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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Reporting on other assignments

Baraka & Co, an audit firm, is engaged by Zenith plc to carry out financial due diligence on a target company, Orla Ltd, before an acquisition. Zenith's board asks the firm to confirm that Orla's historical financial statements are 'true and fair'. Which response is most appropriate for the firm?

The firm should explain that due diligence is not an audit. It is a scoped investigation agreed with the client, and it normally results in a report of findings rather than a true and fair opinion on the target's historical financial statements.

  1. AAgree, because due diligence work is performed to the same level of assurance as a statutory audit
  2. BExplain that due diligence is not an audit; the firm would report findings on agreed scope, usually without an audit opinion on the financial statementsCorrect
  3. CAgree, but only if the firm expresses the opinion as limited assurance
  4. DRefuse the engagement because due diligence is outside the permitted services of an audit firm

Explanation

Due diligence is an investigation tailored to the client's needs and agreed in the engagement letter. It typically produces a report of findings rather than an audit opinion. Treating it as equivalent to an audit (option A) misstates the nature and scope of the work, and it is not prohibited (option D).

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