Due Diligence Checklist

ACQUISTION OF A BUSINESS
DUE DILIGENCE CHECKLIST

You may have entered into a decision to purchase an existing business started by
someone else. You may do this in order to diversify or expand. Having so decided, you
must now decide whether you should acquire the shares or the assets if the business is
constituted as a company. If it is a firm, namely, a sole proprietorship or partnership,
then only the assets can be acquired.

Advantage of acquiring only the shares
1. You take over the benefit of all existing contracts and debts owing to the company without any need for
assignments.
2. You take over the benefit of all governmental licences, franchises provided there are no restrictions in those
licences or franchises.
3. You take over all the company's employees without having to enter into new contracts of employment.
4. There is no need to transfer title to any real or moveable property.
5. It may, depending on the arrangements, possible for you to continue with existing bank loans, credit facilities or
banking services.
6. Where you wish to assume the existing goodwill developed by the company.

Advantage of acquiring only assets

1. You need not have to take over debts and liabilities owing by the company to others.
2. You need not have to take over obligations under contracts or undertakings that you do not want.
3. You need not have to continue employing any existing employee that you do not wish to employ.

Matters to take into account in acquiring shares

1. The price of the shares.
2. Examine the company's Memorandum and ' Articles of Association to ensure that they have not been
contravened in respect of matters pertaining to the issue of the shares in question and their intended sale.
3. The agreement for Ute sale and purchase of the shares that will contain certain warranties in respect of the
company.
4. Approval of relevant governmental authorities or agreement can provide that sale and purchase is subject to
such approval.
5. The share transfer forms and share certificates.
6. Procure a change in the board of directors.
7. If you desirable, change the auditors and secretary of the company.
8. Where it has been agreed that the bank accounts be continued, a change in the authorised signature.
9. Present the transfer forms duly stamped to the company's secretary for registration.

Matters to take into account in acquiring assets

1. Identify the assets to be acquired.
2. Value of assets and price to be paid for them.
3. Agreement for sale and purchase of assets which would necessarily be more complicated.
4. It is usual to have agreement signed on one day with completion at a later date. This is to enable the
purchaser to investigate matters relating to the company and to obtain whatever approvals that may be
necessary.
5. Procure all consents and licences e.g., from the government, landlords, patent owners, etc.
6. Identify employees you wish to employ and consider the terms of such employment.
7. Consider whether any restrictive covenants ought to be imposed against out-going proprietors.
8. Make arrangements with regard to hire purchase contracts, leasing arrangements, bills of sale and all other
matters and encumbrances on the assets in question.
9. Make arrangements in relation to the debtors and creditors of the business, i.e. whether they should be taken
over and if so, to execute the appropriate assignments.

Terence Wong
wongkm@pacific.net.sg


DUE DILIGENCE CYCLE
The below is a list of general procedures to be covered in most due diligence exercise, they are not definitive and
additional specialised investigations will be required relevant to the industry in question

A GENERAL BACKGROUND

1. Obtain the following
a. Organisation chart and history of business
b. List of officers and directors with their affiliations and personal data.
c. Number of employees and their job classification and approximate salaries
d. Listing of shareholders
e. Copies of shareholders’ agreements and all material contracts
f. Obtain any stock exchange filings, if applicable
g. Particulars of company’s professional advisers, including legal, auditors, principal bankers
h. Particulars of all fees, commissions, brokerage, etc arising from matters included in prospectus
i. Memorandum and articles and certificate of incorporation

2. If significant investments held in any other companies, complete a separate checklist for each investment
3. Summarise terms of the proposed offering and ascertain arrangements made with brokers and advisers.

PROCEDURES

1. Determine key strengths and risks in the industry and evaluate the company's position in comparison to
these.
2. Confirm that all directors' benefits have been fully disclosed.
3. Is the company able to pay its debts as and when they fail due.
4. Determine if the company could diversify to other desirable industry segments, identify and evaluate the
possibilities and the impact on management, employees and goodwill
5. Ascertain if the company's management staff or directors have been involved in criminal proceedings,
regulatory violations or significant litigation.
6. Obtain information or evaluate the following:
7. recent major developments among competitors;
8. Government or other regulation under which the company operates;
9. Impact of external factors affecting the company, e.g. economy, trade restrictions;

