BSCI371/

BSST371

SU E6 - Part 1
Due Diligences

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Learning outcomes
On completion of this study unit you should be able to:

• Discuss the purpose and types of assurance, applicable to

due diligence engagements.

• Name and discuss the stages of the due diligence process.

• Recommend specific procedures applicable to a certain

scenario whilst performing due diligence engagements.
Study material

• Dynamic Auditing 15-9 to 15-12

• SAICA student handbook ISRS4400* (Agreed upon procedures)

* International standard on related services 4400

Different Levels of Assurance

Reasonabl •Not 100 % assurance - Audits

e
•Present fairly
Assurance

Limited
Assuranc • Independent review
e

• Agreed upon procedures

No • Compilation engagements
Assuranc • Due diligence (depending on engagement)
e • Environmental Audits
Special engagements - definition

• Special investigations are the investigation by

practitioners for clients in terms of OTHER
INFORMATION as financial statements like:
– Performance audits (not part of the study unit)
– Forensic audits (not part of the study unit)
– Investigate the effectiveness of the internal controls/governance (not part
of the study unit)
– Review of the compliance with corporate governance principles (not part
of the study unit)
– Environmental audits (not part of the study unit)
– Due diligence (DD) investigations: To determine the reasonableness
of information in financial statements, contracts etc.
– Investigation for mergers: reasonableness of information in
financial statements
– Compliance of contracts: if the terms have been complied with
 Due diligence DYNAMIC AUDITING 15-9 to 15-11
- definition
• Due diligence investigations comprise of special investigations to
provide specific findings to the parties involved in a transaction:
– E.g. i.r.o. a take-over a financial adviser could perform a due diligence
investigation on the object company to verify the reasonableness of the info in
the statements, as well as to search for unrecorded liabilities.

• The critical aspects to determine the nature of the work to be

performed for the buyer. Due diligence could include:
– A complete audit of financial statements (ISA)
– Limited assurance of financial statements (ISRE)
– Agreed-upon procedures (ISRS)
– Other work of a consulting nature:
• To evaluate material contracts
• Take-overs, mergers and
• Identify risks for the company When: acquisitions
• Human resource issues • Compliance with contracts
• Quality of personnel and management, etc. • Entering into agreements,
etc.
Procedures to follow Same as 4 main audit
stages – what are they?

1. Pre-engagement activities
Consider acceptability of the engagement.

Special attention to the requirement of knowledge and competency.

If accepted, documents the conditions of the engagement in an

engagement letter.

2. Planning

Plan the work and the areas to cover:

• Assets and liabilities

• Contingencies / Contingent liabilities

• Income and expenses

Procedures to follow (cont.)
3. Perform the investigation

Normal procedures of inspection, observation, enquire and

confirmations.
More focus on – Reconciliations, external confirmations,
reasonableness of provisions, confirmation of ownership of assets, AP
of income and expenses
Document the procedures, evidence obtained and findings.

4. Reporting

Such investigations will probably meet the requirements of an agreed-

upon engagement. Thus, the procedures performed, and the findings
thereof, will be described in the report, without assurance being
expressed. (See ISRS4400 – appendix 1 example)
Areas to cover & procedures
• General:
– Statutory details: memorandum, articles, minutes.
– Annual F/S (current & previous year) to determine trends.
– Management accounts: trends, areas that require further investigation.
– Budgets: to determine trends.
– Strategic plans.
– Standing, reputation & experience in business community: quality of products.
– Management: integrity and reputation, contracts with management.
– Agreements with suppliers, clients, etc.
– Existing contracts: conditions, obligations, profitability.
– Intellectual assets: existence, conditions, tax treatment.
– Staff: quality, years of service, experience, etc.
Areas to cover & procedures
• Statement of financial position:
– Debtors * composition, large debtors, conditions, etc.
* allowance for credit losses
– Creditors * composition, large creditors, etc.
* unrecorded liabilities & obligations
– Inventory * confirm existence, ownership through inventory
counts, inventory records
* provision for obsolete, damaged inventory
– Fixed assets * confirmation & ownership
* confirm valuation
* is it secured?
– Bank / Overdraft facilities * liquidity & cash means
* external bank confirmations (confirms balances
and securities held
– Loans * conditions, interest, securities
Areas to cover & procedures
• Statement of comprehensive income:
– Profitability & profit margins
– Contract for income and expenses, conditions etc.
– Nature of income, expenses &completeness of recording

• Liabilities:
– Tax returns: tax liability
– Liabilities, guarantees, etc. – conditions & contingencies
– Environmental liability – pollution, repair of environment

• Conditions of the agreement:

– Obligations of the seller and the buyer
– The basis for determination of prices, etc.
Performing DD in terms of ISRS4400
• Financial due diligence can require some form of assurance – then
perform in terms of (ISAE3000*) – not applicable for this study
unit
• Advisable to perform DDs in terms of ISRS4400
• Objectives of ISRS4400
– agree the procedures to be performed with engaging party
– Perform the procedures
– Communicate findings

• Procedures
– Procedures will be pre-determined and agreed upon
– For instance – Compare the physical assets to the asset register and report
on any missing assets
– Can also use an expert where deemed necessary and agreed upon

*International Standard on Assurance Engagements

Performing DD in terms of ISRS4400
• Report
– Must be issued in writing
– No need to study all the requirements of the report for this
study unit
– New table format (ISRS4400 revised)
 appendix 1
Reporting in terms of *ISRS4400

* International Standards on Related Services 4400(revised)

Reporting in terms of *ISRS4400

* International Standards on Related Services 4400(revised)

Any questions?