Due diligence audits are performed as part of the due diligence process in business transactions, such as mergers, acquisitions, or investments. The purpose of a due diligence audit is to evaluate the financial, operational, legal, and regulatory aspects of a target company or asset to assess its value, risks, and potential synergies.
During a due diligence audit, the acquiring or investing party engages an independent auditor or a team of auditors to conduct a comprehensive examination of the target entity. The specific areas covered in a due diligence audit can vary depending on the nature of the transaction and the parties’ requirements. However, some common areas typically addressed in due diligence audits include:
Financial Statements
The auditor reviews the target company's financial statements, including the balance sheet, income statement, and cash flow statement, to assess their accuracy, completeness, and compliance with applicable accounting standards.
Assets and Liabilities
The auditor verifies the existence, ownership, and valuation of the target company's assets, such as property, equipment, inventory, and intellectual property. They also examine liabilities, including loans, debts, and contingent liabilities, to identify any potential risks or obligations.
Financial Performance and Projections
The auditor evaluates the target company's historical financial performance, including revenue growth, profitability, and cash flow generation. They may also assess the reasonableness and accuracy of financial projections or forecasts provided by the target company.
Internal Controls
The auditor examines the target company's internal control environment, including its policies, procedures, and systems for financial reporting, operational efficiency, risk management, and compliance. They identify any weaknesses or deficiencies in the control environment and assess their impact on the target company's operations and financial reporting.
Legal and Regulatory Compliance
The auditor reviews the target company's compliance with applicable laws, regulations, licenses, permits, and contractual obligations. They identify any legal or regulatory risks, pending litigation, or non-compliance issues that may impact the transaction or the target company's operations.
Taxation
The auditor assesses the target company's tax compliance, including its tax filings, liabilities, and any potential tax risks or exposures. They may review tax returns, correspondence with tax authorities, and tax strategies to ensure compliance with tax laws and identify any potential tax implications.
Contracts and Agreements
The auditor examines the target company's contracts, agreements, and legal arrangements, including customer contracts, supplier agreements, leases, and licenses. They identify any unfavorable terms, potential risks, or contingencies that may impact the target company's financial position or operations.
Operational Efficiency and Synergies
The auditor assesses the target company's operational processes, cost structure, supply chain, and key performance indicators. They identify opportunities for operational improvements, cost savings, and potential synergies with the acquiring or investing party.
The findings from a due diligence audit help the acquiring or investing party make informed decisions about the transaction, negotiate deal terms, assess risks, and plan integration or post-acquisition strategies. It is common for a due diligence audit to involve a combination of financial, operational, legal, and industry-specific experts to provide a comprehensive assessment of the target entity.
LOB perform this service by highly qualified and competent professionals.