Terence Wong


B. MANAGEMENT AND CONTROL

1. Management

1. Ascertain management approach (e.g. entrepreneurial, conservative, management-by-objective) and the
level of decentralization and control.
2. Evaluate whether the company's current management approach will be suitable with that of the new
structure and determine the ability to replace management staff in case of resignations.
3. Assess the management team's performance to date with that of others in the industry, has the
company's performance been successful due to good market and industry instead of management
strategies.
4. Is management working as an integrated unit or is it constantly dealing with crises and emergencies.
5. Evaluate the effectiveness of basic management control ,including:
a) Documented objectives, plans, strategies(short and long term)
b) Adequate organisational structures
c) Documented policies and procedures
d) Budgetary control
e) Adequate staff training programs

6. Determine the basis of budgeting process and assess reasonableness of assumptions in light of
manpower, working capital, capacity and trend
7. Determine whether budgets and plans have been meet in the past and variances documented
8. Ascertain whether there are any cost cutting or profitability/productivity

2. Internal controls

1. Determine whether there is: adequate segregation of duties and responsibilities defined.
2. Assess adequacy of accounting system in providing control over all assets and transactions

Terence Wong

C. INDUSTRY AND COMPETITORS

A) Business activity

1. analyse the past and future trend of changes in the industry
2. Determine customer type requiring company's goods and services
3. Ascertain whether there are established terms, prices etc for customers
4. Ascertain warranty terms and their accounting procedures
5. Evaluate possibility of any significant exposure to product or service liability
6. Determine adequacy of patent and trademark protection
7. Identify the importance of domestic and export demand and the company's dependence on them
8. Ascertain factors that affect demand and whether the company can expand its market e.g.:
9. Environmental issues, economy, technology, advertising, governmental factors, population and customer
growth, fashion etc.
10. Analyse any seasonal sales trend changes in established trends and obtain explanations
11. Review major accounts receivable and sales correspondence and determine continuity
12. Obtain:
- Names of major customers, annual volume of sales and buying habits
- Any contractual agreements with customers
- A summary of special deals and credit terms offered to major customers

13. Ascertain the methods companies in the industry use to distribute/sell their products/services and compare
with this company e.g. Advertising, field sales, promotions, commissions and bonuses
14. Analyse distribution and selling costs for the past few years to determine possible changes in profitable
customers and lines. Evaluate any unusual marketing practices, including licensing arrangements and joint
ventures.

B) Industry conditions and competition

1. ascertain the industry's composition and recent changes in that composition considering:
- The number of companies in this industry and whether number has been declining, is there over/under
capacity in industry?
- The recent merger, acquisition and divestiture deals in the industry and terms of transactions

2. Analyse factors critical for success in this industry considering:
- The industry leaders and reasons for their success
- The principal bases of competition (price, quality, service, innovation)
- Unique strategies
- High volume versus low cost
- Reliance on and vulnerability to imports

3. Obtain and evaluate
- The growth trends and projections in the industry
- The trends and projections in other related industries
- Investment or industry analysts reports on adverse conditions

4. Ascertain external factors influencing the industry
- Litigation
- Governmental regulations
- Environmental issues
- Potentially adverse political, social or economic conditions
- cutting off supply
- Existence and power of industry lobby groups
- New developments, planned or in progress
- Special skills and advantages (e.g. technical position, cost structures, new product success)
- Cyclical factors
- Contracts and leases nearing expiration
- labour negotiations pending
- International trends in similar industries
- Major customers
- Major suppliers
Terence Wong


D. HUMAN RESOURCES

1. Obtain and review contracts for significant agreements, including industrial awards

2. Review the industrial relations history for the past five years (e.g. dates, issues, and duration and settlement
terms) and determine pending cases.

3. Review:
- working conditions, statistics on staff turnover and reasons for it
- Employment, recruiting and personnel policies and procedures
- Accident frequency and safety inspection reports.
- The wage and salary administration system
- Training programs and apprenticeship systems
- The productivity of the labour force
- Any unfilled positions

4. Review the overall labour market situations and the demands made by unions in the last negotiations and
likely demands to be made in the next.

5. Determine whether there is a key executive who has the ability to effectively run the company if the founder
retires or sell his interest.

