Other Assignments and Ethical Considerations

SECTION B: ADVISORY REPORT It is 10 November 20X6. You are a manager in the advisory department of K&P Associates. Your firm has been the external auditor for AquaStream Utilities Co (AquaStream), a listed public water treatment company, for the past five years. AquaStream is looking to expand its capabilities and is currently in negotiations to acquire 100% of the share capital of DesalInnovate, a private technology startup. DesalInnovate has developed a patented, highly efficient water desalination process. However, the startup has only been trading for two years and is currently loss-making. The Board of Directors of AquaStream has approached K&P Associates to perform a financial due diligence review on DesalInnovate prior to finalizing the acquisition. Specifically, AquaStream wants your team to: 1. Assess the overall financial health and unrecorded liabilities of the target. 2. Review and provide assurance on DesalInnovate's 5-year prospective financial information (PFI), which forecasts a return to profitability by Year 3 based on aggressive licensing of their patent. Requirements: (a) Evaluate the ethical and professional issues K&P Associates should consider before accepting the engagement to perform the financial due diligence and PFI review for AquaStream. (8 marks) (b) Recommend the key areas of focus for the financial due diligence review of DesalInnovate, explaining why each area is critical to AquaStream's acquisition decision. (10 marks) (c) Describe the specific examination procedures you would perform to review DesalInnovate's 5-year prospective financial information (PFI). (7 marks)