What is the difference between due care and due diligence?
A practitioner(auditor) is required to conduct an assurance engagement with due care which ultimately requires the auditor to act diligently.
Due care simply refers to the degree of care that is expected from a reasonable person under the circumstances. An auditor is neither required nor expected to take special care to conduct an audit engagement. Due care implies the efforts which are ordinarily applied by an ordinary reasonable person i.e. the efforts which are expected from a prudent person in a given situation. An auditor is not expected to act in any way more than a prudent person with the same set of skills and experience.
Due diligence is one of the requirements that arise out of the due care principle. Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis. The requirements of the assignment depend on the nature of the assignment itself and also to some extent on the circumstances. In simple words diligence is adherence to the applicable legal and other requirements.
Due care is much wider in scope than due diligence and due care encompass due diligence in itself as one of the key areas.
EXAMPLE FOR A DUE DILIGENCE CHECKLIST
1. DOCUMENT REVIEW AND LEGAL DUE DILIGENCE
(a) Review of Corporate Records
- Review the following:
- Review the following:
- Certificates of Incorporation;
- Company Registration Affidavits;
- Memoranda of Association;
- Articles of Association
- Copies of Share Certificates;
- Shareholder Lists;
- Share Registers; and
- Minute Books of Directors’ and Shareholders’ Meetings.
- Evaluate capital structure of Company.
- Determine share certificate numbers of shares to be transferred.
- Determine location of share certificates.
- Determine whether there are any liens on the shares to be transferred.
- Review any shareholder agreements, stock restriction agreements, covenants and/or undertakings given by Sellers or the Company with respect to the Company, the shares being transferred, voting rights or the declaration or payment of dividends.
(b) Licenses
- Review Company Operating License and Import Licenses, if any.
- Review correspondence regarding and applications for licenses required under other laws.
(c) Contracts and Agreements
- Review all powers-of-attorney issued by the Company, including those for use with government bodies, such as Customs Department.
- Review all leases, service agreements, licenses, concessions and agreements in which the Company is a party, guarantor, surety or third-party beneficiary.
- Review all confidentiality agreements and non-competition agreements.
- Review all employment, consultancy or other agency agreements between Company and persons rendering services to the Company.
- Review all agreements concerning investment or shareholding in other companies or investments in any partnerships joint ventures, or other enterprises with natural or juristic persons.
- Review all loans, advances and other financial facilities made available by the Company to any of its employees or directors or shareholders.
- Review any other Agreements.
(d) Breaches and Defaults
- Investigate all actual and suspected breaches or defaults by the Company under any contract, agreement or commitment.
- Investigate all actual and suspected breaches by any other party to any contract, agreement or commitment to which the Company is a party.
(e) Transactions with Related Persons
- Review particulars of all transactions, written or verbal, of the Company with companies and persons affiliated with Seller.
- Review rights and benefits available to the Company from companies which will cease as a result of change in shareholding.
- Review all loans, advances and other financial facilities made available by the Company to any of its employees or directors or shareholders, including terms and scope of those facilities, and amounts utilized to date.
(f) Claims and Litigation
- Determine all disputes before a court, tribunal or other judicial or determining body to which the Company is a party, giving full particulars) with respect to which the Company has a contingent liability directly, or by way of surety or otherwise.
- Inquire regarding any threats or demands, made by local villagers and/or other parties against the Company whether or not they may involve the Company in any dispute or liability.
(g) Government Dealings
- Review all correspondence with the Ministry of Industry, Ministry of Energy, Ministry of Commerce, Customs Department, Department of Forestry, Department of Agriculture and any departments or divisions thereof.
(h) Protections of Trade Secrets and Intellectual Property
- Review and evaluate all efforts to protect the Company’s rights and interests with regard to any intellectual property rights owned by or licensed to the Company, whether patents, trade names, trademarks or other proprietary rights.
(i) Compliance with the Law
- Determine whether the Company is in material violation of any law, regulation or existing Government Approval.
- Determine whether the Company has all Government Approvals necessary or proper to conduct their operations as currently conducted and as proposed to be conducted.
- Investigate to make sure all Government Approvals are in full force, and nothing has been done or omitted to be done, whereby any of them may become void or be voided.
- Determine whether any Government Approval will be terminated, revoked, suspended, cancelled or adversely modified, as a result of the execution or performance of the contemplated acquisition of the shares of the Company.
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(j) Correspondence from Legal Counsel.
- Review all correspondence with legal counsel of the Company and all memoranda from legal counsel with respect all of the above mentioned items.
2. REVIEW OF DOCUMENTS PERTAINING TO PROJECT SITE
- Review of all relevant land titles, leases (draft or otherwise) and other information relating to the Company’s use of the lands located at the Project Site including, but not limited to, correspondence with all government authorities and local villagers.
- Review all documents related to the intended Project Site on file with the local land office where the Project Site is located and inspect the Project Site and review all applicable zoning restrictions.
3. FINANCIAL AND TAX REVIEW (limited)
(a) Review of Liabilities
- Determine all loan guarantees, indemnities, undertakings, letters of comfort, letters of awareness or the like which have been issued or given or undertaken to be issued or given (giving particulars of party to whom given, reason why given, amount, period of validity of obligation).
- Provide particulars of any liens, pledges, mortgages with respect to Company assets.
- Provide particulars all liabilities of Company other than those specified above (giving full particulars).
- Determine existence of any facts or circumstances which could give rise to any material liabilities.
(b) Summary of Dividends
- Review summary of dividends paid.
- Review summary of any stock rights dividends or other non-cash dividends.
(c) Financial Statements
- Obtain audited financial statements of the Company since the time of establishment.
(d) Taxes
- Determine whether the Company has filed, within the times and in the manner required by the laws of Thailand, any and all Tax Returns and Tax Reports that are required to be filed by them.
(e) Bankruptcy
- Determine whether there has been any order made, petition filed or resolution passed for the winding up, dissolution or liquidation of the Company.
(f) Bank Accounts/Financial Facilities
- Provide list of banks with which company has accounts, giving name of bank, address, type, account number, balance, authorized signatories and relevant terms of authorization to operate.
- Provide list of natural or juristic persons with whom company has deposits, giving name of holder, address, reference numbers (if any), amount, authorized signatories and relevant terms of handling the deposit and income thereon.
- Obtain copies of current bank statements.
- Obtain particulars of all overdraft, credit, financing, loan facilities available to company indicating person or institution, address, reference numbers, amount, authorized signatories and relevant terms of handling the deposit and income thereon.
- Provide persons performing document review and legal due diligence copies of all of agreements (contracts, letter agreements, etc.) related to the foregoing showing full and complete current particulars.
4. REVIEW OF EMPLOYMENT-RELATED MATTERS
- Obtain list of all employees showing name, address, title, period of employment, salary, bonus record, benefits and entitlements (Company car, travel allowances, entertainment allowances, rent-free accommodation, memberships, charge accounts, fuel allowances etc.).
- Provide same information for all directors, but in addition showing directors fees paid to each director.
- Review all employment, consultancy or other agreements (written or verbal) between company and directors or employees.
- Examine pension plan or similar plan, if any; examine list of persons participating in pension plan, giving particulars of contributions and amounts payable.
- Examine any profit sharing and stock bonus plans and arrangements.
- Provide summary of financial details of the pension plan or profit sharing plan.
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