Due diligence engagement

Co. A (acquire/purchaser)

Co. B (target)

Either :
Acquire perform DD
Firm perform DD (external DD)
On behalf of acquirer : financial DD
On behalf of target : Vendor DD

Benefits of external DD
1. External DD provider will be more independent in providing information relating to the
target (both +ve and -ve) as they are not involved in the acquisition decision.
2. External DD provider cann do a better job as they have extensive exposure in performing
DD services to many clients.
3. Mgmt. of client can focus managing their biz activities rather than involved in DD activities
which are not their expertise

DUE DELIGENCE FOCUSES ON FACTS FINDINGS

- gather as much information as you can to help client make decision

Purpose & Benefit of DD

1. Information gathering (facts findings)
a. Gather as much info as possible
b. To assist the client in their decision making on the potential acquisition

2. Verify target co representations / statement

a. Verify all info provided by mgmt especially when the mgmt. may try to push the
sales by only emphasizing positive facts
3. Identify all asset and liabilities of the company
a. Confirm existence, completeness, valuation and right & obligation of asset and
liabilities
b. Asset – Liabilities = Net asset = Purchase price
c. Identification assets & liabilities are not limited to those in FS only
4. Identification of any operational issues
a. Perform visit and background research of the company
b. Assist the client to plan ahead for any potential operational issues
i. Eg “ acquiring owner managed biz
 Acquirer should discuss w owner to become the employee
and plan for transition of leadership
ii. Some operational issues can affect forecast result – nego PP
5. Acquisition planning
a. Acquirer can plan on the purchase price to be quoted
b. Acquirer can also make planning on any operational issues that they expect to
occur upon the acquisition
Scope and procedures of DD compared to Audit
need to focus on beyond FS items

Audit Due diligence

An assurance engagement
 Provide positive assurance
Focus of material misstatement
 mistakes
Source of information for audit is limited to Wider sources of information to understand
the info required for the f/s only
Procedure to be performed are guided by No detailed procedures required unless
requirement of ISAs
Audit tends to focus on historical results
TOC + SP
Normally a non-assurance engagement
 No assurance/opinion. Only factual
Focus on fact findings only for the purpose
of decision making
the past history of the biz and future
potential biz
 several years of PY F/S
 normally – 5 years trend
 current year F/s
 forecast for the next 5 years
 any biz plan
 discussion w mgmt. and 3rd parties
there are unusual facts identified or
requested by the mgmt. of acquirer
DD tends to be more forward looking
No TOC – unless major internal control
deficiencies that could affect the acquirer
Only SP

Contents of a DD report

1. identification of acquirer and target co

2. Objective of DD work
3. Identification of net asset of target co
4. Scope of work  procedures performed and findings
5. Appendix and supporting info relevant for DD work

Type of conclusion (VS audit)

1. Audit report issue a positive assurance
2. Positive opinion would be included “true and fair” paragraph included in the audit
report
3. DD report normally is a non assurance engagement which focuses more on facts
findings
4. No opinion will be issued in the auditors report
5. If it is an assurance engagement, it will be only a review engagement in which
negative assurance will be provided