u2019 (The Code), may be adopted voluntarily by the Corporates. The Code, once adopted by the Company, shall be applicable to the company and its:<\/p>\n<ul>\n<li>Board of Directors,<\/li>\n<li>Employees (full time or part-time or employed through any third party contract),<\/li>\n<li>Agents, Associates, Consultants, Advisors, Representatives and Intermediaries, and<\/li>\n<li>Contractors, Sub-contractors and Suppliers of goods and\/or services.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Chapter 4 Forensic Audit: Laws and Regulations \u2013 Forensic Audit ICSI\u00a0Study Material is designed strictly as per the latest syllabus and exam pattern. Forensic Audit: Laws and Regulations &#8211; CS Professional Forensic Audit Study Material Question 1. Jupiter Hospitals Ltd., (JHL) is a renowned corporate house owning a famous hospital called \u201cJupiter Hospitals\u201d. Two family &hellip;<\/p>\n<p class=\"read-more\"> <a class=\"\" href=\"https:\/\/gstguntur.com\/forensic-audit-laws-and-regulations-cs-professional-study-material\/\"> <span class=\"screen-reader-text\">Forensic Audit: Laws and Regulations &#8211; CS Professional Study Material<\/span> Read More &raquo;<\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":"","footnotes":""},"categories":[165],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/22219"}],"collection":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/comments?post=22219"}],"version-history":[{"count":3,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/22219\/revisions"}],"predecessor-version":[{"id":22222,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/22219\/revisions\/22222"}],"wp:attachment":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/media?parent=22219"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/categories?post=22219"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/tags?post=22219"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}