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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 financial due diligence on a target company, Arogya Labs Pvt Ltd, before an acquisition. The engagement letter asks the firm to report on the quality of earnings and net debt. Which statement best describes the nature of the firm's work and the expected output?

Financial due diligence is an agreed-scope advisory engagement. The firm reports its findings and analysis on the specified areas, such as earnings quality and net debt, to help the acquirer decide. It does not give an audit opinion or perform a statutory attest function.

  1. AIt is an audit engagement, and the firm must express a true and fair opinion on Arogya Labs' financial statements
  2. BIt is an agreed-scope advisory or related-services type of engagement, where the firm reports factual findings and analysis on the agreed areas without giving an audit opinionCorrect
  3. CIt is a statutory attest function under the Companies Act, and the report must be filed with the Registrar
  4. DIt is a forensic investigation, and the firm must necessarily report suspected fraud to law enforcement authorities

Explanation

Financial due diligence is performed on the scope agreed with the client, such as quality of earnings and net debt. The output is findings and analysis for decision making, not an audit opinion on financial statements. The audit-opinion option is wrong because no statutory audit or true-and-fair opinion is being given.

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