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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Specific assignments

During commercial and financial due diligence on Tandem Ltd for a prospective buyer, the assurance team notes that 40% of Tandem's revenue comes from a single customer whose contract expires in six months with no renewal agreed. How should this be treated in the due diligence report?

The report should flag the single-customer dependence and unrenewed contract as a major risk to the sustainability of earnings and to valuation, recommending the buyer seek renewal assurance or adjust price or terms. It should not be omitted or made subject to management's agreement, since the report serves the buyer.

  1. AOmit it, as contract renewal is outside the scope of financial analysis
  2. BHighlight it as a key risk to the sustainability of earnings and valuation, and recommend the buyer obtain assurance on renewal or adjust the price or termsCorrect
  3. CTreat it as an adjusting event in Tandem's audited statements
  4. DInclude it only if Tandem's management agrees to disclosure

Explanation

Customer concentration with imminent expiry directly affects the quality and sustainability of future earnings, which is central to a buyer's valuation. The report should flag it and suggest mitigations such as warranties, price adjustment or conditions. Omitting it or requiring management consent would undermine the buyer's interests and the report's purpose.

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