How due diligence differs from an audit
An audit gives an opinion on whether financial statements are true and fair according to accounting standards. Due diligence asks a more commercial question: is this business what it's being represented as, and what should the party paying for it actually know before they commit. A due diligence review can and does draw on audited financials as a starting point, but it goes further — testing the quality of earnings, checking for undisclosed liabilities, and assessing whether the numbers would look the same to an independent reviewer as they do in the pitch.
The scope is set by what the commissioning party is trying to decide. An investor buying a minority stake may want a lighter financial review; an acquirer buying the whole business typically wants financial, tax and legal diligence together; a bank considering a large facility may want diligence focused specifically on cash flow and existing debt.
What a due diligence review typically covers
- Financial due diligence — quality and consistency of reported earnings, working capital trends, and whether reported numbers reconcile to underlying records.
- Tax due diligence — outstanding tax liabilities, ongoing assessments or disputes, and whether tax positions taken are defensible.
- Statutory compliance review — GST, TDS, ROC filings, and labour-law compliance (PF, ESI) — a business with informal or lapsed compliance carries risk that doesn't show up in the financial statements alone.
- Contingent liabilities and off-balance-sheet exposure — guarantees given, pending litigation, and commitments that may not be fully reflected in the accounts.
- Related-party transactions — arrangements with promoters, group companies or related entities that may need separate scrutiny or adjustment in a valuation.
- Working capital and debt position — the actual net debt and working capital position at the transaction date, which often differs from the last audited balance sheet.
Documents typically required
- Audited financial statements for the past three to five years, and management accounts for the current period.
- Statutory registers, ROC filings, and the company's incorporation and constitutional documents.
- GST, TDS and income tax returns and assessment records for the review period.
- Details of loans, guarantees and contingent liabilities, including any pending litigation.
- Material contracts — with customers, suppliers, lenders and landlords.
- Related-party transaction details and agreements.
- Bank statements and loan account statements for the review period.
- Details of licences, registrations and approvals the business holds or requires.
The due diligence process, step by step
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Scoping with the commissioning party
The review is scoped to the transaction — a full acquisition warrants a different depth of review from a minority investment or a lending decision, and the scope is agreed before work begins.
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Document request and review
A structured request list is issued, and the documents received are reviewed systematically against the agreed scope, with gaps or inconsistencies flagged as they're found.
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Management discussions
Discussions with the target's management or finance team clarify points the documents alone don't fully explain — the reason behind an unusual trend, or the status of a pending matter.
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Testing and verification
Key figures and representations are tested against underlying records — bank statements, tax filings, contracts — rather than accepted at face value from the financial statements alone.
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Draft findings and discussion
Draft findings are shared and discussed with the commissioning party before the final report, so any clarification needed from the target can still be sought before the review closes.
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Final report
A report sets out findings, quantifies identified risks or adjustments where possible, and flags matters that couldn't be fully verified within the scope and timeline agreed.
Practical notes from our engagements
- Compliance gaps that don't show up in the financial statements. A lapsed GST registration variant, unpaid PF contributions, or an ROC filing default doesn't necessarily distort the P&L, but it's exactly the kind of liability a due diligence review is meant to surface before a deal closes rather than after.
- Related-party transactions priced differently from market terms. A transaction with a promoter-owned entity at non-market pricing can materially change the picture of the target's true profitability once adjusted for.
- Working capital measured at the wrong date. The working capital position on the last audited balance sheet date and the position at the actual transaction date can differ significantly, particularly for a seasonal business — using the wrong reference point skews the numbers that feed into a valuation.
- Timelines compressed against the depth of review wanted. A transaction timeline set before the diligence scope is agreed often leaves too little time for the depth of review the commissioning party actually wants — this is worth resolving at the scoping stage, not partway through.
How we handle a due diligence engagement
We scope the review to the specific decision being made — an investment, an acquisition, or a lending decision each warrant a different depth and focus — and agree that scope with the commissioning party before starting. Findings that need discussion with the target's management, or that could materially affect the transaction, are flagged as they surface rather than held for a single final report, so the commissioning party has time to act on them within the transaction timeline.
Related services
Frequently asked questions
Who commissions a due diligence review — the buyer or the seller?
Typically the buyer, investor or lender — the party putting money in commissions the review, to independently verify what they're being told about the business.
How is due diligence different from a statutory audit?
A statutory audit gives an opinion on whether financial statements are true and fair under accounting standards. Due diligence is a broader, transaction-specific review that also looks at tax exposure, compliance gaps, contingent liabilities and the quality of earnings.
How long does a due diligence review take?
It depends on the scope and the size of the business, but it's generally weeks rather than months, driven by the transaction timeline rather than a fixed statutory cycle.
Does due diligence only cover financial matters?
Financial and tax diligence is the core of what a CA firm typically covers; a full transaction often also includes legal diligence, usually carried out by lawyers alongside the financial review.
What happens if diligence finds a significant problem?
It's reported to the commissioning party, who then decides how to proceed — adjusting the valuation, seeking specific warranties or indemnities in the transaction documents, or in some cases reconsidering the transaction itself.
Can a business request its own due diligence review before going to market?
Yes — sometimes called vendor due diligence, this lets a business identify and address issues before a buyer's own review surfaces them, which can smooth the transaction process.