ACCA AAA ^INT Syllabus F. Other Assignments - Due Diligence - Notes ^{1 / 1}

Normally someone buying a company wants info about the target organisation.

So, the assurance provider tries to verify any management representations and offer practical recommendations regarding the acquisition process

Scope of a due diligence assignment compared to an audit

Fact finding from a WIDER range of sources

Such as..

• Several years prior financial statements

• Management accounts

• Profit and cash flow forecasts

• Any business plans recently prepared

• Discussions with management, employees and third parties

Purpose of a Due diligence review

1. Information Gathering
   about a target company so the buyer knows everything 

   Essentially the aim is to uncover any ‘skeletons in the closet’  before a decision regarding the acquisition is made.

2. Verification of specific management reps

3. Identification of assets and liabilities
   Especially internally generated intangibles such as customer databases and brand names (these won't show on the SFP)

4. Operational issues
   Risk can come from issues such as high staff turnover, or suppliers contract terms

5. Acquisition planning
   Look for commercial effects of the acquisition. Eg. synergies & economies of scale

   Also acquisition expenses to pay such as redundancies and change management

6. Management involvement
   Reduces time spent by the directors on fact finding, leaving more time to focus on strategic matters to do with the acquisition and on running the existing group.

7. Credibility
   An external investigation is independent & impartial view, enhancing the credibility of the amount paid for the investment.

NO aim to provide assurance that financial data is free from material misstatement

No detailed audit procedures will be performed unless there are specific issues which cause concern

More AP used

More forward looking

No detailed tests of control

Information requested for Due diligence review

1. Directors, and any other key management personnel’s contracts of employment 

   – these will be needed to see if there are any contractual settlement terms if the contract of employment is terminated after the acquisition.

2. An organisational structure should be obtained

   - to identify the members of management and key personnel and their roles

3. Details of any legal arrangement, such as a lease.

4. Prior-year audited financial statements, and management accounts for this financial year

   - FS will also provide useful information regarding contingent liabilities, the liquidity position of the company, accounting policies, and the value of assets.

5. The most recent management accounts for the current year should be analysed.

6. Forecasts and budgets for future periods