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CA Final · Advanced Auditing, Assurance and Professional Ethics · Due Diligence, Investigation & Forensic Accounting

Anand & Co, CAs, are performing legal due diligence support and financial due diligence for a buyer of Tulsi Pharma Ltd. They find that the target has a pending tax demand of Rs 3 crore not disclosed in the information memorandum. What is the most appropriate action?

The firm should report the undisclosed Rs 3 crore tax demand to its client in the due diligence report and assess its effect on valuation and deal protections such as indemnities. It must respect confidentiality and not disclose to competitors or authorities without a legal duty.

  1. AOmit it from the report because the target did not disclose it
  2. BReport it to the client in the due diligence report, assess its potential impact on valuation and deal terms such as indemnities, and discuss with client confidentiality obligationsCorrect
  3. CDisclose it to the target's competitors to protect the market
  4. DInform the income tax department immediately

Explanation

The buyer engaged the firm to identify risks, so undisclosed liabilities must be reported to the client with their effect on price or protective clauses. Passing information to third parties breaches confidentiality. Omission would defeat the engagement's purpose.

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