Due Diligence Auditing

About programme:

Due diligence is about independently verifying a supplier’s ability to deliver fully against a contract or a tender bid. It’s a matter of prudence and good business practice. Due diligence audit forms part of the evaluation process that precedes contract negotiation, when both parties have an opportunity to test their expectations and understanding of the contract. Our role during the due diligence audit is to check all the contract assumptions and clarify all the roles and obligations. If serious, irresolvable issues arise during the due diligence, the client might consider finding another supplier.

Due diligence means checking that the tenderer:

  • is who they claim to be
  • is financially sound
  • has the capacity, capability and expertise to deliver
  • has the systems and processes to deliver
  • has a strong understanding of the contract deliverables and requirements and its obligations under the contract.

The audit is to test is the tenderer’s ability to deliver not only now, but throughout the life of the contract.

Methodology and approach:

The Business Associate has found that it’s best to verify information from more than one source – through the receipt of the suppliers’ tender document, our own research, by asking the supplier for documentation and by seeking confirmation from referees or third parties. The referees must be the supplier’s current or recent customers. Other third parties could be the supplier’s accountant or bank manager.

Due diligence can take many different forms, with the main types in procurement activities being:

  • Referee checks                                            
  • Companies Office checks
  • Audited accounts’ checks                             
  • Credit checks
  • Insurance certificate checks                         
  • Compliance certificate checks
  • Site visits                                                    
  • Product testing
  • Security checks.                                          
  • Asset Register checks
  • Clarifications of methodology and approach to delivery

Not all procurement activities require detailed due diligence. It depends on their value, the nature of the goods or services and the risk of poor performance for the City.

Verification Process:

In completing our work we shall rely on the integrity of the information and data supplied to us. We have not independently verified the information or documentation provided to us unless expressly stated in our final report. Accordingly, we do not express an audit opinion on the information included in the report.

Our testing shall be focused and directed to make an opinion whether the tenderer has the ability to deliver fully against a contract if award is made. The decision to award rests with the Client. Our work is to assist the Client in their evaluation process. In order to check for compliance the compliance and substantive tests in the pre-determined areas shall include the following:

1. Legal Status

The due diligence is to confirm the validity of the tenderer’s legal status, i.e. the tenderer is who they claim to be. The audit shall include a review of company registration documents, tax clearance certificates, registration to applicable industry / legislative bodies and validity of documents supporting the legal status of the tenderer.

2. BBBEE compliance

The due diligence is to confirm the tenderer’s BBBEE compliance in terms of legitimacy, i.e. the tenderer is who they claim to be. Such audit shall include a review of BBBEE certificate, BBBEE Level, the legitimacy and validity of the certificate.

3. Financial ability / Creditworthiness

The due diligence is to confirm that the tenderer is financially sound. The audit shall include evaluating the financial status / systems of the tenderer to ensure the that solvency levels, the ability to obtain credit, accounting practices do / shall support the tenderer’s ability to deliver / render the required services / works / goods. The audit shall not only be limited to the tenderer’s three years’ audited financial statements.

4. Ability to deliver/perform in terms of the scope of work

The due diligence is to confirm that the tenderer has a good understanding of the contract deliverables and requirements and its obligations under the contract. The audit in this area shall be based on a subjective assessment, i.e. an assessment of the ability where there is no pre-established measure or standard and is thus based solely on the opinion of the evaluator. The subjective assessment shall include the evaluation of all information submitted and checking for physical evidence relating to the tenderer’s ability / potential to perform the services/deliver the goods, taking into account the scope of the work based on a review of the quality management, production/service processes, its maintenance programme, adherence to safety and regulatory requirements, evidence of delivery (production / service), logistics management (inbound & outbound) and information management.

Time Frames:

The time frame to conclude the due diligence audit is within 5 days from receipt of the instruction / collection of the tender document(s). The service provider shall submit a report to the Client within 5 days after having received the instruction to evaluate a tenderer for due diligence. The report must clearly state the findings regarding all five above-mentioned areas or individual areas only if so requested.

Risk Management:

Due diligence involves an independent review and site visits. We are aware of the associated risks like collusion between the tenderer and our auditor that can influence the independent review or opinion associated to our work. In order to mitigate this risk and to ensure assurance to the Client our process shall be done by a auditor, supervised by a project supervisor/manager and review and sign off by a committee, comprising of the auditor, project supervisor and two independent partners not associated with the due diligence review. Our final report shall also reflect this.

In order to mitigate the risks associated with our site visits we shall ensure that the following process is followed consistently:

  • Applying the same process to all site visits i.e. allocating the same time to each visit, inspecting the same products or services and asking the same questions
  • Maintaining a record of each visit – who attended, who we spoke to and the answers we received
  • Making a formal note of our findings for each visit. These are part of the evaluation and will be recorded
  • Not letting the visit give the supplier the opportunity to enhance or add to its original tender.

Deliverables and Report:

The Due Diligence Audit shall be delivered within 5 days after receipt of the tender document(s) and shall include the following:

  • A Due Diligence Report
  • Original Tender Document (return thereof)

 

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