What is difference between due diligence reports and prospective financial statement reports?

leaving this question for the experts....

The due diligence process may cover a wide range of areas, including legal, IT, operational, marketing and financial matters.  Financial due diligence (often referred to as “accounting” due diligence) is focused on providing potential investors with an understanding of a company’s (i) sustainable economic earnings,[3] (ii) historical sales and operating expense trends, (iii) historical working capital needs, (iv) key assumptions used in management’s forecast, and (v) key personnel and accounting information systems.  Although audits may provide a starting point for a potential investor’s evaluation of a company, they generally do not comment on the focus areas noted above.

Financial forecasts and financial projections may be in the form of either complete basic financial statements or financial statements containing the following minimum 12 items:

• Sales or gross revenues

• Gross profit or cost of sales

• Unusual or infrequently occurring items

• Provision for income taxes

• Discontinued operations or extraordinary items

• Income from continuing operations

• Net income

• Basic and fully diluted earnings per share

• Significant changes in financial position

• Management’s (or another responsible party’s) intent as to what the prospective statements present, a statement indicating that management’s (or another responsible party’s) assumptions are predicated on facts and circumstances in existence when the statements were prepared, and a warning that the prospective results may not materialize

• Summary of significant assumptions

• Summary of significant accounting policies

Due Diligence : Wider scope, referred to a situation where a investor investigates all the past, present and expected affairs of the company. Analyses historical data etc. Due diligence is sort of investigation done by the investor himself even when the firm is providing adequate data for reference. 

Prospective financial statement reports state what the analyst has stated regarding the future growth of the firm. it discusses what the accountants suppose the market share of the firm in the upcoming future.

Due Diligence is based upon the current position of the organization and the future business, market, economy and strategy of the acqueirer, whereas prospective financial statements are based upon current position, future expansion plans, market and economic scenario considered by present management

A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for an acquisition.

Financial forecasts are prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows

Prospective financial statement (PFS) and due diligence reports are both assurances done by the professional practitioner.

PFS is based on assumptions made about future events occurring  which are either forecasts or projections, the practitioner in this case does analytical procedures and inquires managements about assumptions made and estimates set , and after understanding the environment of the clients company he will give a limited assurance as his conclusion and will not give an opinion as the practitioner can't give absolute assurance about the future. The practitioner in most cases will follow ISAE "International standards of assurance engagements".

Meanwhile with due diligence engagement there is no specified criteria the practitioner can abide by as each case is specified , but the most practical example would be a company getting into an engagement with an audit firm to consult with an acquisition or merger, as the practitioner would be brought to project what risks may arise .in order to take a decision on a price range to negotiate with ,

Understanding the differences between an audit and financial due diligence

In the context of mergers and acquisitions, potential investors get a level of assurance when the investment target is audited.  However, relying solely on the target’s audited financial statements when making an investment decision could be shortsighted.

[1]  Through testing and analytical procedures, an audit’s purpose is to provide assurance that management has presented a true and fair view of a company’s financial performance and position 

[2] not to identify issues likely to be of interest to a buyer or seller.

The due diligence process may cover a wide range of areas, including legal, IT, operational, marketing and financial matters.  Financial due diligence (often referred to as “accounting” due diligence) is focused on providing potential investors with an understanding of a company’s (i) sustainable economic earnings,

[3] (ii) historical sales and operating expense trends, (iii) historical working capital needs, (iv) key assumptions used in management’s forecast, and (v) key personnel and accounting information systems.  Although audits may provide a starting point for a potential investor’s evaluation of a company, they generally do not comment on the focus areas noted above.As an analogy demonstrating the difference between an audit and financial due diligence, imagine a close friend entrusts you to buy her a used car.

.[4]  Having searched the classifieds, you find what appears to be the perfect car, and the seller provides you with a certificate from a reputable mechanic.  The purpose of the certificate is to provide a certain degree of comfort that the car is roadworthy.

Although the certificate verifying the car’s roadworthiness is nice, you may insist on performing your own due diligence.  Personally inspecting the car, kicking the tires, and taking a test drive might make you more comfortable about your friend’s potential purchase.  In fact, you may even want to hire another mechanic that you know and trust to perform a more thorough inspection.  Your mechanic knows more about your specific concerns and can delve deeper into the car’s history, operational features, and maintenance record to help you decide if it’s a lemon.

The financial due diligence provider is that second mechanic.  Based on the investor’s specific concerns, the financial due diligence provider can alter the scope of the engagement to address specific key risks.  The diligence provider can “kick the tires” and delve deeper into deal breaker issues and other potential areas of concern.

The primary difference is Scope and nature

apologize i'm not expert on this field

Well, I think basically it is the objective. DD is carried out to verify and ensure accurate and enough info is provided to potential stakeholders to assess risk. PFS are, what their name suggest-simply projections.

I hope I am right.

1. Auditor’s Report: This provides the highest degree of assurance one can obtain from an accountant. This report is provided after the accountant has conducted an in depth review of the bookkeeping practices of the business, has physically counted inventory, and has applied numerous check and balance tests to the figures. The report of the accountant will specifically state that the statements are based on a full audit of the business.
2. Review Engagement Report: This report does not arise from an audit but does provide a moderate degree of assurance. It involves a limited review of the business, by doing checks on certain risky areas of the financial statements. This report will generally state that the accountant’s review was conducted in accordance with generally accepted standards for review engagements which include inquiry, analytical procedures and discussion related to the information supplied by the business. It will advise if anything has come to the attention of the accountants which causes them to believe the financial statements were not prepared in accordance with generally accepted accounting principles.
3. Notice to Reader: This is usually provided in the case of small businesses, and no assurances are given respecting the information given in the financial statements. In this circumstance the statements have been assembled and prepared by the accountant based upon information provided by the business, without any independent verification.  If financial statements are provided to you without any type of communication from an accountant, it is very likely they are financial statements generated by management of the business without any input from an accountant. You should be very careful to ensure that any such statements provided to you are professionally reviewed.