Due Diligence Audit is an investigation or examination of a business or person before signing a contract, or an act with a certain standard of care. During a Due Diligence Audit, the analysis or review could be carried out for a potential objective for the merger, acquisition, privatization, or similar corporate finance transaction, usually by a buyer.
A reasonable investigation is focusing on future material matters and current practices of process and policies. It can be a legal obligation, but the term due diligence will more commonly apply to voluntary investigations. A typical example of due diligence audit in various industries is how a potential acquirer evaluates a company that he has targeted or its assets for an acquisition. In some circumstances, sellers also opt for due diligence audit.
The businesses involved in acquisition or mergers as buyers or sellers must ensure that all the financial and other information exchanged are verified and accurate. A due diligence process will help the buyers pay more than the actual purchase price or, in the seller's case, receiving less than a reasonable price.
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Operational due diligence deals with the review of non-financial matters of a business, which may include insurance and risk assessment, HR activities, review of systems and processes, evaluation of management team etc.
Financial due diligence is a due diligence process where due diligence is required to validate financial statements. The goal of the process is to ensure that all stakeholders associated with a financial endeavour have the information they need to assess risk accurately. Also, financial due diligence helps to expedite the deals with fewer risks and capture and deliver value to stakeholders.
In particular, financial due diligence allows the buyer to assess all financial aspects of a potential acquisition to determine what the benefits, liabilities, risks, and opportunities are. Financial due diligence consists typically of the analysis of :
Legal due diligence includes investigating any legal risk associated with the target company's rights and obligations. The issues may involve intellectual property, employment disputes, and property ownership.
It considers the major external and uncontrollable factors that influence an organization’s decision making and affects its performance and strategies.
It considers the evaluation intended to identify environmental compliance and management system implementation gaps and related corrective actions.
It is a fundamental part of the marketing planning process. It is conducted at various points during the implementation of the plan. The marketing audit considers both internal and external influences on marketing planning and a review of the plan itself.
It verifies the production records such as production slips/memos to ensure that they are appropriately maintained. Also, verify the logbooks of machinery to check the details of production.
It is a systematic examination of the decisions and actions of the management to analyze the performance. Management audit involves the review of managerial aspects like organizational objectives, policies, procedures, structure, control, and system to check the management's efficiency or performance over the company's activities.
It is an examination of the management controls within an Information technology (IT) infrastructure. The evaluation of obtained evidence determines if the information systems are safeguarding assets, maintaining data integrity, and operating effectively to achieve the organization’s goals or objectives. These reviews may be performed in conjunction with a financial statement audit, internal audit, or another form of attestation engagement.
Due Diligence Audit process helps the buyer by enhancing the understanding of the target business; a proper analysis of critical success factors, digging out the real historical track record; sustainability of profit and cash flow generation; assessment of normalized profit; providing opinions on the Target Company’s current financial status and prospects, providing a view of the quality of the management team, and specifically about the accounting and finance teams.
Through the due diligence process, the buyer will assist as an expert in the negotiation process, reviewing Sale purchase documents like representations, warranties, indemnities, etc.
Due Diligence Audit process helps the seller management to collate vital financial information, assess and advise on potential issues that a buyer may rise, and provide process support.
Due diligence takes different forms depending on its purpose:
This can include self-due diligence or “reverse due diligence,”, i.e., an assessment of a company, usually by a third party on behalf of the company, before taking the company to market. An examination is achieved by asking specific key questions, including how we buy, structure the operation etc.
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