What is the difference between due diligence and an audit?

When a seller says the statements are “audited”, “reviewed” or “compiled”, CPA Québec says the nature and extent of the work the CPA performed affects the level of assurance given to the statements. CPA Québec explains that CPAs provide three levels of service on financial statements: an audit, a review or a compilation. BDC says due diligence gives crucial information on a target’s finances, prospects and legal issues.

What an audit tests

CPA Québec says an audit provides reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error, and that reasonable assurance is not absolute. Its sample report covers the balance sheet as at a date and the statements of income, retained earnings and cash flows for the year then ended, with conclusions based on audit evidence up to the date of the report. CPA Québec describes a review as a limited assurance engagement that consists primarily of inquiry, analytical procedures and discussion, and a compilation as providing no assurance whatsoever.

Who an audit is for

Under s.169(1) of the Canada Business Corporations Act, an auditor of a corporation shall make the examination that is in the auditor’s opinion necessary to report in the prescribed manner on the financial statements required by the Act to be placed before the shareholders, except statements or parts relating to the period referred to in s.155(1)(a)(ii). The shareholders of a corporation that is not a distributing corporation may resolve not to appoint an auditor, but under s.163(3) the resolution is not valid unless all the shareholders consent to it, including shareholders not otherwise entitled to vote, and under s.163(2) it is valid only until the next succeeding annual meeting of shareholders.

What is left for your diligence

CPA Québec’s sample report notes that future events or conditions may cause an entity to cease to continue as a going concern, and that its conclusions are based on audit evidence up to the date of the report. BDC lists questions a buyer can ask: whether any customers make up a large portion of sales, whether customers leave when the vendor does, and who is actually running the business day to day. If the seller gives you an adjusted earnings figure, ask your accountant how it was built. See quality of earnings versus audit and financial due diligence explained.