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- 20 Marks
Question
Bolokupalemo Pharmaceuticals Limited is a fast-growing company operating with its head office in Onitsha. The management of the company is targeting the takeover of another company located in the South-South zone of Nigeria with the intention of expanding its business frontier. Preliminary discussions reveal that the management of the other company has not shown any effective resistance to the proposed takeover. However, the management of Bolokupalemo wants a clear due diligence work to be performed to determine the viability of the acquisition.
As the auditor of the acquiring company, its management has approached you to carry out a due diligence work on the company that it has proposed to acquire. The management also requires your firm to carry out the engagement in accordance with the provisions of International Standard on Review Engagements (ISRE 2400).
You are required to:
a. Explain the concept of “due diligence engagement.” (2 Marks)
b. Discuss the items to be investigated in a due diligence exercise. (5 Marks)
c. Explain the benefits of using an audit firm for due diligence engagement. (5 Marks)
d. Discuss the objectives of “International Standard on Review Engagement” (ISRE 2400). (5 Marks)
e. Explain the principles to be applied in review engagements as set out by ISRE 2400. (3 Marks)
Answer
a. Concept of Due Diligence Engagement
A due diligence engagement is an investigative process conducted to evaluate the financial, operational, legal, and strategic position of a target company during mergers, acquisitions, or investments. It involves analyzing information to provide assurance to the acquiring party about the viability, risks, and potential of the transaction.
b. Items to Be Investigated in a Due Diligence Exercise
- Financial Information:
- Audited financial statements, tax compliance records, and cash flow trends.
- Operational Performance:
- Business processes, supply chains, production efficiency, and key performance indicators.
- Legal and Regulatory Compliance:
- Compliance with laws, licenses, contracts, and potential litigations.
- Management and Workforce Analysis:
- Leadership capability, employee skill sets, and turnover rates.
- Market Position and Competitors:
- Competitive analysis, customer base, and market share.
c. Benefits of Using an Audit Firm for Due Diligence Engagement
- Expertise:
- Audit firms possess specialized skills in financial analysis, risk assessment, and regulatory compliance.
- Independence:
- An independent auditor ensures objective and unbiased results.
- Comprehensive Assessment:
- Thorough analysis of financial, operational, and legal aspects to uncover risks and opportunities.
- Compliance Assurance:
- Alignment with international standards and local regulations.
- Credibility:
- Reports prepared by professional audit firms enhance confidence among stakeholders.
d. Objectives of ISRE 2400
- Limited Assurance:
- Provide moderate assurance about whether the financial information is free from material misstatements.
- Scope of Engagement:
- Enable the practitioner to express a conclusion based on a review of the subject matter.
- Improved Decision-Making:
- Offer a foundation for decisions by identifying financial or operational irregularities.
- Enhance Transparency:
- Improve reliability of financial data and facilitate stakeholder trust.
e. Principles to Be Applied in Review Engagements (ISRE 2400)
- Professional Skepticism:
- Maintain a questioning mindset to identify potential misstatements.
- Materiality:
- Focus on areas likely to impact users’ decisions based on the financial information.
- Evidence Gathering:
- Use analytical procedures, inquiries, and limited assurance techniques to draw conclusions.
- Tags: Due diligence, ISRE 2400, Mergers & Acquisitions, Review Engagements
- Level: Level 3
- Topic: Assurance Engagements
- Uploader: Kofi