Ch 16 - Due diligence, Investigation and Forensic Audit Flashcards
(38 cards)
What is the different between Due diligence and Audit?
It needs be underlined that due diligence is different from audit**. Audit is an **independent examination and evaluation of the financial statements** on an organization with a view to express an opinion thereon. Whereas, due diligence refers to an examination of a potential i_nvestment to confirms all material facts of the prospective business opportunity_**. It involves review of financial and non-financial records as deemed relevant and material. Simply put, due diligence aims to take the care that a reasonable person should take before entering into an agreement or a transaction with another party.
What are the different classifications of due diligence or rather what are the different sub classification or discipline wise category of due diligences that are available out there?
(i) Commercial/Operational Due Diligence: It is generally performed by the concerned acquire enterprise involving an evaluation from commercial, strategic and operational perspectives. For example, whether proposed merger would create operational synergies.
(ii) Financial Due Diligence: It involves analysis of the books of accounts and other information pertaining to financial matters of the entity. It should be performed after completion of commercial due diligence.
(iii) Tax Due Diligence: It is a separate due diligence exercise but since it is an integral component of the financial status of a company, it is generally included in the financial due diligence. The accountant has to look at the tax effect of the merger or acquisition.
(iv) Information Systems Due Diligence: It pertains to all computer systems and related matter of the entity.
(v) Legal Due Diligence: This may be required where legal aspects of functioning of the entity are reviewed.
(vi) Environmental Due Diligence: It is carried out in order to study the entity’s environment, its flexibility and adaptiveness to the acquirer entity.
(vii) Personnel Due Diligence: It is carried out to ascertain that the entity’s personnel policies are in line or can be changed to suit the requirements of the restructuring
what things encourage to conduct due diligence as to whether it will be worthwhile to acquire a business? what is the procedure or advice to the buyer with respect to objectives of the due diligence process?
what is the procedure in relation to due diligence of hidden liabilities while acquiring a company?
What is the procedure in relation to verification of the overvalued assets while performing the due diligence process accordingly?
What points will you check in order to ensure that the manufacturing unit of SV Ltd. will be able to meet the cash requirements internally? - In relation to due diligence only?
A review of historical cash flows and their pattern would reflect the cash generating abilities of the target company and should highlight the major trends. It is important to know if the company is able to meet its cash requirements through internal accruals or does it have to seek external help from time to time.
What is the work approach to due diligence in terms of the steps that are involved in the same?
What is the six dimensional process framework in relation to the work approach for due diligence?
What are the brief contents of a due diligence report?
What is the difference between audit and investigation?
Investigation differs substantially from an audit assignment. Audit aims at collection of sufficient appropriate audit evidence to enable the auditor to form a judgement and express an opinion on the financial statements or other data under examination. An investigation, on the other hand, requires special in-depth examination of the particular records or transaction with the objective of establishing a part or happening or assessing a particular situation. The scope of audit is broad based and general in nature whereas investigation is narrow and specific.
What are the various steps of investigation in brief?
What are the various steps of investigation in brief? - with respect to the last step on reporting of the findings, what are the important issues to be kept in the mind of the investigator while preparing his report?
Due to non-availability of standardised procedure and lack of professional guidance, investigation calls for extreme care, caution and circumspection on the _part of the investigator in exercising his judgement and discretio_n. Investigation often has a characteristic of very intimate and direct involvement of parties whose interest may be affected. _Therefore, unlike auditing, chances of one or the other of the parties challenging the finding of the investigation are far greater._
Whether the investigator can put reliance on the already audited statement of account? - write down all the relevant in relation to this from whole of the subject accordingly?
Process used for checking and reliance on already audited statement of accounts -
Following process may be carried out-
1. If the statements of account produced before the investigator were not audited by a qualified accountant, then of course there arises a natural duty to get the figures in the accounts properly checked and verified.
2. However, when the accounts produced to the investigator have been specially prepared by a professional accountant, wh_o knows or ought to have know_n that these were prepared for purposes of the investigation, _he could accept them as correct relying on the principle of liability to third parties._
3. Nevertheless, it would be prudent to see first that such accounts were prepared with objectivity and that no bias has crept in to give advantage to the person on whose behalf these were prepared.
Here also no dogmatic views are possible. If the investigation has been launched because of some doubt in the audited statement of account, no question of reliance on the audited statement of account arises. However, if the investigator has been requested to establish value of a business or a share or the amount of goodwill payable by an incoming partner, ordinarily the investigator would be entitled to put reliance on audited materials made available to him unless, in the course of his test verification, he finds the audit to have been carried on very casually or unless his terms of appointment clearly require to test everything afresh
Whether an investigator necessarily requires assistance of expert?
Often an investigator may feel the necessity of obtaining views and opinions of experts in various fields** to properly conduct the investigation. It would be therefore, proper for the investigator t_o get the written general consent of his client_**, to refer special matters for views of different experts at the beginning of investigation and he should settle the question of costs for obtaining the views and other related implications.
In relation to a business investigation, what are the procedures to be performed in relation to turnover?
In assessing the turnover which the business would be able to maintain in the future, the following factors should be taken into account:
(i) Trend: Whether in the past sales have been increasing consistently or they have been fluctuating. A proper study of this phenomenon should be made.
(ii) Marketability: Is it possible to extend the sales into new markets or that these have been fully exploited? Product wise estimation should be made.
