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Chapter 29
DUE DILIGENCE
1. Introduction
Due diligence is typically required when one company is proposing to takeover another. Essentially 
due diligence is fact finding and information gathering: exactly what is being bought?
The target company’s published financial statements give some information, but not enough, and 
besides the financial statements could be over a year old. Financial statements are historic, showing 
what has happened, but what is being bought are the future prospects of the business and the new 
owner will end up with both the assets and liabilities of the acquired business.
A due diligence assignment could be either:
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A review engagement to provide limited assurance (negative opinion) to the effect that nothing 
worrying has been found.
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An agreed-upon procedures engagement to report factual findings.
2. Procedures
Often, due diligence assignments are urgent. For example, the take-over is happening to rescue a 
failing company. However, the auditor must take care to ensure that there is a comprehensive 
engagement letter and that staff of the proper skills and experience can be assigned to the job. 
Typically, the engagement letter will cover:
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Extent of the work.
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Type of report.
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Timescale.
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A clause saying that any takeover is the decision of the client, not the auditor or accountant.
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A clause stating that misstatements made by the target company might not be discovered, that 
all irregularities might not be found and a description of the nature of the work. For example, of 
a review nature (ie making inquiries and performing analytical procedures) but may include 
other procedures (eg inspection, external confirmation).
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A clause stating that the auditor is dependent on the cooperation of the target company’s 
management.
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The fee. (May create self-interest threat if the potential purchaser is an audit client.)