Financial Due Diligence Interview Questions & Answers

Introduction

Financial Due Diligence is one of the most sought-after career paths for CAs and finance professionals moving beyond traditional audit and accounting roles. Whether you are preparing for an FDD interview or planning a transition into transaction advisory, understanding how financial concepts are evaluated from a deal perspective is critical.

Unlike textbook definitions, FDD focuses on economic reality, sustainability, cash flows, working capital behavior, and hidden risks that impact valuation and deal negotiations. This blog compiles key Financial Due Diligence interview questions with practical explanations used by professionals at Big 4 and transaction advisory firms. 

It is designed to help students and working professionals think like investors, identify red flags, and confidently answer FDD-related questions during interviews and live case discussions.

FDD Direct and Mind Evaluation Questions 

1) What is Working Capital?
In FDD, working capital shows the cash tied up in daily operations and helps determine the Normalized Working Capital (NWC) required to run the business. It is Current Assets – Current Liabilities, but adjusted for non-operational items. FDD focuses on seasonality, trends, aging of receivables, obsolete inventory, and stretched payables to understand true liquidity. The buyer uses WC analysis to negotiate WC peg/target, ensuring the seller hands over the business with sufficient WC on Day 1. Identifying WC pressure, leakage, or manipulation is crucial in due diligence.

2) Is Negative Working Capital Good?
In FDD, negative working capital is not automatically bad. It depends on the business model. For retail, FMCG, or marketplaces, negative WC means customers pay early while suppliers are paid late—this is value-accretive and reduces cash requirement. For manufacturing or project-based companies, it signals stress, delayed collections, and high reliance on vendor credit. FDD assesses whether negative WC is:
• Structural (business model advantage)
• Temporary (seasonality)
• Aggressive (unsustainable vendor pushing or channel stuffing)
This analysis influences deal pricing and WC adjustments.

3) How Can You Change Negative Working Capital?
FDD identifies improvement levers to move WC towards sustainable levels. This includes:
• Tightening credit policies to reduce receivable days
• Improving collection processes
• Reducing slow-moving inventory
• Negotiating longer payment terms
• Converting short-term debt to long-term
• Removing non-operating items from WC
FDD provides a “WC Bridge” showing what changes are structural vs temporary. Improving WC reduces cash gaps, enhances valuation, and avoids post-acquisition working capital disputes. 

4) What Is Net Worth & How Is It Calculated?
Net worth (equity) is Assets – Liabilities and represents shareholders’ claim in the business. In FDD, net worth is reviewed to verify solvency, identify erosion, understand capital structure, and ensure regulatory compliance. FDD adjusts net worth for unusual reserves, related-party balances, unrealized gains, and incorrect accounting treatments. A buyer checks whether the company’s equity is inflated or suppressed, whether losses have eroded capital, and if any contingent liabilities exist that may reduce true net worth. 

5) What Are Financial Ratios & Their Classification?
Financial ratios help FDD teams analyse performance, liquidity, leverage, profitability, and operational efficiency. Ratios reveal sustainability and detect manipulation, trends, red flags, and quality of earnings. FDD classifies ratios into:
• Profitability – evaluate core earnings quality
• Liquidity – check short-term solvency and WC stress
• Leverage – assess financial risk and debt pressure
• Efficiency/Activity – analyze asset use and WC cycle
• Valuation/Market – for listed companies
These ratios test whether reported numbers reflect true performance.  

6) Types of Ratios & Formula
In FDD, ratios highlight operational red flags:
Profitability:
• Gross Margin = Gross Profit / Revenue
• EBITDA Margin = EBITDA / Revenue
Liquidity:
• Current Ratio = CA/CL
• Quick Ratio = (CA – Inv)/CL
Leverage:
• Debt/Equity = Total Debt/Equity
• Interest Cover = EBIT/Interest
Efficiency:
• Receivable Days = (AR/Revenue) × 365
• Inventory Days = (Inv/COGS) × 365
• Payable Days = (AP/COGS) × 365
These support WC normalization and QoE adjustments. 

7) FDD Definition
Financial Due Diligence is a detailed investigation into a company’s true earnings, cash flow, working capital needs, net debt, and risks before an acquisition. FDD identifies quality of earnings, one-offs, accounting issues, cash leakages, related-party transactions, contingent liabilities, and sustainability of margins. It ensures the buyer pays the right price and reduces post-deal surprises. FDD goes beyond audit numbers to reveal economic reality and validate valuation drivers. 

