Financial Due Diligence is the kind of detailed investigation service over the Financial Records for the specific objective like purchase and acquisition of the whole shares of the targeted companies or extending the number of shares of the existing company from the existing shareholders.
In real practice, especially for companies with few shareholders, the selling of shares in the company to outsides shareholders or to the existing shareholders, Financial Due Diligence Service always requested to verify the value of assets and liabilities. However, sometimes the most current Audited Financial Statements are being used instated.
The following are the standard procedures used in Financial Due Diligence that are generally used by professional accountants or engagement teams to conduct Financial Due Diligence.
Related Article: The Concept of Due Diligence
1) Review Procedure:
Just like audited historical Financial Statements, Financial Due Diligence has also performed the reviewing of related financial documents, management’s records, and documents.
The main objective of reviewing the Procedure is to identify the critical areas and potential material misstatement on the Financial Statements being reviewed. In most cases, professional judgments will be used in the reviewing procedure.
Such the review focus on the company’s assets being capital as well as contingent assets outside the Financial Statements. It is quite important if you could identify the contingent assets because they are what the prospective shareholders want.
The review of Financial Statements also looks into the detail of contingent liabilities. Such liabilities are not recorded in the Financial Statements, but they are likely to be responsibilities of the prospective shareholders. The reviewing procedure also looks into the current shares capital, capital structure, and owners so that the size of the companies and shares information are well known and aware by the prospective shareholders.
2) Analytical Procedures:
Analytical procedures are one of the most popular procedures for reviewing engagement like Due Diligence. Such a procedure will be involved with the study of the trend of the specific items in the financial statements over the specific period to see if there is any unusual trend.
Normally, the time selected would be a few years until the current period and also check again the forecast which is performed by management in the next few years. The analytical procedure is the procedure that uses most often due to diligent engagement as it is less assurance and statutory audit.
3) Interview Procedure:
To better understand the entity being reviewed, understand the current internal control system related to financial reporting, and assess if there is any internal control weakness related to the process of preparation of the financial report, interviewing be management is normally used.
This procedure is conducted by performing a predetermine question which is prepared by the professional engagement team for the specific objective before performing.
The above procedures are the top procedures that the professional due diligence engagement teams use, and you if need more understanding about Due Diligence, please check here. Moreover, if you have some question-related Financial Due Diligence procedure, just drop it below.