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Dear Kim,
This would be a more general one as I cannot find specifics.
Could you please explain a little bit more on the due diligence reporting:
Do I understand correctly that there are 2 types assurance :
1) assurance in form of limited assurance in format “nothing came to our attention”. Is this type of report prepared in accordance with ISAE 3000?
2) no assurance report describing procedures and finding in accordance with ISRS 4400?Next question is who is the one producing the report and how it correlates with ISAE 3000 and ISRS 4400? It seems that for both types of reports there should be some subject matter already prepared to report upon?
Sorry for the lengthy topic. Maybe you could just provide me with some links to the relevant material, which would cover my question and save up some of your time.
Anyway, appreciate your replies 🙂Thanks
See the bottom of page 147 – ISAE 3000 is the “generic” standard for an engagement to provide ASSURANCE (other than audits or reviews of historical financial information – to which ISAs applly) where there is no specific standard.
Examples of specific standards relevant too AAA are referenced at the bottom of page 123.
For an engagement to carry out agreed-upon procedures (AuP) – ISAE 3000 does NOT apply – because ISAE 3000 is for ASSURANCE engagements. But the purpose of AuP is NOT to provide assurance but to report factual findings – see top of page 124.
So your first statement is correct – though I wouldn’t say there are two types of assurance – when one is no assurance – the two types of DD assignment/engagement are summarised at the top of page 135.
Only an assurance engagement has to have a specified subject matter (as part of the definition – page 8).
I’m not sure I understand your “next” question – it is the professional accountant who issues the report. An AuP report is not a report on subject matter prepared by someone else – it is a report on procedures (this is what we agreed to do) and findings (this is what our procedures showed).
For example:
Procedure 1. Obtain [what from where] and identify [what]
…. “Obtain a list of all contracts signed between [dates] from management and identify all contracts value at over $25,000”
Finding: We obtained … a list of 125 contracts and identified 37 contracts valued at over $25,000.
Procedure 2: For each contract identified in 1 determine whether it was subject to bidding by at least three contractors form [approved listing].
Finding: We inspected bidding records and found that all 37 were ….And so on.
Dear Kim,
Thank you for your explanation and references to the standard, it helped.
Coming back to the assurance engagement and the subject matter.
Who would be preparing a subject matter? How would it look like?This part is confusing because Kaplan text provides the benefits of providing due diligence. For example:
“- Enhance the credibility of the investment decision –
Engaging an external advisor to carry out the due diligence will ensure an
independent, objective view is obtained on the investment decision,
including the price to be paid.”So it sounds like the auditor should produce the subject matter and report on it at the same time.
Thanks,
ArtemFor an assurance service – the “subject matter information” (SMI) – is what the practitioner is reporting on – so it cannot be prepared by the practitioner otherwise they would be evaluating their own work. Some (or all) of the SMI might be stated in the practitioner’s report (though it is more likely that it will be referenced – just as the financial statements are referenced in an auditor’s report) but it’s the responsible party (management) who is responsible for the SMI.
Definitions:
Responsible party – The party(ies) responsible for the underlying subject matter.
Practitioner – The individual(s) conducting the engagement …
Assurance engagement – An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information …Yep, this understood.
But how does the subject matter would look like?
For example, valuation based on discounted free cash flow?
And who is going to prepare the such valuation (in case the management is lacking the expertise)?Thanks
I think you are massively over-thinking this – if management couldn’t come up with, say, a share price to offer to the shareholders of a target company, it would employ the services of an M&A consultant (for example). That same consultant could not then give assurance on the share price – and at the end of the day it’s for the shareholders of the target company to decide whether or not they are going to sell. (And if management is lacking the expertise to perform their own DCF calculation perhaps they shouldn’t be making business acquisitions!)
If you look at this article, you will see the examining team has very little to say about DD https://www.accaglobal.com/uk/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/continue-to-be-rest-assured.html and the IAASB Handbook doesn’t even mention due diligence (either as an assurance service or AuP engagement).
When A Co wants to acquire B Co it will often want this done quickly – so rather than assurance it asks a firm to carry out AuPs – there isn’t a package of “subject matter information”.
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