Accounting Due Diligence Checklist

One of the most intimidating aspects of accounting due diligence is knowing where to begin. Fortunately, we've put together a checklist that works for virtually every company's cash flow system.

Accounting Due Diligence Checklist

Whether an organization is for profit or nonprofit; employs 1 person or 100,000 people; is headquartered down the street or on the other side of the world, they all probably heavily depend on the same element: cash flow. Cash flow is a major signifier of the health of a business or organization. Because of this, performing proper accounting due diligence is a crucial preemptive measure to closing any investment deal, merger, or acquisition.

One of the most intimidating aspects of accounting due diligence is knowing where to begin. Fortunately, DealRoom’s team of seasoned professionals crafted an Accounting Due Diligence Checklist that is applicable to virtually any company’s cash flow system.

  • Tailored for auditing a target’s cash flows and accounting practices
  • Requests are prioritized to focus on areas of due diligence to uncover potential financial issues and malpractices
  • Checklists are customizable to meet the specific circumstances of your deal
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Accounting Due Diligence Checklist

Whether an organization is for profit or nonprofit; employs 1 person or 100,000 people; is headquartered down the street or on the other side of the world, they all probably heavily depend on the same element: cash flow. Cash flow is a major signifier of the health of a business or organization. Because of this, performing proper accounting due diligence is a crucial preemptive measure to closing any investment deal, merger, or acquisition.

One of the most intimidating aspects of accounting due diligence is knowing where to begin. Fortunately, DealRoom’s team of seasoned professionals crafted an Accounting Due Diligence Checklist that is applicable to virtually any company’s cash flow system.

  • Tailored for auditing a target’s cash flows and accounting practices
  • Requests are prioritized to focus on areas of due diligence to uncover potential financial issues and malpractices
  • Checklists are customizable to meet the specific circumstances of your deal

Accounting Due Diligence Checklist

One of the most intimidating aspects of accounting due diligence is knowing where to begin. Fortunately, we've put together a checklist that works for virtually every company's cash flow system.

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Accounting Due Diligence Checklist

Whether an organization is for profit or nonprofit; employs 1 person or 100,000 people; is headquartered down the street or on the other side of the world, they all probably heavily depend on the same element: cash flow. Cash flow is a major signifier of the health of a business or organization. Because of this, performing proper accounting due diligence is a crucial preemptive measure to closing any investment deal, merger, or acquisition.

One of the most intimidating aspects of accounting due diligence is knowing where to begin. Fortunately, DealRoom’s team of seasoned professionals crafted an Accounting Due Diligence Checklist that is applicable to virtually any company’s cash flow system.

  • Tailored for auditing a target’s cash flows and accounting practices
  • Requests are prioritized to focus on areas of due diligence to uncover potential financial issues and malpractices
  • Checklists are customizable to meet the specific circumstances of your deal

What Tasks does the 

Accounting Due Diligence Checklist

 Include

General Information

If you are planning on investing in a company, it is crucial to have a comprehensive knowledge of their leadership, business practices, and employees. The General Information tab of our Accounting Due Diligence Checklist will give you a holistic overview of the company and their accounting practices. Information required include general company data, tax documents, accounting procedures, and bank references.

ITEMS IN GENERAL ACCOUNTING DUE DILIGENCE INCLUDE:

  • Corporate name
  • Address
  • Accountant's name
  • Attorney's name
  • Fiscal year
  • Capitalization
  • Bank references
  • Location of company records
  • Employee contacts
  • Tax audit records
  • Tax audit actions against company and terms

Sales and Earnings

Sales are the bread and butter of earning an income and sustaining a business. Investigating the sales facet of a business gives you an authentic look at the growth and sustainability of an organization.  Information required include market and sales data, earnings records, and calculations such as ROI.

ITEMS IN SALES AND EARNINGS DUE DILIGENCE INCLUDE:

  • Description of market
  • Gross and net sales for past year and past five years
  • Sales backlog and accounts receivable activity
  • Advertising and sales promotion cost
  • Earnings record and budget for past five years
  • Earning comparison with industry for past five years
  • Dividend and earnings record for past five years
  • Analysis of selling and general administration expenses
  • Sales comparison to industry
  • Sales compensation plan
  • Comparison of sales team to total revenue
  • Earning margin
  • Return on investment
  • Return on equity

Plant and Real Estate

Prior to undertaking a new investment, you want to ensure that the organization’s physical facilities are healthy and operating. This can help you predict costs and gauge resale value of property and equipment. Information required include leases, insurance coverages, appraisals, and costs of equipment and maintenance.

