Page 332 - CA Final PARAM Digital Book.

Inventory
• Obsolete, slow non-moving inventories or inventories valued above NRV; huge
inventories of packing materials etc. with name of company.

Trade Receivables
• Uncollected / uncollectable receivables.
• Group Company balances under reconciliation etc.

Authors Note
Students are advices to see in the question what is asked, whether hidden liabilities or overvalued assets
or both and then shall answer accordingly.

Due Diligence Report Old Course -- (M07E, N08R, N15E, N16R, PM17, N17R, N18M, M19M, SM21, N21R)
QNO TITANIUM CNO – New Course-- (SM23)
628.000
DD.160
A Japanese Company engaged in the business of manufacturing and distribution of industrial gases, is
interested in acquiring a listed Indian Company having a market share of more than 65% of the industrial
gas business in India, request you to conduct a “Due Diligence” of this Indian Company and submit your
report.

As a due diligence auditor:
(a) indicate the key areas you will cover in your review.
(b) list out the contents of your Due Diligence Review Report that you will submit to your Japan based
Client.
Answer (a)Some of the significant key areas which shall be covered under the review are as under:
➢ Historical Background: The accountant should begin the financial due diligence review by looking

into the history of the company and the background of the promoters. The details of how the
company was set up and who were the original promoters have to be gone into, before verification
of financial data in detail. An eye into the history of the company may reveal its turning points,
survival strategies adopted from time to time, the market share enjoyed by and changes therein,
product life cycle and adequacy of resources. It could also help the accountant in determining
whether, in the past, any regulatory requirements have had an impact on the business of the said
company. This could, inter alia, include the nature of business (es), location of production facilities,
warehouses, offices, products or services and markets.

➢ Financial Projections: The projections for the next five years with detailed assumptions and
workings and the appropriateness of assumption used in the preparation and presentation of
financial projections. If the accountant is of the opinion that as assumption used by the company
are unrealistic, the accountant should consider its impact on the overall valuation of the company.

➢ Significant Accounting Policies: The accounting policies being followed by the company and the
appropriateness thereof is another key area. The impact of the recent changes in the accounting
policies in the recent past keeping in view its intention of offering itself for sale. The accountant
has to look at the main effect of accounting policies on the overall profitability and their
correctness. It is also quite important to ascertain significant accounting policies used by the
company, that changes that have been made to the accounting policies in the recent past, the areas
in which accounting policies followed by the company are different from those adopted by the
acquiring enterprise and the effect of such differences. Finally, examine whether the financial
statements of the company have been prepared in accordance with the governing statutory
requirements.

➢ Review of Financial Statements: An evaluation of the profit reported by the company would be
largely based upon its operating results. Any extraordinary item of income or expense that might
have affected the operating results would require close examination.

It is advisable to compare the actual figures with the budgeted figures for the period under
review and those of the previous accounting period. It is important that the trading results for the
past four to five years are compared and the trend of normal operating profit arrived at. The
normal operating profits should further be benchmarked against other similar companies. Besides

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