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

During financial due diligence on Aston Retail, the team finds that 40% of revenue comes from one customer whose contract expires in six months with no renewal agreed. How should this be treated in the due diligence report?

The concentration should be reported as a key risk to the sustainability of earnings, with analysis of its impact on forecasts and valuation. Historical revenue should not be restated because it was genuinely earned, and the issue is a forward-looking commercial risk rather than evidence of misstatement.

  1. AOmit it because the contract is still valid at the review date
  2. BReport it as a key risk to sustainability of earnings and consider its effect on forecasts and valuationCorrect
  3. CAdjust historical revenue downward by 40% to reflect the risk
  4. DConclude that the target's financial statements are materially misstated

Explanation

Customer concentration with an imminent contract expiry affects future earnings and the price or terms of the deal, so it should be flagged as a key risk with its forecast implications. Historical revenue is not restated since it was genuinely earned. It does not indicate misstatement; it is a forward-looking commercial and financial risk.

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