Advanced Audit and Assurance (International) · Specific assignments

Due Diligence and Investigations for ACCA AAA

Updated 11 October 2026 · Fact-checked

Due diligence is an investigation of a target business, done before a deal, to check that what the buyer believes is true. Main types are financial, commercial and operational. To answer a question, state the objective, list targeted procedures for the scenario, then explain the risks and limits for the assurance provider.

Understand Due Diligence and Investigations

A buyer is about to spend a large sum on a company. It cannot rely on the seller's word. So it hires an adviser to investigate the target first. That investigation is due diligence. It is usually done for an acquisition, a merger, a joint venture, or an investment such as a private equity purchase. It can also support a sale (vendor due diligence), where the seller commissions the work to speed up the deal.

The work is not an audit. There is normally no opinion on financial statements. The scope is set by the client in an engagement letter. The report is often a detailed findings report, sometimes a limited form of assurance or agreed-upon procedures. This matters in the exam: say clearly what level of assurance, if any, is given.

There are three types you must know.

Financial due diligence: tests the quality of earnings, assets and liabilities, cash flow, working capital, debt and debt-like items, and forecasts. The question is: are the numbers reliable and sustainable?
Commercial due diligence: tests the market, competitors, customers, pricing, and the business plan. The question is: will the business really earn what the buyer expects?
Operational due diligence: tests processes, supply chain, IT systems, people, capacity and integration potential. The question is: can the business deliver, and can it be integrated?

Other strands also appear: legal, tax, environmental and IT due diligence. Often the assurance firm covers the financial strand and relies on specialists for the others.

The risks sit with the provider too. Time is short. Access to management and records is limited. Information may be incomplete or biased. Forecasts are uncertain. The provider may face a negligence claim if the buyer overpays and blames the report. There are also ethical issues: confidentiality of the target's data, conflicts of interest if the firm audits the target or the buyer, and self-review or advocacy threats. Good answers deal with these directly.

Key rules to remember

Purpose test for any due diligence question: Objective → Scope → Procedures → Risks → Report; Use this order to structure written answers.
Enterprise value to equity value bridge: Equity value = Enterprise value − Net debt − Other debt-like items; Debt-like items include unfunded pensions, leases and contingent liabilities found in diligence. Each reduces the price.
Normalised (adjusted) earnings: Adjusted EBITDA = Reported EBITDA ± one-off, non-recurring and non-market items; Common adjustments are restructuring costs, owner perks and above-market related-party charges.
Working capital: Net working capital = Inventory + Receivables − Payables; Compare the level at the deal date to the normal average level to set a price adjustment.

How to solve Due Diligence and Investigations questions

Use this method for any due diligence or investigation question. It keeps you on the requirement and earns professional skills marks.

1Read the requirement. Note the verb (explain, recommend, evaluate) and which type of due diligence or which party (buyer, seller, firm) is asked about.
2State the objective in one or two sentences: what the client needs to learn and the decision it supports.
3Pick the relevant strands from the scenario: financial, commercial, operational, or others. Do not cover all if the scenario points to one.
4List specific procedures tied to scenario facts, such as testing a named customer's revenue or reviewing a stated contract.
5Identify the risks and limits: time pressure, limited access, unreliable forecasts, reliance on specialists, and the level of assurance given.
6Cover ethics and firm risk: confidentiality, conflicts, independence, engagement letter scope and liability.
7Conclude with a clear recommendation or next step, such as price adjustment, warranties or walking away.
8Check your answer against the marks. Make one separate, applied point for each mark.

Quickest way: Type, Test, Trap

When to use it: Use when you have only a few minutes to plan a due diligence answer.

Type: write F, C or O next to the scenario facts to show which strand each fact belongs to.
Test: for each fact, write one procedure, such as vouching, analytical review, customer calls or process walkthroughs.
Trap: add one risk or limit, such as incomplete data, a conflict of interest or over-reliance on forecasts.
Write the answer in that order using short headed paragraphs, each linked to a scenario fact.

