Makhana Pesticides Ltd. is engaged in manufacture and distribution of pesticides, other ancillary products and has a turnover of ₹ 1,000 Crores. The Company has branches across multiple locations and the stocks are store

CS Professional · Forensic Audit · PYQS · December 2021
Makhana Pesticides Ltd. is engaged in manufacture and distribution of pesticides, other ancillary products and has a turnover of ₹ 1,000 Crores. The Company has branches across multiple locations and the stocks are stored and distributed though these locations. The Management of the Company noticed that in few of the branches the write off in stocks was higher. The internal auditor was asked to cover in his scope these aspects and report to the Board, his findings, if any. However, the internal auditor reported that there were no material exceptions and some quantity of stock was becoming obsolete due to weather conditions and was written off. However, the Management was not satisfied with the internal auditor's response, and so it appointed Amrut for an investigation. Amrut went to those branches for detailed investigation and also tried to use data analytics tools to understand the movement of stocks and deliveries. He noted that the stocks worth ₹ 5 Lakhs were pilfered and sold to small farmers in small quantities by the junior staff there. He got to know of this when he overheard a labourer discussing with a local farmer. However, there was no documentation which suggested the involvement of the Branch Manager. The Management issued a Memo to the Branch Manager, to which he agreed to strengthen the internal controls around the storage of inventory and gave explanation to the Management. In this background, answer the following: Can the forensic auditor go by what he heard and issue a report?

Answer & Explanation:

Section 60 of Indian Evidence Act, 1872 requires that the oral evidence must, in all cases whatsoever, be direct. Where the testimony of the witness is entirely hearsay and on some matters hearsay of hearsay, it cannot be admitted in evidence. Where a witness gives evidence that he received information from other person and that person does not say about it, such evidence would be inadmissible being hearsay evidence. Hearsay information is useful and acceptable during an investigation to generate leads and can lead to important evidence and witnesses. Eventually, however, investigators should try to obtain information from witnesses with direct knowledge of the facts. Direct knowledge means that the witness participated in the event, or observed it directly, or heard about it from the subject. The latter is known as an "admission, is not hearsay, and often is the best evidence of knowledge and intent.

Topics: Forensic Audit Evidence

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