Due Diligence Audit

In business, a due diligence audit is typically a detailed investigation or examination of a company’s complete financial picture. This process of verification can be done before mergers, purchase of a business or any other major decision which could influence the finance of business negatively. The process of due diligence is to ensure that no hidden liabilities are existing in a business.

Due diligence can improve the quality of information available to decision-makers of an organisation. Also, there are higher chances of success in transactions that undergo a due diligence process. Thus, it can significantly contribute to making informed decisions by the top officers of a company.

Depending on the purpose, there can be different forms of due diligence:

• An evaluation of existing policies and practices
• A practical examination that focuses on material future matters
• Reverse due diligence’ where a company can get itself assessed by a third party on its behalf before stepping into the market
• An examination being achieved by gaining answers to key questions such as how to structure an acquisition, how to buy or how much to pay?

The procedure of due diligence can be broadly categorised into nine definite audit areas:

• Reconciliation Audit

This includes audit related to different types of reconciliations, mainly bank reconciliation. Additionally, it also includes an audit of other reconciliations such as creditors and debtors that are performed in conjunction with internal audit, financial statement audit, etc.

• Information Systems Audit

This type of audit includes testing the management controls within an Information Technology (IT) infrastructure. The evidence obtained after performing the audit is thoroughly evaluated to ascertain whether the IT systems are working efficiently to maintain the integrity of data and safeguard assets.

The internal controls must be operating effectively to achieve the business goals of an organisation. Information Systems Audit are performed in conjunction with internal audits, financial statement audits and other forms of attestation engagement.

• Compatibility Audit

This includes dealing with strategic components of a transaction and linking other areas of the audit through a formal valuation aimed at testing whether any shareholder value has been added.

• Financial Audit

Due diligence in a financial audit is needed to validate financial statements. The primary objective is to make sure that all the necessary information is made available to stakeholders who are dealing with a financial assignment so that they can assess the risk correctly.

• Management Audit

A management audit involves an assessment and analysis of the capabilities and competencies of the management of a company to meet its business goals. It is a systematic examination of the actions and decisions taken by the management in managerial areas like policies, structures, organisation control, and so on. The audit includes reporting on areas of weaknesses and irregularities in the performance of the management to improve their efficiency.

• Macro-environment Audit

The macro-environment audit is aimed at examining the broad range of external and environmental issues that can affect a company. These external factors can influence the decision making, performance and strategies of an organisation. The factors include economic issues, socio-cultural issues, political issues and technological developments. For example, a change in interest rates or taxation policies can have a huge impact on an organisation.

• Production Audit

This includes verifying the production records to ensure they are properly maintained at all times. Checking of production slips and memos and log books of machinery to know the details of production. It also includes checking the entire method of recording the input and the output while accounting for normal and abnormal losses.

• Marketing Audit

This includes a detailed review of a company’s marketing plan, strategies, policies, objectives and current activities being carried out. The primary objective of this audit is to identify what's working and what isn't so you know where to improve. A successful marketing audit can allow a company to know its strengths and weaknesses, so it knows where to invest its resources in the future.

• Legal / Environmental Audit

This audit involves evaluating a company’s environmental management practices and environmental performance against legal and other requirements. Any implementation gaps can be brought to the attention of the management so corrective action can be taken. Understanding and evaluating compliance addresses the general due diligence requirements of any company.