Page 343 - CA Final PARAM Digital Book.

She also makes discreet inquiries from few clients of the branch engaged in similar line of activity
regarding credit worthiness of company, its promoters, and directors.

Based on above:

i. Identify activity being performed by CA Rajul and discuss its nature.
ii. Would your answer be different if this activity was to be performed by a person not qualified as
a Chartered Accountant? Can a non-CA perform such activity? State reason.
iii. Name any three other areas where identified activity can be undertaken.
Answer i. The activity described in the situation is Due diligence. Due diligence is a measure of prudence
activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable

and prudent person under the particular circumstance, not measured by any absolute standard
but depending upon the relative facts of the case. It involves a careful study of financial and non-
financial possibilities. It implies a general duty to take care in any transaction.

Due diligence is a process of investigation, performed by investors, into the details of a potential
investment such as an examination of operations and management and the verification of material
facts. It entails conducting inquiries for the purpose of timely, sufficient and accurate disclosure of
all material statements/information or documents, which may influence the outcome of the
transaction. Due diligence involves a careful study of the financial as well as non-financial
possibilities for successful implementation of restructuring plans.

Due diligence involves an analysis carried out before acquiring a controlling interest in a company
to determine that the conditions of the business conform with what has been presented about the
target business. Also, due diligence can apply to recommendation for an investment or advancing
a loan/credit.

ii. There would be no difference in answer if above activity was to be performed by a person who is
not a Chartered Accountant. The activity would remain due diligence. Due diligence can be
performed by any person. It is not necessary that due diligence can only be carried out by a
Chartered Accountant. As due diligence involves exercise of prudence and general duty to take
care in any transaction, it can be undertaken by any person.

iii. The areas where due diligence may be undertaken are: -
1) Corporate restructuring.
2) Venture capital financing.
3) Public offerings.

QNO Investigation (Propriety Business) – Old Course- (M04E, PM17, SM17, SM21)
643.050 TITANIUM CNO— INTG.180 New Course-- (SM23)
Mr. Clean who proposes to buy the proprietary business of Mr. Perfect, engages you as investigating

accountant. Specify the areas which you will cover in your investigation
Answer ➢ Following are the areas which shall be covered under investigation while proposing to buy a
proprietary business-
• Studying the overall picture:
o The first and foremost important aspect in any business investigation is to have an overall
picture of the position of the business which is being investigated before the details are gone
into.
o Further, it is important to know whether the business is engaged in the manufacture of one or
two important lines of products, is principally processing materials or is concerned only with
the sale of a single product.
o Also, whether it is a business which depends for its success on imported raw materials or
supply of parts and components from ancillary businesses or uses indigenous materials and
parts which are manufactured locally.
o If the business is labour - intensive, its future profitability would be dependent on availability
of skilled labour and relations of the management with the trade unions. Labour relations thus
can affect the future profitability of the business.
o The method of distribution of products, either through wholesalers or retailers also must be
examined.
o For studying the economic and financial position of the business, the following should be

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