Ser Otto will tell The Warden that he can sense an evil presence in the Alienage, and asks The Warden to look out for strange things. There are four signs that can be found. In front of the orphanage there is a pool of blood, a dead rabid dog, a feral dog and a deranged beggar. Interact with at least two of them and return to Otto. He will then accompany The Warden to the old orphanage. It is now haunted, and Mabari and shades all attack. After fighting through these a demon appears. Once defeated, Otto will initially think that this will solve the problem. Yet another, more powerful demon awaits. This demon kills Otto before The Warden has a chance to defeat it. With the powerful demon sent back to the Fade, the threat is finally over. Before leaving the orphanage, check in the chest of the last room to aquire an amulet which you can use to complete the mini-side quest Hearing Voices.
After entering the orphanage it is possible for this quest to bug. Upon completing a step in the quest, Otto will merely stop and stand in the center of the room. All the doors will be locked and talking to Otto will reset the cutscene. It is also because once you end the battle with the demon you approach him to quickly and is yet not ready so the quest glitches. Do not talk to him after the battle. In a moment it will go to the cutscence. Casting an area damage spell in the room (like blizzard) may advance the quest if it has already glitched.