Author: Joseph Nacmias (CPA)
McGladrey & Pullen, LLP., Certified Public Accountants 
750 3rd Avenue, New York, NY 10017 

Telephone: (212) 297-4888 / Fax:  (212) 972-9088
E-Mail: Joseph_Nacmias@rsmi.com / http://www.mcgladrey.com

4.2 Key points to audit

·          Accounts receivable: some verifications of the validity of invoices should be done along with a review of the aging and of subsequent collections. Dependencies on large customers should be ascertained and evaluated.

·          Inventories: physical existence of inventories should be validated on a test basis along with review of costs and obsolescence. In manufacturing situations, cost systems and work-in-process valuation should be reviewed.

·          Fixed assets: the existence of important fixed assets in use should be validated by observations or site visits. Assessment of their technological utility may require engineering or technical evaluations, particularly in manufacturing situations. In some cases (particularly real estate) appraisals by experts may be required.

·          Intangible assets: patents, trademarks, license rights, etc. can usually be verified by reference to documents or public records. Their utility to a business and their useful lives need to be assessed.

·          Accounts payable: tests of the validity of invoices should be done, particularly in manufacturing situations. Dependencies on large vendors should be ascertained and evaluated.

·          Loans payable: underlying documents should be reviewed to ascertain what assets are pledged, restrictions on transferability of assets, prepayment requirements/penalties, etc.

·          Other assets and liabilities should attract little audit attention other than to determine if there are any unusual items or exposures such as litigation.

·          The target’s accounting principles and methods should be evaluated for their quality and applicability to the industry. There will usually be a clause in the purchase agreement that specifies a mechanism for which accounting principles are used (i.e. the target’s or acceptable principles generally) in the valuation of assets and liabilities or in the computation of adjustments; further, there will also be a clause specifying a dispute resolution mechanism (typically the buyer and the seller’s accountant appoint as arbitrator another accountant or a group of 3).