GST Course

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

Due Diligence: Process of Investigation performed by investors into details of potential investment

1. Applicability: HILAR

  • Hand Over of Charge within in the same group from one management to another management
  • Recommendation for Investment
  • Recommendation for advancing a Loan/credit
  • Acquiring a controlling interest in a company
  • Corporate Restructuring
Shortcuts to Remember CA Final Audit Chapter - Due Diligence

2. Importance of Due Diligence: VINC

  • Verify that transactions complies with investment or acquisition criteria
  • Identify potential defects in the target and avoid a bad business transaction
  • Gain Information for valuing assets and or Negotiating Price Concessions
  • Confirm that the Business is what it appears to be

3. Areas/Classification of Due Diligence: FILE CPT

  • Financial Due Diligence - Analysing books of accounts and financial information
  • Information System Due Diligence - computer systems
  • Legal Due Diligence - Review Legal Aspects
  • Environmental Due Diligence - Studying the Entity's Environment
  • Commercial Due Diligence - Evaluation from commercial and operational perspectives
  • Personal Due Diligence - Entity's Personal Policies
  • Tax DUe Diligence - Evaluate the Tax Affect

4. Scope of Financial Due Diligence: CHAPTERS

  • Cash Flow - PreDICT
    • Review Historical Cash Flows and their Pattern
    • How well does it Deploy its funds
    • Are there any funds lying Idle or is the company able to get maximum benefits out of the available funds
    • Is the company able to honor its Commitments to the trade payables
    • How well the company able to turn its trade receivables and inventories
  • Brief History of the Target and Background of its Promoters
  • Significant Accounting Policies
  • Financial Projections
  • Taxation
  • Management and Employees
  • Review of Financial Statements - COBRE (Similar to Cobra)
    • Compare the actual figures with budgeted figures
    • Objective is to look specifically for any hidden liabilities or over valued assets
    • Benchmark normal operating profits against other similar companies
    • Applicable Financial Reporting Framework
    • Extraordinary Item of Income or Expense that might affect operating results
  • Statutory Compliances

5. Examples of Hidden Liabilities: - SUBCELLS + WTP

  • ​​​​​​​Company agreed to pay liabilities of Subsidaries
  • Unfunded Gratuity/Superannuation/Leave Salary liabilities/ incorrect gratuity valuations
  • Agreement to Buy Back shares at stated Price
  • Letter of Comfort given by company not disclosed in the balance sheet
  • Environmental Problems
  • All Litigations
  • Future Lease Liabilities
  • Show Cause notice which has not matured into demands
  • +
  • Warranty Liabilites
  • Tax Liabilities
  • Pending Final Assessment of Customs

6. Examples of Over-Valued Assets: NEUROPIL

  • ​​​​​​​Investments at Cost though NRV is lower
  • Infructurous Project Expenditure
  • Uncollectable Receivables
  • Capitalisation of Revenue Expenditure
  • Obsolete Inventories
  • Obsolete Plant and Machinery
  • Intangible Assets of No Value
  • Litigated Assets and Property

7. Contents of a Due Diligence Report - SHOE + FRONTALS + SOFA

  • ​​​​​​​Share Holding Pattern
  • Brief History of the Target
  • Objective and Scope of Due Diligence
  • Executive Summary --> Introudction
  • +
  • Financial Liabilities
  • Review of Components of Due Diligence
  • Operating Results
  • Net Worth
  • Taxation and Statutory Liabilities
  • Valuation of Assets
  • Possible Liabilites on account of litigations and legal proceedings
  • Management Structure
  • +
  • Swot Analysis
  • Financial and other Obligations
  • Comment on Future Projections
  • Status of Charges, Liens, mortgages, Assets and properties of the company 
  • Suggestions on various aspects to be taken care of

Note: Above information is only informative and for remembering purposes only. For detailed information it is always advisable to refer ICAI Study Material

Also Read: Shortcuts to Remember Advanced Auditing and Professional Ethics - CA Final

Tags :

Category Students, Other Articles by - kushwanth avsr