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A Typical Model Audit/Review Approach Grenville Croll EuSpRIG -European Spreadsheet Risks Interest Group, UK October 2002.

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Presentation on theme: "A Typical Model Audit/Review Approach Grenville Croll EuSpRIG -European Spreadsheet Risks Interest Group, UK October 2002."— Presentation transcript:

1 A Typical Model Audit/Review Approach Grenville Croll EuSpRIG -European Spreadsheet Risks Interest Group, UK October 2002

2 High Level Review Low Level Review Low Level Review Sensitivities Comparisons run between model versions Preparation of queries list - issued to client Model requires alteration ? Queries responded to by client Model amende d by client Report issued to client Familiarisation Yes No Model Audit/Review Process

3 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 ( ) –Cell Error Rate –Estimated Review Time –Probability of Bottom-Line Error

4 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

5 Step 1: Model Maps

6 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

7 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

8 1.2 Spreadsheet Map

9 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)

10 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

11 Step 2: Code Review

12 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

13 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

14 Step 3: Range Names

15 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

16 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

17 Step 4: Queries

18 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

19 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

20 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

21 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

22 Step 5: High Level Review

23 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

24 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

25 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?

26 Step 6: Documentation

27 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

28 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

29 Step 7: Comparisons

30 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

31 Comparisons Software Tools for running Workbook Comparisons Code comparisons, range name comparisons Impact of New sheets & New Rows & Columns Print out, and tick off or mark with Q to document Compare model changed in accordance with query & response Query again if necessary

32 Step 8: Sensitivities

33 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

34 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

35 Step 9: Final Review

36 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

37 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

38 Step 10: Report

39 Model Review framework 2 Code Review 1 Model Maps 4 Queries 3 Range Names 5 High Level Review 10 Report 9 Final Review 8 Sensitivities 7 Comparisons 6 Documentation

40 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

41 Financial Modelling by Grenville Croll Model Review Model Build –Financial –Marketing –PFI –Production Training –Building Better Business Spreadsheets Technologies –MS Excel –Monte Carlo (Crystal

42 Grenville Croll - contact details


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