6. Ascertain employee benefit programs and review:
- The details of pensions, post retirement benefits, profit sharing, severance plans
- Whether superannuation funds performance is satisfactory
- Benefits and salary levels compared with those of other companies, determine whether the company
would need to upgrade its benefit programs or salaries. If so, estimate the cost
- Employee share ownership schemes

7. Ascertain any outstanding claims such as sexual discrimination, illness, negligence.

Terence Wong


E. OPERATIONS

A) Plant and Facilities

1. Obtain particulars on:
- Location, description and costs of plant and property and usage
- Restrictions imposed by building codes and zoning laws
- Title to property
- The adequacy of insurance coverage
- Any liens or actual or potential condemnation proceedings
2. Assess the following:
- Depreciation rates and policies (or lease terms)
- Additions during last five years, by category
- Market value
- Technological obsolescence
- Compliance with health and safety regulations
- identify any major repairs or improvements required
3. Determine any surplus and idle buildings, plant and equipment
4. Determine estimated future plant, machinery and equipment requirements
5. Determine adequacy of maintenance program
6. Assess the adequacy of auxiliary, equipment such as tools, patterns and material handling equipment and
their valuations.

B) Production

1. Ascertain the nature of the manufacturing process and analyse major components. (e.g. capital investment,
know-how, design of plant, skilled labour)
2. Evaluate:
- Production methods, efficiency and layout
- Storage and inventory requirements and warehousing facilities
- Major and critical raw materials, their availability and price prospects
- make or buy practices i.e. subcontracting done by others
- Critical lead times for materials and current problems
- Quality control
3. Analyse production costs(materials, direct labour, indirect labour, manufacturing expenses), compare these to
industry norms
4. Evaluate the efficiency of the company's production process in relation to the industry and determine the
factors that might lead to an increase in production costs

C) Purchasing

1. Identify principal raw materials or products required, commenting on future price trends, market conditions,
supply of raw materials, competitors' activity and general economic conditions in suppliers' industries
2. Ascertain if any reciprocal buying arrangements exist.
3. Determine how the purchasing department is organised
4. Evaluate adequacy of steps that are followed such as authorised requisitions, inquiry, priced purchase orders,
receiving and supplier payment.
5. Identify if there is significant reliance on purchases of any items from one supplier

Terence Wong


D) Inventories and Costing

1. Obtain analysis of trends in inventory levels by category and by value of fast and slow moving surplus and
obsolete inventory.
2. Basis of valuation (e.g. FIFO, average costs) any recent changes to that basis and its effect on reported
performance.
3. Agreements on inventory held by others, whether under consignment or otherwise. The treatment of
inter-company profit in inventory
4. Obtain particulars on long-term contracts, including:
- The method of recording income and provision for losses
- cost estimate procedures and an analysis of cost overruns and underruns
- bidding procedures and strategy
- Any disputes or litigation with subcontractors or customers
5. Ascertain the frequency and adequacy of physical counts and quality of perpetual inventory records

E) Research and Development

1. Ascertain the quality of product, process and market research in the company and compare it to that of the
industry as a whole
2. Ascertain the industry's primary source of research
3. Analyse industry expenditure for research and compare with company's research expenditure
4. Assess the company's policy regarding R&D, analyse the percentage of sales it has been spending on R&D,
any significant new products under development and the known R&D activities of competitors
5. Determine the methods of authorisation, funding and reporting for product engineering and company R&D,
related to overall research plans and market requirements
6. Assess the calibre of the research staff
7. Evaluate the effectiveness of the R&D program during the past five years in light of new products produced.
8. Ascertain whether proprietary rights on all products under development are adequately secured
9. Determine any patents and trademarks held or that have been applied for
10. Ensure the company is protected in domestic and foreign markets
11. Obtain agreements under which the company is licensee or licenser and determine the level of the estimated
royalties
12. Are any key patents held by share holders, management or other individuals. Are the company's rights to
these patents satisfactory?
13. Ascertain whether any infringement suits or claims are outstanding

F) Environment

1. ascertain from national, state are local environmental regulatory agencies whether the company and its
facilities are in compliance with requirements, in particular relating to waste disposal
2. Determine whether it is necessary to obtain opinion from environmental legal counsel concerning the
application of laws and regulations to the company
3. Evaluate the impact on operational costs and efficiencies of:
a) Non-compliance
b) ensuring compliance
c) The use of by-products and recyclable materials in the production process
4. -recycling by-products and other materials for sale to third parties

Terence Wong


F. LEGAL

1. Ascertain the legal structure of the group and its relationship with the company under review

2. Review the minutes of the board and committee meeting to ascertain whether there are current or contingent
liabilities. Obtain a representation from the company if these minutes are not available.

