CA. Rajul is designated as the Credit Manager at a branch of APP Bank Limited. PQR Ltd has approached the branch with a request to sanction credit…

CA Final · Advanced Auditing, Assurance and Professional Ethics · RTP · November 2024
CA. Rajul is designated as the Credit Manager at a branch of APP Bank Limited. PQR Ltd has approached the branch with a request to sanction credit facilities worth 12 crore for meeting its regular business needs. This is a potential new client for the bank. She has reviewed the company's past history, the background of its promoters and directors, the shareholding pattern, and the nature of its business. She also conducted an assessment of the financial results of past years and future projections. Additionally, she carried out a SWOT analysis of the company. She also evaluates the net worth of the directors, checks the CIBIL score, and verifies whether the names of the promoters or directors appear on the RBI defaulters' list. Furthermore, she makes discreet inquiries with a few clients of the branch who are engaged in a similar line of activity regarding the creditworthiness of the company, its promoters, and directors. Based on the above: (a) Identify the procedures followed by CA Rajul and discuss its nature. (b) Would your answer be different if this activity was to be performed by a person not qualified as a Chartered Accountant? Can a non-CA perform such activity? State reason. (c) Name any three other areas where the identified activity can be undertaken.

Suggested Answer and Working Notes:

(a) The activity described in the situation is Due diligence. Due diligence is a measure of prudence activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstance, not measured by any absolute standard but depending upon the relative facts of the case. It involves a careful study of financial and non-financial possibilities. It implies a general duty to take care in any transaction. 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 timely, sufficient and accurate disclosure of all material statements/information or documents, which may influence the outcome of the transaction. Due diligence involves a careful study of the financial as well as non-financial possibilities for successful implementation of restructuring plans. Due diligence involves an analysis carried out before acquiring a controlling interest in a company to determine that the conditions of the business conform with what has been presented about the target business. Also, due diligence can apply to recommendation for an investment or advancing a loan/credit. (b) There would be no difference in answer if above activity was to be performed by a person who is not a Chartered Accountant. The activity would remain due diligence. Due diligence can be performed by any person. It is not necessary that due diligence can only be carried out by a Chartered Accountant. As due diligence involves exercise of prudence and general duty to take care in any transaction, it can be undertaken by any person. (c) The areas where due diligence may be undertaken are: - (i) Corporate restructuring (ii) Venture capital financing (iii) Public offerings

Topics: Due Diligence, Investigation & Forensic Audit

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