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a) Ways of understanding a client's industry, business and organisations
• Studying the client's annual reports and financial statements.
• Understanding analytical review of the client's interim accounts, financial reports,
variance analyses and other management information.
• Reviewing the reports of the internal auditors.
• Visiting the clients' premises and holding discussions with management and staff.
• Perusal of minutes of meetings of shareholders, directors, audit committee, budget
committee and other relevant committees.
• Review of previous years' files including the permanent file.
• Perusal of relevant trade magazines and journals.
• Consideration of the state of the economy.
• Reports from within the audit firm which may be relevant to the client for exam tax
department and management consultancy.
b) Meaning of;-
i) Due diligence
This is the process by which a comprehensive survey of a business is undertaken on behalf of a
purchaser to avoid any operational or financial surprises of post-acquisition, This is fact finding
where information is gathered on a target company for the purpose of ensuring that the purchaser
has full knowledge of operation, financial performance and position, legal and tax situation as
well as general commercial background.
For example, if the target company has taken same debt finance, it becomes crucial for the
acquirer to understand the terms of any debt covenant attached to such finance and to know if
there is a history of the target company defaulting on loan repayments. This information is
unlikely to be available unless a detailed due diligence investigation is carried out.
The aim of a due diligence in contract to an audit is NOT to provide assurance that the financial
data is free from material misstatement but rather to. provide the acquirer with a set of
information that has been reviewed.
Thus no audit procedures are performed unless there are specific issues of concern. A due
diligence also draws from a much wider range of sources including:
• Several years' prior financial statements.
• Profit and cash flow forecasts.
• Any business plans recently prepared.
• Discussions with management, employees" and their parties.
ii) Forensic auditing
Forensic auditing utilises auditing and investigation skills to conduct an examination into a
company's financial statements. The aim of forensic auditing is to provide an analysis that is
potentially suitable for use in court. it is the audit of financial information to prove or disprove a
fraud, the interview process used during an investigation and the act of serving as an expert
witness.
A forensic audit is the specific use of audit procedures within a forensic investigation to find
facts and gather evidence usually focused on the quantification of a financial loss. This could
include, for example the use of analytical procedures and substantive, procedures to determine
the amount elan insurance claim or how the company deteriorated into its current financial
problems.
Kavungya answered the question on May 14, 2019 at 12:22