ITEMS IN PLANT AND REAL ESTATE DUE DILIGENCE INCLUDE:

  • Location
  • Real estate holdings
  • Real estate valuations and appraisals
  • Tax assessor real estate valuation
  • Acreage
  • Cost at purchase
  • Real estate fair market value
  • Building age and condition
  • Building depreciation methods rates and policies
  • Fire insurance
  • Title insurance to realty and policy
  • Equipment description
  • Equipment cost age condition efficiency and insurance coverage
  • Equipment reserves deprecation methods age rates and policies
  • Projected plant and equipment for next five years
  • Capital expenditure and repairs expense for past five years
  • Maintenance cost for all real estate
  • Sub leasing agreements with other contractors or tenants
  • Major maintenance issues in past five years
  • Major plant and equipment purchases in past five years

Assets

Since assets facilitate running a business, it is essential to examine a target company’s during due diligence. Information required here include copyrights, patents, trademarks, specs on accounts such as inventory, work in progress, and raw materials, as well as calculations and valuations such as current ratio, fixed asset ratio, and asset turnover.

ITEMS IN ASSETS DUE DILIGENCE INCLUDE:

  • Ratio of cash to current liabilities
  • Age and number of accounts receivable
  • Provision for bad debts
  • Complete inventory
  • Inventory location
  • Inventory of finished goods by product
  • Work in progress by product
  • Raw materials by product
  • Pricing methods
  • Accounting methods and procedures
  • Analysis of notes receivable
  • Analysis of investments
  • Patents trademarks and copyrights
  • Current ratioInventory turnover ratio
  • Asset turnover ratio

Liabilities

Liabilities cover all of the legal responsibilities, obligations, and debts of an organization. By examining an organization’s liabilities, you can have a better understanding of what debts you will inherit and if you will be able to sustain them. Information required here include loan documents, warranties, dividend agreements, and calculations and valuations such as debt equity ratio, interest coverage ratio, and fixed interest cover.

ITEMS IN LIABILITIES DUE DILIGENCE INCLUDE:

  • Current state and federal tax status and payments
  • State and federal tax status and payments for past five years
  • Commitments for new building equipment and inventory
  • Long term loans outstanding
  • Long term loan terms
  • Short term loans outstanding
  • Short term loan terms
  • Debentures outstanding and terms
  • Pensions
  • Dividend and interest arrearages
  • Contingent liabilities
  • Warranties
  • Patent infringements
  • Compensation for services
  • Written off losses for past five years
  • Debt equity ratio
  • Interest coverage ratio
  • Fixed interest cover

Financial Data

Financial data contain all of the vital information to appraise an organization’s financial health. This can backup or refute a target company’s claims and provide feedback for what areas need improvement. Information required here include financial statements, audit reports, reports to SEC, historical ratios and valuations, and calculations such as price to earnings, sales to accounts receivable, earnings to book value, and financial leverage.

ITEMS IN FINANCIAL DATA DUE DILIGENCE INCLUDE:

  • Annual statements for past five years
  • Audit reports for past five years
  • Tax returns for past five years
  • Disposition of funds for past five years
  • Reports to SEC
  • Chart of accounts
  • Book, net, quick, liquidating and market value for past five years
  • Working capital for past five years and normal trade practices for industry
  • Inventory turnover for past five years
  • Interest charges for past five years
  • Exchange on which stock is traded and price chart for past five years
  • Price to earning ratio
  • Sales to accounts receivable ratio
  • Sales to inventory ratio
  • Sales to fixed asset ratio
  • Earnings to book value ratio
  • Debt service coverage ratio
  • Fixed interest coverage ratio
  • Debt to equity ratio
  • Operating leverage ratio
  • Financial leverage ratio

Terms and Projected Financials

Terms and projected financials concerns everything for the sale of the target company. This includes the target company’s price and other associated fees as well as future projections.

ITEMS IN TERMS AND PROJECTED FINANCIALS DUE DILIGENCE INCLUDE:

  • Reason for sale
  • Price to be paid
  • Terms of payment
  • Financing Brokerage fees
  • Tax considerations
  • Current or past company sales agreements
  • Pro forma balance sheet
  • Projected earnings forecast
  • Projected Income statements
  • Projected income statements dated for the past five years
  • Projected cash flow statements
  • Projected cash flow statements dated for the past five years
  • Capital turnover ratio
  • Receivable turnover ratio

FAQ

What Is Due Diligence?

