Potential investors in mergers and acquisitions often feel reassured when their investment target has undergone an audit. However, making an investment decision solely based on an audited financial statement from a prospective firm may not be realistic. Audited financials can overlook critical issues that a buyer or seller might find important. The primary goal of an audit is to ensure that management has provided an accurate and fair representation of a company’s financial performance and condition.

**What is Due Diligence?**

Due diligence is the comprehensive process of verifying all essential facts, financial data, and other relevant information during an M&A transaction or investment process. It involves thoroughly investigating or auditing a potential acquisition or investment opportunity. Due diligence is performed before the closing of a transaction to ensure that the buyer receives what they are paying for.

**What is an Audit?**

An audit typically refers to a financial statement audit, which is an independent examination and evaluation of a company’s financial statements. The purpose is to ensure that the financial records accurately and fairly reflect the company’s activities. Audits can be conducted internally by company employees or externally by independent auditors.

**Advantages of Auditing:**

**Trustworthiness and Credibility**

An effective internal auditing system can help your company produce accurate and reliable financial reports. This provides vital insights into which product lines or market segments are performing best and how to allocate resources efficiently. Additionally, regular auditing can assure your shareholders that your financial statements are accurate and dependable, making your firm a safer investment.

**Preventing Fraud**

If the government reviews your financial statements and finds that your company has been hiding sales and losses or misrepresenting its financial health, you could face substantial fines and legal consequences. Moreover, your company would suffer reputational damage, and stakeholders and customers might lose trust in you.

Regular internal audits by experienced auditors or accountants are crucial for detecting fraud before it escalates. Having a robust auditing system in place acts as a deterrent, discouraging employees and vendors from attempting to defraud your organization in the first place.