For anyone serious about building a long-term career in transactions, structured exposure to real FDD working capital bridges, QoE adjustments, and deal-side thinking—like what is covered in the Master Blaster of Financial Due Diligence—helps convert theory into decision-ready analysis.

8) What Is Withholding Tax?
Withholding tax is tax deducted on payments (interest, royalty, services) especially in cross-border transactions. In FDD, withholding tax matters because incorrect compliance creates tax exposure, penalties, and contingent liabilities. FDD checks whether the company has deducted and deposited WHT correctly, applied DTAA rates, and maintained documentation. Any lapses identified become part of tax red flags, impacting the deal or requiring indemnities. 

9) Why Is Net Worth Calculated?
FDD evaluates net worth to check the company’s financial stability, compliance with capital requirements, ability to absorb losses, and protection of creditors/buyers. It helps identify capital erosion, accumulated losses, fraudulent capital infusion, or overstated assets. Net worth analysis also assists buyers in determining whether additional equity infusion is needed post-acquisition. It is also used to assess purchase consideration structure, solvency, and debt repayment capacity.

10) What Is Deferred Revenue?
Deferred revenue is advance money received for services yet to be delivered. In FDD, deferred revenue is important because it directly affects revenue quality, sustainability, and cash-adjusted earnings. High deferred revenue means strong cash inflow but obligations to deliver in the future. FDD evaluates whether revenue recognition is compliant, whether any aggressive recognition is done, and how much cash is backed by genuine future obligations. 

11) How Is Deferred Revenue Calculated?
Deferred revenue equals advances received for future services. Example: A SaaS company collects ₹12,00,000 for a 12-month subscription. Monthly revenue = ₹1,00,000. At the start:
Deferred revenue = ₹12,00,000 (liability).
After 3 months:
Recognised revenue = ₹3,00,000
Deferred revenue = ₹9,00,000
FDD checks aging, matching of cash vs obligation, and whether recognition aligns with performance.

12) Does Deferred Revenue Appear in Financial Statements?
Yes. Deferred revenue appears in the Balance Sheet as a liability. In FDD, this is a critical area because:
• It impacts EBITDA (through revenue timing).
• It affects Net Debt (cash received may belong to future periods).
• It impacts valuation (QoE adjustments).
FDD ensures classification between current and non-current is correct. 

13) Steps of Revenue Recognition
FDD verifies whether the company follows the 5-step model:
1. Contract identification
2. Identifying performance obligations
3. Setting transaction price
4. Allocating price to obligations
5. Recognising revenue as obligations are fulfilled
FDD checks for early recognition, channel stuffing, round-tripping, and compliance with Ind AS 115/IFRS 15. 

14) What Is ROE?
ROE = Net Profit / Equity.
In FDD, ROE helps assess whether returns are driven by genuine operating performance or leverage. A high ROE may indicate strong margins or excessive debt. FDD analyses ROE using DuPont to break down profit margin, asset turnover, and leverage effect, ensuring the ROE is sustainable and not inflated by accounting adjustments.

Advanced FDD Case Study based

Many of the red flags discussed in FDD—like WC manipulation, aggressive revenue recognition, or related-party transactions—overlap closely with forensic thinking, which is why professionals often deepen these skills further through focused learning paths such as the Master Blaster of Forensic Accounting and Investigation.

1. Working Capital Deep-Dive
A target’s receivable days increased from 45 to 78 days in the last 12 months, while revenue grew only 5%. Management says it’s due to “market slowdown.” As the FDD reviewer, what would you investigate? 

✅ 1. Rising Receivable Days Investigate ageing, customer credit terms, disputes, revenue cut-off, slow-paying customers, channel stuffing, and whether revenue growth is real. Compare collections to invoices, analyse top-debtor concentration, and reconcile AR ageing with GL. Check if receivables are inflated to boost sales or EBITDA.

2. Negative Working Capital Stress
A manufacturing company shows negative working capital for 3 years, yet claims strong liquidity. Their payables have increased 60% YoY. What risk areas will you evaluate?

✅ 2. Negative WC in Manufacturing Evaluate payables ageing, overdue vendors, short-term borrowing dependence, production delays, inventory build-up, customer payment delays, and liquidity stress. Analyse whether WC structure is sustainable or driven by cash crunch. Validate whether suppliers have reduced credit period due to past defaults.

3. WC Manipulation Near Deal Closing
The seller collected ₹40 crore from customers in the last 10 days but delayed vendor payments. How will you test whether WC is being artificially inflated before signing? 