3. Obtain a copy of the last legal representation letters sent to the auditors and determine any evidence of
current or contingent liabilities.

4. Ensure that proposed transaction will not raise any problems re compliance with the applicable Trade
Practices regulations. Stock Exchange, Corporations regulations, industrial awards, environmental and other
regulatory requirements.

5. Ascertain if any change by any government agency or public authority are pending e.g. Outstanding taxation
obligations. Determine whether there are any penalties for non-compliance

6. Ascertain if any legal problems have been experienced by competitors and its impact on the company

7. Review statutory registers - i.e. charges, options, directors, and other officers of the company. Determine the
legal/beneficial ownership of shares in the company. Identify any encumbrances over the property of the
company(i.e. mortgages)

8. Ascertain whether the company has adequate insurance coverage in all respects and its impact on the
proposed transactions

9. Determine any share investments or other interests the company holds in companies that are not part of its
group. Ascertain whether the company is involved in any Joint Venture Agreements.

10. Determine whether the company is a guarantor under any agreement.

11. Ascertain whether there are any intellectual property rights any licences given in respect of them

12. Obtain copies of any major contracts and of any contract containing unusual obligations

13. Determine whether all these procedures and investigations need to be carried out for the subsidiaries of the
company.

Terence Wong


G. FINANCIAL CONSIDERATIONS

1. Financial analysis overview

A) Obtain for the past five years:
- Audited financial statements
- Comparative financial results by major divisions
- The most recent unaudited financial statements
- Tax returns
- projected operating and financial statements
- The chart of accounts and a description of accounting practices
B) Check industry sources for pertinent data on:
- Economic situation and market trend
- Accounting, auditing and tax implications
- Management methods
- Employee benefits
C) Review the following agreements, where applicable, and note pertinent points for file:
- Bonus or profit sharing plans
- Union contracts and employment contracts
- Long term leases
- Sales and marketing contracts, dealership agreements. Royalty agreements and suppliers contracts
D) Calculate and analyse the following ratios:
- Return on total assets (%)
- Return on net assets (%)
- Return on ordinary shareholders' funds
- Earnings per share
- Gross profit margin (%)
- Net earnings margin (%)
- Growth in sales (%)
- Growth in net profit (%)
- Growth in earning per share (%)
- Interest cover (times)
- Inventory turnover (times)
- Trade receivable turnover (times)
- Current ratio
- Quick assets ratio
- Debt to equity ratio
- Net tangible assets per share

2.Accounting Policies

Determine whether the accounts are in accordance with corporations Law, accounting standards and whether they
are reasonable in the circumstances and have been consistently applied

3.Operating Results

- Carry out analyses of the profit and loss accounts for the last five financial years and the most recent
interim period, Include trends in sales, gross profit, net income, earnings per share, dividends and return
on equity, interest expense and growth rates
- Determine the affects of acquisition, dispositions. Changes in accounting policies, all extraordinary and
abnormal items, significant items in the other income and expense categories, impact of income taxes and
changes in tax rates.

4.Financial Position, Cash

Review cash position, present and projected, including:
- List banks where accounts are kept
- Monthly cash balances, unusual fluctuations, significant outstanding cheques or deposits in the
reconciliations

Terence Wong

5. Accounts receivable

- Obtain aged trial balances of all the amounts receivable and compare to aging percentages for previous years.
Obtain explanations for major variations.
- Obtain particulars on customers re:
- Terms of sales and credit policies
- List of large customers and volume of annual sales and unusual arrangements etc.
- Unfilled orders
- Analyse returns and allowances as % to sales for the year and inquire about major fluctuations
- Inquire whether any receivables are discounted or factored to finance companies
- Evaluate how the company determines doubtful debt provisions and assess its adequacy
- Assess effectiveness of credit control department
- Evaluate the appropriateness and adequacy of calculating other provisions (e.g. discounts, returns,
allowances)

