Page 328 - CA Final PARAM Digital Book.

Part 1- Due Diligence

QNO Due diligence v/s Audit Old Course-- (SM21)
621.500 TITANIUM CNO – DD.020 New Course-- (SM23)
“Due diligence is different from audit” – Explain the difference between due diligence and audit.
➢ It needs be underlined that due diligence is different from audit.
➢ Audit
Audit is an independent examination and evaluation of the financial statements on an organization
with a view to express an opinion thereon.

➢ Due Diligence
Whereas due diligence refers to an examination of a potential investment 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.

QNO DD (Areas) Old Course-- (M08E, M13M, M15E, PM17)
622.000 TITANIUM CNO – DD.040 New Course-- (SM23)

Areas in which due diligence can take place.
Answer ➢ Areas in which Due Diligence can take place–

Legal due diligence: This may be required where legal aspects of functioning of the entity are
reviewed. For example, the legal aspects of property owned by the entity or compliance with
various statutory requirements under various laws.
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.
Environmental due diligence: It is carried out in order to study the entity’s environment, its
flexibility and adaptiveness to the acquirer entity.
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.
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.
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.
Information systems due diligence: It pertains to all computer systems and related matter
of the entity.

Financial Due Diligence Old Course--(M11R, N12R, N12M, N14R, M16R, SM17,PM17, N17E, SM21, M21M)
QNO TITANIUM CNO – New Course-- (SM23)
623.000
DD.060
Mr. Q is the proprietor of a very profitable business dealing in speciality chemicals. Due to his old age, Mr.
Q wants to sell his business and has approached XYZ Pvt. Ltd., a competitor, for the same. As an advisor
to XYZ Pvt. Ltd., you are appointed to do a 'Due Diligence' of the business. Enumerate the points which
you would look into as part of the Due diligence exercise.
OR
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