A Typical Model Audit/Review Approach Grenville Croll EuSpRIG -European Spreadsheet Risks Interest...
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Transcript of A Typical Model Audit/Review Approach Grenville Croll EuSpRIG -European Spreadsheet Risks Interest...
A Typical Model Audit/Review Approach
Grenville Croll
EuSpRIG -European Spreadsheet Risks Interest Group, UK
October 2002
High Level Review
High Level Review
Low Level Review
Low Level Review
SensitivitiesSensitivities
Comparisons run between
model versions
Comparisons run between
model versions
Preparation of queries
list - issued to client
Preparation of queries
list - issued to client
Model requires
alteration?
Model requires
alteration?
Queries responded to by
client
Queries responded to by
client
Model amende
d by client
Model amende
d by client
Report issued to
client
Report issued to
clientFamiliarisation
Yes
No
Model Audit/Review Process
SES-Risk
• Software for Estimating Spreadsheet Risk
• Identifies Used Cells, Data cells, Logic Cells– Calculates formulae length– Calculates ratio of Original to Repeated cells– Determines number of cell precedents– Uses clustering to infer spatial layout– Neural Network Engine
• Outputs Risk Score (0.0 - 1.0)– Cell Error Rate– Estimated Review Time– Probability of Bottom-Line Error
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6 Documentation
Step 1: Model Maps
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
1.1 Model Maps
• Why do we use maps?– To ensure each original formula is checked– To help document the review– So that the review can be divided up between different people
• How we run maps– Use commercially available software– Maps all sheets in Workbook
• Map Key– L = Label– N = Number– F = Original Formula– ^, <, + = copied form above, left, above & left– M = Long complex formula
1.2 Spreadsheet Map
1.3 Model Maps - checking formulae
• What we look for when checking formulae– All references to other cells or ranges are correct– All arguments of functions are correct (e.g. IF, INDEX, MATCH, OFFSET,
VLOOKUP, HLOOKUP, SUMIF) – ROUND functions for appropriate accuracy– Review #REF, #ERR etc to establish cause– Check any inconsistent formulae identified from maps– Embedded constants– Reperform array & data table calculations– Consistent units eg currency, weights, measures, dimensions– Calculation produces something sensible– Result has the correct sign (i.e. + or -, CR or DR)
1.4 Model Maps
• How we check the formulae– Tick off each original checked formula (F) on the map– Mark queried formulae with a Q
• Painstaking but essential
• Independent peer review– academically verified method of detecting & correcting errors
Step 2: Code Review
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
2. Code Review
• Ways we review code (VBA & Macros)– Print out and look through– Step through– Run complete procedure– Hit Buttons
• Things we look for– Does the code do what it is intended to do?– Is there anything that would make it break?
• Eg macro contains absolute cell addresses
• How we document code review– Print out and annotate along with queries
Step 3: Range Names
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
3. Range Names
• Why do we need to do a range name review?– Names in formulae– Names in macros– Redundant names
• How do we do it?– Software tools reports all range names– Check that each range is complete and appropriate
Step 4: Queries
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
Queries
• Query document– Each query is numbered uniquely– Records each query & response from the client– Reference Resource
• useful if queries from different reviewers/clients
• Six Different query types– AE, PE, C, N, I, BP
• Before query document gets sent to the client– Reviewed for duplicates– Edited so it is clear and concise
Queries - Basic types of query
• Actual Error– All actual errors, including Excel errors e.g. #N/A or #Div/0!
• Potential Error– If the value of a precedent changed, would the result be wrong?
• Clarification– Request for clarification of a point
• Numbers– Constants in formula: require confirmation and/or explanation
• Information– Items of interest to the modeller, but do not affect output
• Best Practice– Consider time constraints, materiality etc
Responses
• All responses reviewed and documented
• Check that changes have been made in new version
• Mark query as resolved or unresolved
• Carry forward unresolved to next query list
• Check that no queries have been missed
Step 5: High Level Review
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
High Level Review
• Why do we do it?– Check big picture items that may be missed by low level review– Consistency with Documentation– Accounting issues
• What does it include?– Circular references– Interest calculations– Tax calculations– Balance Sheet/P&L/Cashflow integrity– Payment of Dividends
• What can it include?– Input to the commercial nature of the model
High Level Review
• Some High Level Checks– The Balance Sheet balances– Retained Earnings flow from P&L to BS– Capex causes cash outflow– Fixed Assets don’t depreciate below zero– Increase in Credit Sales impacts Trade Debtors– Is effective tax rate reasonable?– Is Interest calculated on prior period ending balance?– Do Revenues & Costs reflect production?– Is debt amortised correctly?– Are foreign currency losses handled appropriately?– Are financial statements in the correct format?
Step 6: Documentation
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
Project Documentation
• What do we do?– Check the project documentation against the model– Review term sheets, agreements, contracts, model specifications– Review work of associated industry experts– Interface with other external teams– Add items to query list as identified
• Our Documentation– Mark maps as for formulae checks– Note from which data source the numbers have been obtained– For each source, note where in the model the data is located
• Changes in project documentation cause re-review
Step 7: Comparisons
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
Step 8: Sensitivities
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
Sensitivities
• A model review cannot deal with every possible input– billions of data permutations & combinations
• Comfort required on certain sensitivities– All compared against Base Case– Delayed start– high/low revenue– high/low cost of finance– high/low capex & opex– otherwise as specified by client
• Each sensitivity methodically reviewed & documented
• Changes in base case model cause re-run of sensitivities
Step 9: Final Review
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
Final Review
• Clear any outstanding queries
• Final high level sense check
• Final documentation & sensitivity check
• Client made clearly aware of any outstanding queries
• Resolved if possible
• Document Resolutions
• Unresolved queries appear in final report
Step 10: Report
Model Review framework
2Code Review
1Model Maps
4Queries
3Range Names
5High LevelReview
10Report
9Final Review
8Sensitivities
7Comparisons
6Documentation
Report
• By standard letter
• Lists exact versions of models & files
• Models identified by filename, date, time & size in bytes
• Reports performance of agreed-upon-procedures
• Reports any unresolved queries
Financial Modelling by Grenville Croll
• Model Review
• Model Build– Financial– Marketing– PFI– Production
• Training– Building Better Business Spreadsheets
• Technologies– MS Excel– Monte Carlo (Crystal Ball/@Risk)
Grenville Croll - contact details
www.grenvillecroll.com