6. Inventory

- Analyse inventories recorded at balance dates showing the various of inventory and inventory provisions,
Obtain explanations for major variations
- Inquire whether perpetual records are kept
- Evaluate the internal control and procedures in place over the physical movement of inventories and the
updating of accounting records
- Inquire as to the regularity of physical inventories and comparison to perpetual records, the procedures and
explanations for resolving variances
- Determine whether all items are counted, regardless of condition
- Ascertain basis of the valuation policies and methods for each class of inventories, if standard costs used
determine basis, regularity of revisions, cost components and accounting treatment of variances
- Determine whether an adequate allowance for inventory shortages has been taken up in the interim accounts
based on historical experience
- Determine whether a review for excessive and obsolete inventories and inventory items carried in excess of
net realisable value has been done for interim accounts purposes
- Ascertain whether the company does forward billing to customers and holds the assets for delivery latter.
Assess the impact of this practice
- Check cut off procedures

7. Investments

- Analyse investments at balance dates, showing the cost, carrying value and market value of each item and
compare with previous periods. Obtain reasons for major variations
- Ascertain policy for determining market value of listed and unlisted investments
- Ascertain whether the company will be required to contribute further capital
- Check whether any material change has occurred in the market value of investments since the end of the most
recent interim period

8. Property, Plant and Equipment

- Analyse property, plant and equipment at balance dates showing separately amounts at cost and valuation
with accumulated depreciation shown as deductions there from and obtain explanations for major variations
- Evaluate policies and procedures in relation to:
- Capitalisation of expenditure
- Adequacy of depreciation methods (e.g. straight line, diminishing balance, commencement date)
- Determination of economic lives and residual values of assets and their revisions
- Obtain fixed assets register and check:
- Reconciliation with the fixed assets accounts in the general ledger
- Where physical inventories of fixed assets are carried out check results of the latest physical inventory and
determine whether differences were adjusted in the general ledger
- Evaluate internal controls in existence for the authorisation of fixed asset additions and disposals and for
expenditure on repairs and maintenance
- Ascertain whether there are any surplus and/or idle fixed assets, including land and buildings
- Obtain copies of recent market valuations of land and determine whether such valuations are reflected in the
accounts
Terence Wong


9. Intangibles

- Analyse intangible assets at balance dates showing the cost, accumulated amortisation and net book value of
each class of other assets and obtain explanations for major variations
- Determine how any goodwill and other intangibles arose and consider the acceptability of the basis upon which
they are included in the balance sheet
- Assess whether the company's amortisation rates appears reasonable in the circumstances

10.Other assets

- Analyse other assets at balance dates closing the gross book value,
accumulated amortisation and net book value of each class of other assets and obtain explanations for major
variations
- Assess amortisation rates for reasonableness
-
11. Creditors, Accruals and Provisions

A) For accounts payable and accruals
- obtain an analysis of the type (e.g. trade creditors, overheads, payroll and described payment practices for
each)
- compare the balances in the various accounts with those at the end of the previous periods
- determine whether advantage of discounts for prompt payment are taken up and review reconciliations of
major suppliers for disputes
- obtain a list of the company's major suppliers, together with the approximate annual amounts purchased

B) Evaluate procedure and internal controls for ensuring that all material liabilities are properly taken up. Determine
basis of each provision made and its adequacy

C) Determine whether any material accrual or provision has either not been taken up or has been based on a
significant element of management judgement e.g.
- holiday pay, sick pay, long service leave, redundancy pay, compensation pay, bonuses, profit-sharing, workers
compensation, product guarantees or service warranties, returnables, superannuation, commitments
- Reorganisation or closure costs
- Remedial and maintenance costs, penalties, damages or other cost increase in relation to completed contracts
- Losses on purchase contracts or outstanding sales orders

12. Debt Finance

- Obtain list of al financial liabilities and determine the general terms of notes, bonds and mortgages payable
and related charges, guarantees, due dates
- Obtain credit reports or any review/ratings
- Obtain the terms of leases, the nature of the property subject to the leases and determine whether renewal or
purchase right exist
- Inquire into any quasi-financing agreements(e.g. put/call option contracts)and guarantees of debt of other
entities
- Obtain information on any established lines of credit, terms and unused amounts available and ensure that
ensure that they reconcile with the forecast cash requirements
- Inquire as to the existence of any off balance sheet items

