Ican 2023 Advanced Audit And Assurance Question 4

Piton Drilling and Engineering Services Limited was established in 2001 by Andrew and Cole. The company provides consultancy, engineering and training services in borehole drilling, power generation, environmental engineering services under drilling, training, and laboratories divisions. The largest division is drilling of which contributes income of more than 60%, while training and laboratory services contribute only over 30% of total income. Piton Drilling & Engineering Services Limited saw opportunity in combining business operation with Valemu Limited, a small engineering company with three members. Valemu Limited has strong presence in the riverine areas and commenced operations about two years ago. The issue of the business combination was brought to the attention of Peter who is the Engagement Partner for the audit of Piton Drilling and Engineering Services Limited. He suggested that Andrew and Cole should perform due diligence on the operations of Valemu Limited, regardless of the fact that they are in similar business operations. He explained that the exercise will be necessary to reduce risk of failure of the merged entity, as both quantitative and qualitative information will be available about the operations of the entity before going on to decide on signing the agreement. It was explained that the due diligence should cover financial viability and long-term sustainability of the merged entity. He made reference to a situation where a large department store was forced to wind down its operations after business combination when it was discovered that the entity merged with was highly indebted to the bank and most of the assets have been pledged as collateral for loans with banks. Some staff of your firm have already been assigned to the audit engagement and you told them that the audit will be delayed because a due diligence is being carried out on the operations of the entity Piton Drilling and Engineering Services Limited wants to merge with. One of the inquisitive staff, who is tired of staying in the office, came up to you with a lot of questions among which is why the audit and the due diligence review could not serve the same purpose.