What is a Model Audit?

What is a Model Audit?

A model audit is a vital and essential task in financial auditing. It helps ensure that the spreadsheet errors are eliminated. It is also known as a model review and is most commonly required by banking organisations for them to be sure that the assumptions within these models are accurate, reassures lenders and investors that the models are reliable.

The Scope of a Model Audit

Model audits are done to make sure that spreadsheet errors are corrected. They need to be specific with their scope and purpose to ensure that relevant tasks are correctly and completely executed or carried out. The scope of a model audit includes:

  • Model audits should successfully review the logic used in the model being scrutinised.
  • The audit much check for the model’s consistency regarding documentation and transactions.
  • The audit must ensure that the model is parallel and consistent with GAAP and tax rules.
  • The audit should check for the sensitivity of the model.

The Purpose of a Model Audit 

The audit should yield accurate results and the auditor should provide an assurance that results will be obtained by the party seeking the audit. To successfully achieve the objectives of the audit, the auditor should offer some amount of liability that assures the reliance level, which can be equal to the fee. If there are any mistakes in the audit because of negligence by the auditors, the company who has asked for the audit has the right to sue.

The audit aims to ensure that the financial model used by a business is accurate and that the assumptions it has are effective. The audit confirms or denies that the financial model does what it is supposed to do and that any errors are minimal and will not derail or delay the business’s projects.

Categories of a Model Audit

There are basically two broad categories of model audits. These are the high-level review and the formal model audits.

The high-level review. The high-level review gives added confidence to clients regarding the financial model that is being used by a business. Apart from the correction of errors on spreadsheets, the model audits have a special feature which is keener and more sensitive to spotting or identifying errors without the need to check every detail of the model. The process is less time-consuming, but still maintains the high accuracy of results and it also includes a checking of the logic of the model.

Formal model audits. Formal audits are what stakeholders and investors require even after the completion of an audit and submission of an audit report that say the model is good enough to use. Most of the time, a comprehensive and formal audit is required. The formal audit is the only one which could satisfy this requirement.

A report is submitted after rigorous checking. The report contains a detailed list of the errors of the model. These are identified to let business solve the issues before their investors take action.

The Cost and Duration of a Model Audit 

A model audit can be completed within one to five weeks. The length of the audit depends on how extensive the review is. The fee to be charged by the auditor depends on:

  • The scope of the audit review
  • The complexity of the model being checked
  • The complexity and volume of documents to be reviewed
  • The seniority of the staff who will do the audit

How to Conduct a Model Audit?

It is important that the auditor should recognise that the model is produced with MS Excel spreadsheets and, thus, contain data, formulas, and figures. Auditors should conduct a bottom-up review or a cell-by-cell checking of each formula in the spreadsheet. They can also choose to do a ‘top-down’ analysis of the model.

The keen eyes of the auditor are very important in a model audit. Because, one way or another, conducting model audits require meticulous and analytical skills as well as patience and accuracy. The final audit opinion will all be based on what the auditor has seen from the review. The evidences and information gathered from the audit services will serve as the basis of the final opinion or report.

Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit,  and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.

Call our Melbourne team today on 03 9088 2242, or email us via  audit@kingstonknightaudit.com.au.

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