Due diligence is a critical aspect of any deal that begins very early in the process and can continue right up until closing. During due diligence, the potential buyer asks questions and requests documentation from the seller that helps the buyer understand the target company and its business. These requests are usually general to start and become more specific as the buyer develops a greater understanding of the target. Buyers use the information provided by the seller to evaluate the opportunities and risks associated with the potential transaction. It is important for sellers to stay organized throughout the process. Buyers often submit thorough, detailed request lists that require input from numerous members of the seller’s deal team.

What is a due diligence checklist?

As the name implies, a due diligence request list is a list of questions and requests for information and documentation that a buyer submits to a seller in order to learn about the target company, its business and its operations. The initial diligence request list tends to be broad and typically includes an extensive list of questions covering a wide range of subjects. This allows the buyer to gain a broad understanding of the target company and identify key issues that can be investigated and considered more closely. Because every deal is different, due diligence request lists have to be tailored to meet the needs of the buyer and address the unique circumstances of your transaction.
However, there is a variety of fundamental requests that are relevant in most deals. These are the types of requests that our templates are designed to address.

What Questions Does the Master Due Diligence Questionnaire Include?

As the name implies, a due diligence request list is a list of questions and requests for information and documentation that a buyer submits to a seller in order to learn about the target company, its business and its operations. The initial diligence request list tends to be broad and typically includes an extensive list of questions covering a wide range of subjects. This allows the buyer to gain a broad understanding of the target company and identify key issues that can be investigated and considered more closely. Because every deal is different, due diligence request lists have to be tailored to meet the needs of the buyer and address the unique circumstances of your transaction.
However, there is a variety of fundamental requests that are relevant in most deals. These are the types of requests that our templates are designed to address.

Key considerations when using our m&a due diligence template

Our templates are drafted to provide an inclusive and wide-ranging list of initial due diligence requests. However, the templates, as well as the information contained therein, are not legal advice. They are not complete, and they are not specific to your transaction. The templates are designed to elicit general information from the seller that will provide the buyer with a broad overview of the target and it’s business and operations. You should review any template before using it, and it may need to be modified to ensure that it is suitable and relevant to your circumstances. Information provided by the seller will likely trigger additional questions that focus on specific aspects of the target’s business and issues identified during the due diligence process.

Are the requests in the template comprehensive?

No. Our Due Diligence Checklist is drafted to include typical requests that are relevant in most transactions. However, every deal and every target company is unique. Before utilizing any template, it is important that you review it with the help of your legal and other professional advisors to ensure that the requests are complete and tailored to the specific circumstances of your deal.

How to use the template with Dealroom

  • Start 14-day Free Trial of DealRoom and sign-up
  • Select a Master Due Diligence Template while creating a new room
  • Start assigning, adding to, and completing due diligence requests with needed documents by uploading them into the built-in virtual data room. The Requests tab is automatically populated with the requests from the due diligence template.

Can I change requests in this checklist or add new?

Every M&A process is different. Downloaders are urged to make these checklists their own by changing the providing information to better fit their needs.

Does this questionnaire provide all the necessary integration information?

This checklist was created by and for M&A professionals. It includes a comprehensive starting point for the integration process. However, every deal is different and may require additional requirements and tasks.

How to use this template with DealRoom?

  • Start 14-day Free Trial of DealRoom and sign-up
  • Select an Integration Template while creating a new workspace
  • Start planning, assigning, adding to, and completing integration tasks. The Requests tab is automatically populated with the tasks from the integration template.

Key considerations when using our m&a due diligence template

Our templates are drafted to provide an inclusive and wide-ranging list of initial due diligence requests. However, the templates, as well as the information contained therein, are not legal advice. They are not complete, and they are not specific to your transaction. The templates are designed to elicit general information from the seller that will provide the buyer with a broad overview of the target and it’s business and operations. You should review any template before using it, and it may need to be modified to ensure that it is suitable and relevant to your circumstances. Information provided by the seller will likely trigger additional questions that focus on specific aspects of the target’s business and issues identified during the due diligence process.

Are the requests in the template comprehensive?

No. Our Due Diligence Checklist is drafted to include typical requests that are relevant in most transactions. However, every deal and every target company is unique. Before utilizing any template, it is important that you review it with the help of your legal and other professional advisors to ensure that the requests are complete and tailored to the specific circumstances of your deal.

How to use the template with Dealroom

  • Start 14-day Free Trial of DealRoom and sign-up
  • Select a Master Due Diligence Template while creating a new room
  • Start assigning, adding to, and completing due diligence requests with needed documents by uploading them into the built-in virtual data room. The Requests tab is automatically populated with the requests from the due diligence template.

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