Common mistakes in Due Diligence and Investigations

Treating due diligence as an audit and giving an audit opinion.
Students are used to audit questions and apply the same framework.
Fix: State that scope is set by the client, the report is usually findings or limited assurance, and no audit opinion is given unless the engagement says so.
Listing generic procedures not tied to the scenario.
Students memorise lists to save time.
Fix: Name the item from the case, for example a key customer, a recent acquisition or a forecast, and say what you would do to it.
Confusing financial, commercial and operational due diligence.
All three look at the same business, so the lines blur.
Fix: Remember: financial checks numbers, commercial checks market and plan, operational checks processes and delivery.
Ignoring the risks to the assurance provider.
Students focus on the target's risks only.
Fix: Add a short section on liability, limited access, tight deadlines, reliance on others' work and conflicts.
Accepting forecasts and adjusted earnings without challenge.
Management's figures look polished and credible.
Fix: Show scepticism. Test assumptions against past performance, contracts and market data, and ask why each adjustment is truly one-off.
Forgetting ethics such as confidentiality and conflicts.
The technical parts seem to take all the time.
Fix: Always add a line on conflicts, independence, and data protection, with a safeguard such as separate teams or declining the work.

Worked examples

Example 1

Zenith Ltd plans to buy Orchid Ltd, a software firm. Orchid's profit rose sharply last year, mainly from one customer that signed a large contract in the final month. Zenith has engaged your firm to carry out financial due diligence. Explain the objective and the procedures you would perform on revenue and profit.

Show the solution

Objective: to give Zenith reliable information on the quality and sustainability of Orchid's earnings, so it can set a fair price.
Concern: one large contract in the final month may mean revenue was recognised early or will not recur, which would inflate the profit.
Procedure 1: read the contract and test the revenue recognition against performance obligations and delivery dates.
Procedure 2: confirm the contract and balances directly with the customer, and check cash received after the year end.
Procedure 3: analyse monthly revenue and margin trends and compare them to prior years to see whether the profit is one-off.
Procedure 4: calculate adjusted earnings with and without the contract and show Zenith the effect on valuation.
Procedure 5: assess customer concentration and the risk of contract termination or renegotiation.
Limitation: tight timetable and limited access to the customer may reduce evidence, so state this in the report.

Answer: The objective is to assess whether Orchid's profit is reliable and sustainable. Test revenue recognition on the large contract, confirm with the customer, review cash received, analyse trends, and present adjusted earnings and concentration risk, while noting limits on access and time.

Example 2

Your firm is asked to perform due diligence for a buyer on Delta Ltd. Your firm is also the statutory auditor of Delta Ltd. Discuss the ethical and firm-risk issues and recommend what to do.

Show the solution

Identify the threats: self-review (you may be assessing numbers you audited), and self-interest if the fee is large or success-based.
Identify the confidentiality problem: you hold Delta's confidential information as auditor and owe duties to the buyer, who is a different client.
Identify the conflict of interest: Delta wants a high price and the buyer a low one, so your interests cannot serve both.
Consider safeguards: separate teams, information barriers, and disclosure to and consent of both parties.
Consider whether safeguards are enough. If the threats remain significant, the firm should decline the engagement.
Consider liability: the buyer may sue if it overpays, so settle the scope and any limit of liability in the engagement letter.
Recommendation: unless consent and strong safeguards can be put in place, decline and suggest another firm.

Answer: The engagement creates self-review, confidentiality and conflict threats. Safeguards such as separate teams and informed consent from both parties may reduce them, but if they cannot be reduced to an acceptable level the firm should decline. Agree scope and liability terms in the engagement letter.

Exam tips

Link every procedure to a fact in the scenario. Generic lists score poorly.
Say which type of due diligence you are discussing and why it fits the question.
State the level of assurance and the scope in the engagement letter. Many answers miss this.
Add a short ethics and firm-risk point. It also supports professional skills marks for scepticism and judgement.
Finish with a recommendation, such as a price change, warranties or withdrawal, in clear business language.

Practice questions from Specific assignments

Due Diligence and Investigations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Due Diligence and Investigations: frequently asked questions

What is the difference between due diligence and an audit?

An audit gives an opinion on financial statements under ISAs. Due diligence is a client-defined investigation to support a deal decision. It usually reports findings rather than an audit opinion.

What are the main types of due diligence?

The main types are financial, commercial and operational. Others include legal, tax, IT and environmental. Each looks at a different risk to the buyer.

Who commissions due diligence?

Usually the buyer or investor. Sometimes the seller commissions vendor due diligence to give buyers information early and make the sale smoother.

How should I answer a due diligence question in AAA?

State the objective, choose the relevant strand, give procedures tied to the scenario, then cover risks, ethics and a recommendation. Keep each point applied to the facts.