FRAUD REPORTING

Term ‘fraud’ as

Fraud’ deals with intentional misrepresentation by one or more individuals among management, TCWG (those charged with governance) o, third parties or employees, involving the use of deception to obtain an illegal advantage”.

CHARACTERISTICS OF FRAUD

Fraud is Intentional

Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional.

Fraud is a broad legal concept

Fraud, whether fraudulent financial reporting or misappropriation of assets,

involves incentive or pressure to commit fraud, 

a perceived opportunity to do so and some rationalization of the act

FRAUD REPORTING

In the course of the audit, the auditor has to perform his duties as auditor, has reason to believe that an offence of fraud involving such amount, has been committed by the company or by its officers or employees.

the auditor shall report the matter to the Central Government within such specified time.

The manner of reporting the matter to the Central Government is as follows:

1. the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than 2 days of his knowledge of the

fraud, seeking their reply or observations within 45 days;

2. After the receiving the approval or 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 from the date of receipt of such reply or observations;
3. If the auditor fails to receive any reply or observations from the Audit Committee or Board within forty-five days, he shall forward his report to the Central Government along with the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;

4. the report shall be sent to the MCA (Ministry of Corporate Affairs) in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an email in confirmation of the same.

5. the report shall be on the letter-head of the auditor containing the postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with fix his seal and shall indicate his Membership Number; and
6. the report shall be in the form of ADT-4.

Reporting to the Audit Committee or Board

Reporting of Fraud involving an amount of less than 1 crore rupees: 

Auditor to Report Board/Audit Committee within 2 days of knowledge of the fraud.

The auditor should report the following matters:

1. Nature of Fraud with description;
2. The approximate amount involved; and
3. Parties involved.

Disclosure in the Board’s Report

Company is bound to disclose certain specified details in the Board’s Report as 

1. Nature of Fraud with description; 
2. The approximate amount involved; 
3. Parties involved if action not taken; and 
4. Remedial actions are taken.

Reporting of Fraud involving a number of rupees 1 crore or above: 

The auditor shall report the matter to the Board or the AC, as the case may be, immediately but not later than 2 days of his knowledge of the fraud, seeking them

reply or observations within 45 days;

• In case a reply/observations received within the stipulated time, the auditor is required.
• to forward a report along with reply/observations and comments to CG within fifteen days of receipt of such reply/observations.
• In case reply/observations are not received within the stipulated time (within 45 days) the auditor should forward the report along with a note containing details of the report for which failed to receive any reply/observations to the Central Government.

Audit Procedures and Reporting under CARO:

1. While planning the audit, the auditor discusses with other team members of the audit team the susceptibility of the company to material misstatements in the financial statements resulting from fraud. While planning, the auditor should also make inquiries of management to determine whether management is aware of any known fraud or suspected fraud that the company is investigating.
2. The auditor should examine the minutes of the audit committee, if available, to ascertain whether any instance of fraud pertaining to the company has been reported and actions are taken thereon.
3. The auditor should obtain written representations from management that:
   • it acknowledges its responsibility for the implementation and operation of accounting and internal control systems that are designed to prevent and detect fraud and error;
   • It believes the effects of those uncorrected misstatements in financial statements, aggregated by the auditor during the audit are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. A summary of such items should be included in or attached to the written representation;
   • it has
     1. disclosed all significant facts relating to any fraud or suspected frauds known to management that may have affected the entity, and
     2. it has disclosed the results of its assessment of the risk that the financial statements may be materially misstated as a result of fraud.
   • Where the auditor notices that any fraud by the company or on the company by its officers or employees has been noticed by or reported during the year, the auditor should, apart from reporting the existence of fraud, also required

to report, the nature of fraud and the amount involved. 

For reporting under this clause, the auditor may consider the following:

1. all frauds noticed or reported during the year shall be reported indicating the nature and amount involved.
2. Of the frauds covered under section 143(12) of the Act, only noticed frauds shall be included here and not the suspected frauds.
3. While reporting under this clause with regard to nature and the amount involved of the frauds noticed or reported, the auditor may also consider the principles of materiality outlined in Standards on Auditing.