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

Sundaram & Co., a firm of Chartered Accountants, is engaged by Veda Pharma Ltd to carry out a financial due diligence on Kiran Labs Pvt Ltd, a target the client plans to acquire. During the exercise the engagement partner finds that the target's management has refused access to its tax assessment records, stating they are confidential. What is the most appropriate course of action for the firm?

The firm should treat the refusal as a scope limitation, take it up with the client, and either obtain the tax records or disclose the limitation in its report. Due diligence is an agreed-scope engagement, so silently assuming the tax position is clean would be unsupported and unprofessional.

  1. ATreat the restriction as a limitation of scope, discuss it with the client, and either obtain access or clearly disclose the limitation in the due diligence reportCorrect
  2. BAssume the tax position is clean and complete the report without mentioning the refusal
  3. CIssue an audit opinion under Section 143 of the Companies Act stating that the target's accounts are not true and fair
  4. DWithdraw and report the target's management to the Institute for misconduct

Explanation

Due diligence is an agreed-scope advisory engagement and not a statutory audit. When access is denied, the practitioner should treat it as a scope limitation, raise it with the client and either get the access or disclose the limitation in the report. Assuming a clean position would be unsupported, and a Section 143 audit opinion is not relevant to this engagement.

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