Alpha Ltd.

Alpha Ltd. proposes to acquire 72% of Beta Ltd.

Before deciding the consideration to be paid, Alpha’s management asks a Chartered Accountant to undertake a review of Beta Ltd.

The management specifically requires the CA to:

examine the quality of Beta’s receivables;
identify liabilities that may not have been reflected adequately in the financial statements;
assess pending litigation and its possible financial impact;
examine whether reported profits are sustainable;
identify unusual transactions with related parties; and
highlight matters that may justify a reduction in the proposed acquisition price.

The CA is not required to express an opinion on whether Beta Ltd.‘s financial statements give a true and fair view. The engagement letter also states that the work is intended to assist Alpha’s management in deciding whether and on what terms the acquisition should proceed.

The CA’s team concludes:

“Since the work involves examination of financial information and verification of balances, this is essentially a statutory audit and the normal audit objective of expressing an opinion on true and fair view should govern the assignment.”

Which ONE of the following is most appropriate?

A. The conclusion is correct because examination of financial information and verification of balances necessarily constitute an audit irrespective of the purpose for which the work is performed.

B. The conclusion is inappropriate because the assignment is a due diligence review directed towards evaluating matters relevant to the proposed acquisition rather than expressing an audit opinion on the financial statements.

C. The conclusion is correct because due diligence differs from statutory audit only in the level of materiality applied to the information examined.

D. The conclusion is inappropriate only because a due diligence assignment cannot involve examination of financial statements or verification of accounting records.