Due & diligence audit is normally carried out before acquiring a business entity or sanctioning loans and credit so as to confirm that the actual facts and the one presented are in conformity. Due diligence is conducted in cases of corporatization, disinvestment, public offerings, leveraged buyouts, lending, financing, venture capital, corporate restructuring, etc.
There are no set standards for due diligence but it is more dependent on the relative and essential facts of the case. VJM & Associates LLP works diligently when it comes to auditing and building up a comprehensive model for the business.
Due diligence is a process of investigation, performed by investors, into the details of a potential investment such as an examination of operations and management and the verification of material facts. It entails conducting inquiries for the purpose of sufficient, timely, and accurate disclosure of all documents, information or material statements that influence the result of the transaction.
Thus from the above definition, we can understand that due diligence is an audit of not only financial matters but also non-financial areas as well. To put it in simple terms due diligence is seeking an opinion from a professional of the prospects of the business where investment is detested.
At the start of business opportunity, initial talks, data collection, and analyzing of the same are performed. The detailed due diligence follows after this. Due diligence is normally performed once it is confirmed between the parties about the transaction or the deal will be pursued. However, this is done before the signing of the contract or the agreement.
Following points reveal the importance of Due diligence:
The major aim of due diligence is to assist the investor or the purchaser to find out the strengths, weaknesses, critical success factors, etc, and get all the possible information before completing the deal. Along with this due diligence also helps in exposing the problems or for that matter potential problems which can help in negotiating price, adding points in the contractual documents or indemnity provisions.
At VJM & Associates LLP we have classified and carry out the due diligence as per the activities performed by the business opportunity and concentrate on the areas specific to it:
Commercial or operational due diligence
This kind of due diligence is performed to analyze operational, strategic and commercial perspectives of the acquiring enterprise
Financial due diligence
This due diligence is normally performed after the operational due diligence is done. This is auditing and evaluation of financial matters, books of accounts, statement of affairs of an entity
Tax due Diligence
This diligence is generally performed along with the financial due diligence. However, it is one totally different activity. This due diligence is all about investigating different types of taxes which are applicable to the entity and to which extent compliance of the same has been done by the company. Auditor also analyzes the possible outcome of all the pending litigations and matters so that any possible liability can be factored in determining consideration of transaction.
Legal due diligence
Compliance of all the statutory laws applicable to the entity, legal activities related to various functions and department of the business etc all come under the purview of legal due diligence. Auditors identify any possible non-compliance which can affect the transaction or can create future liability for prospective buyer or investor.
Information Systems Due diligence
Information system is the backbone of every organisation and if an entity is looking for merger with another entity then it is important to know to which extent their IT system syncs with each other. Therefore, IT Due diligence is carried out to analysis capabilities and limitations of the IT system of the entity.
Environmental due diligence
When the merger happens it is very important to understand the flexibility of the business operations and management of the organization. Environmental due diligence aims at assessing the environmental condition so that investors are aware about potential environment liability. It can involve looking at various perspectives like checking past spill or fire incidences, operations carried out by adjacent facilities, availability of resources nearby etc. It helps in evaluating the flexibility, the working environment and adapting capability of the organization
Personnel due diligence
This due diligence is conducted to ascertain whether prospective organisation has potential employees as per organisation requirement and what is the over all structure of employees like current positions, vacancies, due for retirement, notice service period etc.
Purchasing a business involves a lot of cost and effort. Therefore the business should be analyzed, ascertained, and evaluated from all the angles relevant. This involves the following approach:
To determine a correct and effective strategy is very important. Factors such as company age, geography, markets, competitive dynamics, price levels, etc impact the decision of the purchasing.
VJM & associates LLP have therefore built up a comprehensive model which is also popularly known as 6 D’s of Due Diligence for due diligence which can be elaborated as below:
Define
With the help of discussions with both parties, we evaluate the project goals. This includes resource requirement, the garner of the project, and the strategy to be adopted
Discover
Here we do a thorough analysis of financial records of the organization. The major reason is to measure the asset health of the entity, stability, and financial performance.
Diagnose
An appraisal of long term value of the organization and understanding the business practices is done in this step. This is a very important step as here we provide an assurance on the basis of overall examination of documents if the business venture is worth or not.
Design
Detailed scrutiny of the business model and plans is done through this process. And then a plan is designed and implemented on the basis of viability and integrity of the two organization
Deliver
After all the inspection of documents and gathering of information and data, the same are analyzed by our experts in VJM & Associates. The valuation is done and we propose the price to be put forth
Defend
Risk management is done through this step so as to assess and forecast any potential risks through this business deal and be prepared for the same.
The process that we follow at VJM & Associates LLP for performing Due diligence is divided into three major steps:
Pre Due Diligence
Pre Due diligence is a period when we prepare ourselves and the target party for the process of Due diligence. It involves the following steps:
Due Diligence process and Negotiation Phase
This phase is the actual working phase. Here we implement all our planning and expertise. Following are the steps followed:
Closing & Post closing Phase
This is the last phase of the due diligence process. Here we follow the following approach
VJM & Associates experts prepare a complete and exhaustive report after a detailed review of the closing documents.
Review of other post-closing transactions is also done
If you require we get involved in price adjustment procedures as we can comment on the same based on our findings during Due Diligence
While the audit is an independent examination of financial statements and it is carried out for the benefit of all stakeholders of the company. However, due diligence is the examination of the entire business for a potential investment and it is carried out for specific stakeholder to assure the consensus between the facts presented and one that is actual.
A review, audit or investigation conducted to identify correctness, completeness and and assurance of the facts presented about the matter in consideration is called due diligence.
Due diligence can be voluntary as well as legally binding. Some examples are evaluating the assets of the company to be acquired, carrying out Tax due diligence to identify possible legal liability that may come up in future, or operational due diligence when there is a change in team or function or department, etc, financial due diligence is carried out before sanctioning any loan or credit facility to identify credit worthiness of the business.
Due diligence can be conducted by any individual or a firm who is an expert in the field. However, these days Chartered Accountants are preferred as they are efficient and carry a thorough knowledge about all the streams, and laws and regulations
Conduction of a prudent review by an expert is due diligence. It is required so as to assess the opportunities, threats, potential risks in a deal to be conducted before entering any contract or agreement
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This tax liability reduction practise, either through legitimate or illegitimate options, is known as “Tax Avoidance”, “Tax Evasion” and “Tax Planning. Although the words “Tax avoidance” and “Tax evasion” and “Tax planning” sound similar but in practical scenarios they are radically different.
For the purpose of Income tax return filing, mere uploading a return file is not sufficient. Post uploading of return, sending a signed copy of acknowledgment (ITR-V) was prerequisite to verify the ITR and complete the filing process. ITR is considered as not filed till it ITR verified and the signed copy of ITR-V is not received at Central Processing Cell (CPC), Bangalore.
As per EPF Act, every establishment employing 20 or more employees are liable to get themself registered under EPF Scheme. However, establishments with less than 20 employees may get registered voluntarily.
The UAN of an employee remains the same throughout life irrespective of the number of jobs he/she changes. Every time an employee switches his/her job, EPFO allots a new member identification number (ID), which is linked to the UAN.
Section 285BA of Income Tax Act, created responsibility to report Specified financial transactions popularly known as SFT. As per Section 285BA of Income Tax Act,
Faceless assessment is a “big step in reducing Department’s interference from people’s lives” and ensures speedy assessment of cases. Further, another major cause is that the I-T department has been progressively reducing the percentage of cases picked up for scrutiny assessment so as to establish the fact that the department places trust on the taxpayer.
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