(iii) Political and economic considerations: Are the policies pursued by the Government likely to promote the extension of the market for goods to other countries? Whether the sales in the home market are likely to increase or decrease as a result of various emerging economic trends?
(iv) Competition: What is the likely effect on the business if other manufacturers enter the same field or if products which would sell in competition are placed on the market at cheaper price? Is the demand for competing products increasing? Is the company’s share in the total trade constant or has it been fluctuating?
What are the various steps involved in relation to investigation done on behalf of an Incoming partner?
what are the various information that an investigator should collect in relation to Investigation on behalf of a Bank/ Financial Institution Proposing to Advance Loan to a Company?
To investigate the profitability of the business for judging the accuracy of the schedule of repayment furnished by the borrower, as well as the value of the security in the form of assets of the business already possessed and those which will be created out of the loan, the investigating accountant should take the under-mentioned steps in relation to Investigation on behalf of a Bank/ Financial Institution Proposing to Advance Loan to a Company?
a) Prepare a condensed income statement from the Statement of Profit and Loss for the previous five years, showing separately therein various items of income and expenses, the amounts of gross and net profits earned and taxes paid annually during each of the five years. The amount of maintainable profits determined on the basis of foregoing statement should be increased by the amount by which these would increase on the investment of borrowed funds.
(b) Compute the under-mentioned ratios separately and then include them in the statement to show the trend as well as changes that have taken place in the financial position of the company:
(i) Sales to Average Inventories held.
(ii) Sales to Fixed Assets.
(iii) Equity to Fixed Assets.
(iv) Current Assets to Current Liabilities.
(v) Quick Assets (the current assets that are readily realisable) to Quick Liabilities(vi) Equity to Long Term Loans.
(vii) Sales to Book Debts.
(viii) Return on Capital Employed.
(c) Enter in a separate part of the statement the break-up of annual sales product-wise to show their trend
Steps involved in the verification of assets and liabilities included in the Balance Sheet of the borrower company which has been furnished to the Bank in relation to Investigation on behalf of a Bank/ Financial Institution Proposing to Advance Loan to a Company? -Part 1 Assets and Liab
Steps involved in the verification of assets and liabilities included in the Balance Sheet of the borrower company which has been furnished to the Bank in relation to Investigation on behalf of a Bank/ Financial Institution Proposing to Advance Loan to a Company? -Part 2 Assets and Liabilities
What is the procedure in relation to verification of cash receipts in relation to embezzlement etc?
On the assumption that some of these may have been diverted before being entered in the books, evidence as regards income received from different sources should be scrutinised, e.g., inventory, sales summaries, rental registers, correspondence with customers, advices of travelling salesmen and counterfoils or receipts. Carbon copies of receipts marked ‘duplicate’, should be scrutinised to confirm that they are in fact copies of receipts issued earlier. In addition, by recalling paying-in-slips from the bank the details of cash deposited on each day should be compared with those shown in the Cash Book. The record of sales of scrap of waste paper, that of collection of rents from labourers temporarily accommodated in the company’s quarters, that of refunds of amounts deposited with the electric supply co., or any other Government authorities should be examined for finding out if any of these amounts have been misappropriated. Cash sales should be vouched in detail. Recoveries from customers and sundry parties should be checked with the copies of receipts issued to them; deductions made on account of cash discounts should be reviewed. All withdrawals from the bank should be checked by reference to corresponding entries in the bank pass book.
What is the procedure for verification of frauds through the supplier’s ledger? and how the verification of balances in the supplier’s ledger supposed to happen?
(i) Adjusting fictitious or duplicate invoices as purchases in the accounts of suppliers and subsequently misappropriating the amounts when payments are made to the suppliers in respect of these invoices.
(ii) Suppressing the Credit Notes issued by suppliers and withdrawing the corresponding amounts not claimed by them.
(iii) Withdrawing amounts unclaimed by suppliers, for one reason or another by showing that the same have been paid to them.
(iv) Accepting purchase invoices at prices considerably higher than their market prices and collecting the excess amount, paid in cash, from the suppliers.
Verification of balances in suppliers’ ledger - The Purchase Journal should be vouched by reference to entries in the Goods Inward Book and the suppliers’ invoices to confirm that amounts credited to the accounts of suppliers were in respect of goods, which were duly received and the suppliers’ accounts had been credited correctly. All the suppliers should be requested to furnish statements of their accounts to see whether or not any balance is outstanding or due so as to confirm that allowances and rebates given by them have been correctly adjusted and were duly authorized by the authorized person/ officer. Examine the system of internal control in relation to purchase orders issued and identify possibilities of collusion with suppliers.
What are the different types of Inventory frauds that can be done?
Inventory frauds are many and varied but here we are concerned with misappropriation of goods and their concealment.
(i) Employees may simply remove goods from the premises.
(ii) Theft of goods may be concealed by writing them off as damaged goods, etc.
(iii) Inventory records may be manipulated by employees who have committed theft so that book quantities tally with the actual quantities of inventories in hand.
(iv) Inflating the quantities issued for production is another way of defalcating raw materials and store items.
(v) Stocks actually dispatched but not entered in sales/ debtor’s account.
What is the procedure for verification for defalcation of inventory as seen before? specific pointers to be kept in mind etc?