Terence Wong


13. Contingencies and Commitments

- Analyse all significant contingencies and commitments at the end of the previous financial year and the most
recent interim period
- Evaluate the procedures and controls for ensuring that all contingencies and commitments are notified to an
appropriate office and included in the analysis referred to above
- Check for likelihood of any significant contingency of commitment is not included in the analysis, in particular
the following:
Contingent liabilities
- Endorsements, warranties, sureties or guarantees
- Claims under costed contracts
- Claims, including liquidated damages, for breach of contract
- Other claims for damages
- Liabilities in respect of notes, drafts and bills receivable which have been discounted or sold with recourse
- pending law suits, proceedings, hearings or negotiations possibly involving retroactive adjustment
- Inadequate insurance cover for events that occurred up to the accounting date
- Uncalled liabilities on investments
- Adjustment of consideration for any business acquired or sold
- Joint and several liability under group banking arrangements; and
- Options and working capital commitments

14. Commitments

- Capital commitments, for the acquisition of fixed assets by purchase or by finance lease including fixed assets
or investment either contracted for, but not provided for, or authorised by Board of Directors but not contracted
for
- pension commitments, whether legal or moral, whether provided for at the accounting date or not

Other financial commitments such as:

- Significant commitments extending more than one year from the accounting date:
- purchase commitments extending more than one year from the accounting date
- Long term supply contracts on unfavourable terms resulting in a drain on resource
- Commitments for the sale of the company's products at forward prices below the prevailing selling prices
- Agreements to repurchase or sale contracts, in relation to:
- Foreign currencies
- Commodities
- Commitments not in the ordinary course of trading, such as:
- Leasing commitments, either in respect of finance leases or operating leases
- To borrow or lend money
- To acquire companies or net assets or to form a joint venture; and to purchase or sell investments

Terence Wong


15. Equity

A) Obtain details of any preference shares outstanding and determine whether the terms of the share specify
special treatment

B) For ordinary shareholder's equity:

- obtain a shareholder's list
- determine the rights for each class
- determine any obligations to issue or repurchase shares
- inquire about past dividend policy
- inquire about any unusual capital accounts (e.g. donated capital, appraised surplus)

C) Determine the extent to which the company's growth has been financed by internally generated cash. Analyse
the implications and inquire about the company's policy on financing its perorations.

D) Evaluate relationship with banks, lenders and the financial community in general

E) Review the capital budget and planned sources of funds

F) Determine whether the existing debt repayment schedule can be met from operating cash flow, if refinancing
will be necessary, determine the effect of current interest rates

G) determine whether the company has a dividend reinvestment plan in place

H) Where hybrid securities or "quasi-equity" issued evaluate the rights obligations attached to these securities and
their impact on the company's future operations

16. Forecasts

- Obtain available projections of earnings and cash flow. If possible, obtain the worst, best and most probable
results and check if the same ratio analysis is applied to historical results to determine whether relationships
are consistent

- Determine and evaluate the reasonableness of the assumptions used. Identify any contingency or margin
allowances that have been made

- Ensure projections are consistent with industry and overall business expectations

- If no projections are available, develop forecasts based on continuing historical growth trends, industry
conditions and known factors

- Adjust the projections for any items resulting from the proposed transaction

- Review cash flow projections to determine that investment in working capital, new plant and equipment and
scheduled debt maturities is appropriately provided. Determine the net cash flow that would be
available(preferably a range of minimum and maximum cash flows)

Terence Wong

H. FINANCIAL MANAGEMENT

A)Evaluate the overall credibility and reliability of the accounting system and reporting capabilities of the company
B)Ascertain the extent to hitch the company's earnings have been efficiently managed
C)Ascertain whether any practices have been adopted to made the company appear more attractive, including:
- Less conservative accounting policies
- Fluctuations in discretionary expenses, such as advertising, personnel and maintenance
- Biased accounting judgements, such as inappropriate provisions for sales returns. Obsolete inventories or
contingent liabilities
- Expenses being paid by shareholders either directly or indirectly
- Inadequate compensation for shareholders-managers
- profit recognition manipulations
- Revaluations/over valuation of assets
D) Check for private company adjustments including:
- Stock valuations discrepancies
- Private expenses through company
- Unrecorded income re tax purposes
- Abnormal salaries, superannuation and other benefits for the proprietor and family
- Interest on shareholders' loans not at arms-length
- Personal security or guarantees given o secure the company's debts and obligations