✅ 3. WC Manipulation Before Closing Perform cut-off testing, review cash collections vs invoices, check sudden vendor payment delays, compare historical collection/payout patterns, and analyse month-end vs mid-month balances. Validate whether the spike is artificial by testing subsequent receipts and payments after deal date.

4. Inventory Build-Up
The company has inventory days rising from 60 to 115, but management says it’s “strategic.” What analysis would you perform to validate this?

✅ 4. Inventory “Strategic Build-up” Claim Analyse SKU ageing, slow/non-moving stock, forecast accuracy, production planning, and gross margin impact. Compare inventory growth vs sales. Validate claims by reviewing purchase orders, sales pipeline, and historical seasonality. Identify if the build-up hides lower demand.

5. Inventory Obsolescence
A distributor has 25% of inventory not moving for 9 months. They still carry it at full value. How will you challenge this? 

✅ 5. Obsolete Inventory Review ageing, write-off policy, physical count, NRV comparison, and sales of old stock. Check if inventory is overstated. Validate whether provisions are adequate. Assess impact on gross margins and WC normalization.

6. Deferred Revenue Accuracy
A SaaS firm has deferred revenue of ₹18 crore, but cash collected is only ₹14 crore. What reconciliations must you perform? 

✅ 6. Deferred Revenue Mismatch Reconcile deferred revenue ledger with customer contracts, cash collected, invoicing schedule, and revenue recognition. Identify discounts, cancellations, credit notes, and free periods. Ensure recognition aligns with performance obligations.

7. Aggressive Revenue Recognition
Management booked ₹12 crore “project revenue” even though only 20% work was completed. They justify it as “percentage-of-completion.” What tests will FDD perform? 

✅ 7. Aggressive Revenue Recognition Check fulfilment percentage, project documents, milestones, cost incurred vs total cost, and customer approvals. Test cut-off, validate if work performed matches revenue booked. Identify inflated WIP or premature recognition.

8. EBITDA Spike Analysis
A company’s EBITDA increased 70% YoY, but cash flow from operations shows no improvement. What areas indicate potential manipulation? 

✅ 8. EBITDA Spike Without Cash Review revenue quality, receivables growth, unbilled revenue, capitalization of expenses, one-off income, cost deferrals, and related-party adjustments. Match cash flow from operations with EBITDA to identify manipulation.

9. One-Off Adjustments
Validation Management removed ₹8 crore litigation expense as a one-off, but similar expenses appear in the last 3 years. How will you challenge this “non-recurring” classification?

✅ 9. Repeated One-Off Expenses Analyse historical patterns, recurring nature, frequency of similar expenses, vendor details, and management explanations. If recurring, reclassify as normal operating cost and adjust EBITDA accordingly. 

10. Related-Party Transactions
A supplier offering unusually low prices is found to be owned by the founder’s relative. What steps should FDD take? 

✅ 10. Related-Party Supplier Check pricing vs market rate, margin impact, contract terms, dependency risk, transfer pricing, and future sustainability. Identify whether profits are artificially inflated due to favourable related-party terms..

Reference Links
All About Financial Due Diligence (FDD): A Complete Guide

Frequently Asked Questions (FAQs)

1. What skills do recruiters look for when hiring for Financial Due Diligence roles?
Recruiters expect candidates to understand working capital normalization, EBITDA adjustments, revenue recognition risks, and deal-linked thinking rather than textbook definitions. Strong Excel skills, analytical thinking, and the ability to explain financial impact on valuation are critical. Many candidates bridge this gap by studying real FDD-style questions and case discussions similar to those used in the Master Blaster of Financial Due Diligence.

2. Can a CA or audit professional switch into Financial Due Diligence without deal experience?
Yes, many professionals transition from audit or accounting into FDD by first changing how they analyze numbers. Instead of asking “Is this correct?”, they learn to ask “Is this sustainable and deal-ready?”. Understanding interview-level FDD questions, adjustments, and red flags is often the first step—something structured learning paths like the Master Blaster of Financial Due Diligence are designed to support.

3. Is Financial Due Diligence a good career option for CA students or freshers?
Yes. Financial Due Diligence is one of the fastest-growing domains for CA students and freshers who enjoy analysis, deal-making, and understanding how businesses actually work. While college and CA curriculum teach accounting and audit basics, FDD requires a deal-oriented mindset—working capital analysis, earnings quality, and risk identification. Many students start building this perspective early by studying real FDD interview questions and case-based learning, such as the approach followed in the Master Blaster of Financial Due Diligence.