Jacob Co, an audit client of your firm, is a large privately owned company whose operations involve a repair and maintenance service for domestic customers. The company offers a range of services, such as plumbing and electrical repairs and maintenance, and the repair of domestic appliances such as washing machines and cookers, as well as dealing with emergencies such as damage caused by flooding. All work is covered by a two-year warranty.

The directors of Jacob Co have been seeking to acquire expertise in the repair and maintenance of swimming pools and hot-tubs as this is a service increasingly requested, but not offered by the company. They have recently identified Locke Co as a potential acquisition.

Preliminary discussions have been held between the directors of the two companies with a view to the acquisition of Locke Co by Jacob Co. This will be the first acquisition performed by the current management team of Jacob Co. Your firm has been asked to perform a due diligence review on Locke Co prior to further discussions taking place. You have been provided with the following information regarding Locke Co:

Locke Co is owner-managed, with three of the five board members being the original founders of the company, which was incorporated thirty years ago. The head office is located in a prestigious building, which is owned by the founders’ family estate. The company recently acquired a separate piece of land on which a new head office is to be built.

The company has grown rapidly in the last three years as more affluent customers can afford the cost of installing and maintaining swimming pools and hot-tubs. The expansion was funded by a significant bank loan. The company relies on an overdraft facility in the winter months when less operating cash inflows arise from maintenance work.

Locke Co enjoys a good reputation, though this was tarnished last year by a complaint by a famous actor who claimed that, following maintenance of his swimming pool by Locke Co’s employees, the water contained a chemical which damaged his skin. A court case is on-going and is attracting media attention.

The company’s financial year end is 31 August. Its accounting function is outsourced to Austin Co, a local provider of accounting and tax services.

Required:

(a) Explain THREE potential benefits of an externally provided due diligence review to Jacob Co. (6 marks)

(b) Recommend additional information which should be made available for your firm’s due diligence review, and explain the need for the information. (12 marks)