FINANCIAL DUE DILIGENCE

CHECKLIST By Bojan Radojicic

GENERAL ANALYTICAL PROCEDURES INTERNAL CONTROLS

All internal accounting acts reviewed (accounting policies etc.) Actual vs comparable period giures differences investigated Review competences, processes, controls in accounting sector

Review of key ratio numbers and changes in ratio numbers Review competences, processes, controls in controlling sector
Audit reports reviewed

Net working capital reviewed Review competences, processes, controls in tax department
Auditor management letter points reviewed
Budget achievements reviewed and differences investigated Review of automatic internal controls
Tax authorities findings reviewed
Review monthly movement in sold quantities, revenues and margins Test how is internal controls is performing
Compare official financials and reports for management
EBITDA adjustments review and check Review of monthly / annual closing procedures
Findings of other external financial or tax consultants reviewed
Quality of earnings report checked
Review business plan and budget
Cash flow statement calculation and verified
Business understanding: review main processes : sales, purchase etc.
Net profit margins and EBITDA margins reviewed

Compare official financials with management reports

PROPERTY PLANT, EQUIPMENT AND IP INVESTMENT IN ASSOCIATES AND SHARES INVENTORIES

Ownership documentation reviewed (eg. Title deeds)
Investment in associates reconciled with associate's equity Inventory structure analyzed (raw materials, WIP, FG)
Useful life for all IP and PPE item groups reviewed
Purchase agreements reviewed Annually / monthly movement in stock reviewed and explained
Variance between tax and accounting depreciation rates explained
Check how well associates is operating, is there impairment needed? Days inventory outstanding (DIO) reviewed and explained
Movement in IP and PPE balances explained
Valuation of shares listed on stocks is properly done Inventory cost and recognition is aligned with GAAP/IAS
PPE and IP registers reconciled with GL accounts
Check capital gains/ losses if any Review the results of annual stock inventory
Check weather GAAP is applied when PPE or IP is acquired (test)
Shortages, write-offs and surpluses verified and explained
Check weather GAAP is applied when PPE or IP is sold (simple test)

Inventory register reconciled with GL accounts

Review useful life for all IP and PPE item groups

Is there PPE or IP impairment indicators? Stock ageing structure analyzed

Check capital gains/ losses if any Cost vs Net realizable value compared

ACCOUNT RECEIVABLES REVENUES LOANS AND INTEREST EXPENSE

Annually / monthly movement in AR balance reviewed and explained Revenues structure analyzed (per product, categories, business units etc.) Creditor list per funding amount and balance prepared and analyzed

Customer list per sales and balances prepared and reviewed Annually / monthly movement in revenues reviewed and explained Loan balances reconciled payment plans - loan schedules

Ageing structure / overdue list of AR prepared and analyzed Main customers' contract reviewed and aligned with associated revenues Loan agreements, mortgages and other debt documents reviewed

Check how much AR balances is reconciled with debtors Gross margin analysis done: movement in GM, GM per products etc.. Interest expenses properly accrued based on payment plans

AR sub-legder reconciled with AR general ledger accounts

Discounts to customers recognized in appropriate reporting period Short term vs. Long term liabilities presented in line with payment plans
Movement of AR impairments and reversals prepared and reviewed
Revenues reconciled with sales reports for management Net Financial Position calculated
Main customers credit rating and liquidity checked
Sales actual vs budget vs. LY analysis performed Debt to equity ratio calculated and analyzed
Collection / credit risks identified and explained
Debt to EBITDA ratio and Income Coverage Ratio checked
Days sales outstanding (DSO) reviewed and explained

Debts covenants evaluated

AP provision analyzed and explained

ACCOUNT PAYABLES COMMITMENTS AND CONTINGENCIES HEADCOUNT AND SALARIES

Annually / monthly movement in AP balance reviewed and explained Litigations and litigations risks reviewed Management labor agreements reviewed

Supplier list per purchase value and balance prepared and reviewed Assumptions of debt litigations reviewed Typical employee labor agreement checked

Ageing structure / overdue list of AP prepared and analyzed Contracts that involve payments exceeding material amounts reviewed Cost of salaries matches with the amounts in agreement

Check how much AP balances is reconciled with debtors Calculation of potential liabilities based on current contracts All bonuses and benefits properly accrued

AP subleader reconciled with AP general ledger accounts Check procedures that company apply when approve material contracts Annually / monthly movements in salaries balance reviewed and explained

Consider reasons if due liabilities is not paid - (impact on NWC) List of guarantees reviewed Average monthly salaries analyzed

Days payables outstanding (DPO) reviewed and explained Check environmental commitments, liabilities, or contingencies.
Ratio salaries in revenues reviewed during periods

Interview key stakeholders to gain insights into contingencies

Short-term and long-term employee benefits check

OPERATING EXPENSES OPEX EQUIRY AND OTHER LIABILITIES INTERCOMPANY

OPEX structure analyzed Understand the position of Company in the Group of related parties
Subscribed equity reconciled with official business register

Recurring operating expenses matches with agreements All related parties identified
Retained earnings / accumulated loss matches with balance sheet data

OPEX variance identified and explained Statement of changes in equity reviewed IC agreements examined

Ratio OPEX in revenues calculated and reviewed during periods Reserves examination if any IC transaction reviewed

Prepaid expenses accrual checked Review of liabilities for taxes, customs and other admin fees Verify if the IC pricing is aligned with market pricing

Check the accruals for undeceived bills and other provisions Professional fees expense examined Analyze financial benefits and risks from IC transactions

Main supplier contracts reviewed, key elements reflected in financials Analyze transfer pricing files

COGS share in revenue: changes considered and explained

Insurance agreement reviewed

CREDITS TO Bojan Radojicic | FOLLOW ON LINKEDIN POWERED BY: WTS TAX AN FINANCE AND