ACCA AAA · Chapter 29
Due diligence
Your chapter at a glance. Open any section, or keep the whole map in view.
Transaction-focused investigation and reporting
Due diligence purpose, risks, evidence, decision
Purpose
- Investigate a proposed transaction, often an acquisition
- Verify seller claims and identify assets/liabilities/risks
- Inform price, terms and proceed/renegotiate/withdraw
- Client remains responsible for transaction decision
Distinguish the work
- Advisory: findings, risks and recommendations
- AUP (ISRS 4400): specified procedures, factual findings
- AUP users draw conclusions; no assurance
- Assurance (ISAE 3000): defined subject and criteria
- Reasonable/limited assurance only where supported
Limit
- No assurance that acquisition will succeed
Agree terms
- Shares, assets or business? Which decision and users?
- Specify purpose, scope, access, timetable and report
- Identify exclusions, reliance and distribution limits
Feasibility and ethics
- Check target access to records, staff and advisers
- Assess skills, independence, conflicts and confidentiality
- Assess deadlines, scope restrictions and liability
- For assurance: suitable criteria and defined subject
Strategy
- Challenge seller-prepared and unaudited information
- Prioritise price, terms and possible deal-breakers
- Financial statement materiality may be unsuitable
Financial and commercial
- Reconcile adjusted profit; challenge “exceptional” costs
- Analyse customer concentration, contracts and revenue
- Assess receivables, inventory and working capital
- Inspect debt, tax, litigation and commitments
- Test forecast assumptions and sensitivities
Other evidence
- Visit sites; interview staff; corroborate externally
- Inspect licences, IP, employee/change-of-control terms
- Use analytics and legal, tax or valuation specialists
Example: retailer
- Recurring marketing cost reduces maintainable EBITDA
- Customer termination clause exposes future revenue
- Quantify implications for valuation and deal terms
Evaluate evidence
- Relevant to purpose, complete and internally consistent?
- Seller claims independently corroborated?
- Contradictions, later events and restrictions resolved?
- Enough evidence for any proposed assurance conclusion?
Report
- State purpose, users, scope, responsibilities and limits
- Present findings, risks and unresolved matters
- Distinguish factual findings from assurance conclusion
- Reasonable/limited conclusion only if engagement supports it
Possible advice
- Adjust price, seek warranties/indemnities
- Change structure, impose conditions or withdraw
- If evidence insufficient: extend work or report limitation
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