I INDEPENDENT REVIEW

A) Inquire if an audit committee or equivalent exists and evaluate its independence. Ascertain the committee's
review scope of audit of financial statements
- evaluate effectiveness in responding to findings of internal and external audit
- evaluate director’s independence from management and controlling shareholders
- Adequacy and frequency of board meetings and information provided for decision making
- determine whether Board is actively involved in major decisions affecting the organisation
B) Investigate the auditing firm's reputation
C) Review the working papers of the auditors to note:
- Adequacy of auditing work
- Adjustment proposed by the auditors
- Problem areas
- Any differences of opinion between the company and its auditors
- Matters raised in audit management letters
D) Review the adequacy of the internal auditing department. Ascertain what the department's major recent findings
were and the company's handling of those findings. Determine to whom the internal auditing department reports
E) Evaluate the internal accounting controls and the company's attitude toward strong controls
F) Evaluate the strength of the financial management and controller ship function
G) Determine:
- The frequency with which internal reports are issued
- Time lapse between the end of the period and when the reports are used
- Whether the internal reporting timetable and content are consistent with any monthly closing requirements
H) Review how centralised the accounting function is and whether subsidiaries have autonomous accounting
departments that may not be functioning uniformly and, if so, how overall control is exercised
I) Investigate:
- Whether interim reports are prepared on a consolidated basis or only by autonomous entities
- The manner in which foreign subsidiaries or branches report
J) Ascertain whether management reports compare results to budget and prior years and determine the reasons
for variances
Determine whether exception reporting is used

Terence Wong

J RISK MANAGEMENT

A)Review the insurance currently in effect and the extent to which company is assuming self insured retentions.
Review any loss experience for insured and uninsured claims and the reporting and reserving practices

B)Determine whether the company has been unable to unsure unusual risks or products or events and whether the
company will be able to obtain necessary insurance in the future

C)Ascertain whether insurance coverage is determined on a "claims made” basis. Determined whether any
insurance policy aggregates have been penetrated or exhausted

D)Identify liabilities that have been assumed or transferred through contractual arrangement

E)Identify any unusual circumstances which may give rise to claims in the future which are as yet unreported

F)Establish whether a decision has been made as to any guarantees that may be given by previous shareholders.
Assess whether the company, or individuals assuming liability for prior acts, will be financially sound enough to
back up its indemnifications

G)Identify any potential for cancellation of coverage such as Director's and Officer's liability insurance or potential
bonding problems due to a highly leveraged condition

H)Determine whether the company entered into any special service agreements that have to be maintained or
renegotiated

I)Identify any outstanding premium adjustments and determine whether there will be credits or charges for them

J)Review the methods by which accruals and tax deductions for premiums are handled

Terence Wong

K. TAXATION

A)Ascertain the principal taxes to which company is subject and the amounts paid for the past five years

B)Consider recent changes in the tax law that would affect the company

C)Ensure deferred taxes are provided on a comprehensive basis

D)Review
- Previous year's assessments that is still open
- Adjustment the company was required to make as a result of the most recent examination
- The balance sheet accrual for open years to ascertain whether it has been adjusted to give effect to the
adjustments for years already examined
- Any examinations currently in progress. Ascertain whether there have been any preliminary findings or
matters under appeal
- A schedule reconciling book income to taxable income for the last five years
- amounts and expirations of any carry over of net operating or capital losses, dividend franking tax credits,
foreign tax credits and other tax credits, foreign tax credits and other tax credit carryovers, Consider how
the transaction will affect the status of these carry overs.
- The tax basis of the company's assets

E) For other taxes, determine:
- ascertain whether company is required to file payroll or other business tax returns in other states and, if so,
whether thy have been filed and taxes have been paid
- Whether local taxes have been accrued and paid currently. Identify any of these taxes that are in dispute
- Whether there are or have been any tax audits
- Whether all payroll taxes have been withheld from employees and forwarded promptly
- Whether there are any problems with other taxes to which the company is subject

F) Determine whether the company has any significant foreign taxes or any significant local tax problems relating
to its foreign operations, such as:
- Foreign tax credits
- Inter-company pricing and reallocation of income or expenses between related entities
- Any transfers of assets/liabilities to a foreign corporation
G) Determine all other areas of potential tax exposure or savings including details of the franking account

H) Inquire whether the company obtained any private rulings

I) Assess the internal tax function to ascertain to what extent the company relies on outside advisers for tax

J) Planning and return preparation and whether the tax function has technical expertise or merely serves
compliance functions

Terence Wong

Due Diligence Checklist

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Similar a Due Diligence Checklist

Similar a Due Diligence Checklist (20)

Due Diligence Checklist