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- 10 Marks
Question
Palm Oil Processing Company Ltd is a palm oil processing company founded in 2001. The processing is done at five different locations within the West Akim District of the Eastern Region. The company is facing a problem of the supply of palm fruits (the raw material of the company). To ensure regular supply of palm fruits, Palm Oil Processing Co. Ltd. approached the Directors of Ayensu Palm Plantations Ltd. to acquire their company. The Directors of Palm Oil Processing Company approached Western Auditors, a firm of Chartered Accountants, to conduct a due diligence review on Ayensu Palm Plantation Ltd.
Required:
As audit manager of Western Auditors:
i) Identify FIVE (5) practical examples of due diligence assignments and which one(s) would be relevant to Ayensu Palm Plantation Ltd. (5 marks)
ii) Explain FIVE (5) issues you would include in your due diligence review inquiries on Ayensu Palm Plantations Ltd. (5 marks)
Answer
i) Practical Examples of Due Diligence Assignments:
- Financial Due Diligence: A review of the financial position and obligations of a target to identify such matters as covenants and contingent obligations.
- Operational and IT Due Diligence: Assessing the extent of operational and IT risks, including the quality of systems, associated with a target business.
- People Due Diligence: Reviewing key staff positions under the new structure, contract termination costs, and the cost of integration.
- Regulatory Due Diligence: Reviewing the target’s level of compliance with relevant regulations.
- Environmental Due Diligence: Evaluating environmental, health, safety, and social issues in a target company.
(Any 5 points for 5 marks)
ii) Issues to Include in Due Diligence Review Inquiries on Ayensu Palm Plantations Ltd.:
- Structure: Including how the target is owned and constituted, and what changes will be necessary.
- Financial Health: Based on a detailed examination of past financial statements and an analysis of the existing asset base.
- Credibility of the Owners, Directors, and Senior Managers: Including validation of the career histories of all the main players in the business.
- Future Potential: Reflected in the strengths of its products or services and the probability of earnings growth over the medium to long term.
- Assessment of Risks: Including market risks, strategy risks, and potential future events that could impact the business.
(Any 5 points for 5 marks)
- Tags: Acquisition, Due diligence, Financial review
- Level: Level 3
- Topic: Audit-related services
- Series: NOV 2018
- Uploader: Dotse