Vicky is a financial analyst working for a large corporation that is considering the acquisition of a mid-sized manufacturing company. The initial…

(a) The objective of the Due Diligence exercise will be to look specifically for any hidden liabilities or over-valued assets. Example of Hidden Liabilities: The company may not show any show cause notices which have not matured into demands, as contingent liabilities. These may be material and important.The company may have given “Letters of Comfort” to banks and Financial Institutions. Since these are not "guarantees”, these may not be disclosed in the Balance sheet of the target company.The Company may have sold some subsidiaries/businesses and may have agreed to take over and indemnify all liabilities and contingent liabilities of the same prior to the date of transfer. These may not be reflected in the books of accounts of the company.Product and other liability claims; warranty liabilities; product returns/discounts; liquidated damages for late deliveries etc. and all litigation.Tax liabilities under direct and indirect taxes.Long pending sales tax assessments.Pending final assessments of customs duty where provisional assessment only has been completed.Agreement to buy back shares sold at a stated price.Future lease liabilities.Environmental problems/claims/third party claims.Unfunded gratuity/superannuation/leave salary liabilities; incorrect gratuity valuations.Huge labour claims under negotiation when the labour wage agreement has already expired.Unresolved labour litigations. OR As per SA 810, “Engagements to Report on Summary Financial Statements”, when the auditor's report on the audited financial statements contains an adverse opinion or a disclaimer of opinion, the auditor's report on the summary financial statements shall, additionally: (a) State that the auditor's report on the audited financial statements contains an adverse opinion or disclaimer of opinion; (b) Describe the basis for that adverse opinion or disclaimer of opinion; and (c) State that, as a result of the adverse opinion or disclaimer of opinion, it is inappropriate to express an opinion on the summary financial statements.