Ch 16 - Due diligence, Investigation and Forensic Audit Flashcards
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?
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 for verification for defalcation of inventory as seen before? specific pointers to be kept in mind etc?
What are the steps to be performed in case of prop concerns or partnerships in relation to Investigation on behalf of an Individual or firm proposing to buy a business?
How is forensic accounting analysis different from an audit?
The general public believes that a financial auditor would detect a fraud if one were being perpetrated during the financial auditor’s audit. The truth, however, is that the procedures for financial audits are designed to detect material misstatements, not immaterial frauds. While it is true that many of the financial statements and frauds could have, perhaps should have, been detected by financial auditors, the vast majority of frauds could not be detected with the use of financial audits. Reasons include the d_ependence of financial auditors on a sampl_e and the auditors’ reliance on examining the _audit trail versus examining the events’ and activities behind the documents._ The latter is simply resource prohibitive in terms of costs and time.
There are some basic differences today between the procedures of forensic auditors and those of financial auditors. In comparison, forensic accounting and audit differ in specific ways, as shown below:
What are some distinctive differences between other audits and forensic audit in a tabular format?
What is the need for forensic Audit or what areas the forensic auditor is often involved with?
In what areas the services rendered by the forensic accountants are in the great demand in the following areas?
what are the points to be kept in mind while appointing forensic auditor? like characteristics and skill needed?
What is the process of forensic accounting - Total of 6 steps - First 3 steps?
What is the process of forensic accounting - Total of 6 steps - Step 5 - What are broad areas of information that needs to be incorporated in the report of forensic auditor? and Step 6 in relation to court proceedings?
What are the various techniques that forensic auditor may use - Technology based /Digital Forensics Techniques?
Every transaction leaves a digital footprint in today’s computer-driven society. Close scrutiny of relevant emails, accounting records, phone logs and target company hard drives is a requisite facet of any modern forensic audit. Before taking steps such as obtaining data from email etc. the forensic auditor should take appropriate legal advice so that it doesn’t amount to invasion of privacy. Digital investigations can become quite complex and require support from trained digital investigators. However, many open-source digital forensics tools are now available to assist you in this phase of the investigation.
What are the various techniques that forensic auditor may use - Remaining Audit Techniques? - What are the techniques to be used for identifying any hidden patterns in Information - Data mining Techniques - See Image
