SRT510 Business Case Studies

An Audit Plan

Project P Example cont’d

Original NPV Analysis:

Original Forecast:

Project P Example cont’d

Audit for project P—revenue was expected to increase over forecast by 2.5%

Note how in this case as actuals are consistently lower than planned amounts, the difference between the two increases over time.

Audit: Targets not met

Potential CausesFailing economyOverall malaise within the company

Need to look at “significant” ratios/numbers in detail

Project not successful—intended scope/quality/cost not delivered

Forecasted company income incorrect (as per forecast)

Audit: Targets not met cont’d

Potential Causes cont’dEstimated benefits (inflows) incorrect (as per

npv analysis)Estimated Outflows (costs) incorrect (as per

npv analysis)Fraud—is someone tinkering with the

numbers somewhere?

Creating an Audit Plan

If you ignore performance of your investment it will (most likely) get worse with time

You need to:Plan how performance will be measured

It should be an assigned process

Plan responses to performance

Audit Plan

How will performance be measured? If the project promises increased revenues:

Look at revenues first

If the project promises decreased expenses: Look at expenses first, including ratios (e.g.

revenue:net income); choose figures depending on what expenses are to be decreased

…and so on…

Audit Plan cont’d

How will performance be measured? cont’d

If the numbers being audited look “good” More investigation—are they being generated by

the project? If not, why not—look for causes.

If they don’t look “good” What are the causes? Is project failure a cause?

Audit Plan cont’d

How often will performance be measured? Typically, quarterly

Responses

Targets Not Being Met:Ascertain causePlan response

This might entail reworking the NPV analysis, as well as forecasted values

It might entail “reworking” the project to get the quality/scope required

It might entail changing company practices that might be hindering attainment of targets

  Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008

Expected Revenue 235.99 235.99 235.99 235.99 259.59 259.59 259.59 259.59 280.36 280.36 280.36 280.36

Actual

% difference

Audit Plan for Project P:

I. Quarterly Review of Revenue:

II. Review of Limits:Situation ChecksActual revenue >= expected revenue

Check financial statement transactions:Is P responsible for the increase as planned? If yes, great, no changes required.If P is not responsible, ascertain

o Causeo Response (see table) 

Actual revenue 1% or more lower than expected revenue

If this is the only quarter that this has happened:Is P responsible for the increase as planned? If yes, great, no changes required.If P is not responsible, ascertain

o Causeo Response (see table) 

If this is not the first quarter that this has happened:Is P responsible? If yes, ascertain cause and response (see table)If P is not responsible, do forecasts need to be redone? Does the financial analysis for P need to be redone?

Audit Plan for Project P cont’d:

III. Potential Responses:Cause Response

Economy Rework forecasts and analysis as per company executives.

Overall company malaise Rework forecasts and analysis as per company executives.

Project scope/quality not delivered Create plan for correction (another phase to the project; another project)Adjust analysis as requiredRecommend steps to prevent recurrence

Company forecasts incorrect Adjust analysis as requiredRecommend steps to prevent recurrence as per company executives

Estimated Project Inflows incorrect Can inflows be increased?Adjust analysisRecommend steps to improve estimating process

Estimated Project Outflows incorrect

Can outflows be decreased?Adjust analysisRecommend steps to improve estimating process

Numbers tampered with in some way

Involves company responseRecommend steps (perhaps amendment to security policy) to prevent recurrence