Best pracitces when auditing models?

Hi everyone:

I was wondering if you have any best practices/priority checks when it comes to auditing models that others have built please? Was curious about the shocks you will introduce to the numbers to make sure it's well-proofed in all situation, espcially in a limited time frame. Thanks!

 

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Most Helpful

Couple ones that come to mind (with varying levels of obviousness):

  • Balance sheet balances
  • Check the summary cash flow statement for anything that jumps off the page as a weird number (e.g. big unjustified swings in working capital)
  • Debt at close less cumulative FCF from ops should equal net debt on exit (in the simplest case, adjust as needed for other financing activities)
  • Sanity check IRRs
  • Throw a ridiculous upside case in to check if the waterfall is functioning as intended
  • Run a very harsh downside case to check revolver draw / repayment functionality, sometimes will break other things if the model isn't well-built
  • Our template is set up so that the total $ amount of the sources and uses should always tie to the transaction balance sheet adjustments. No clue if that's true of every model
  • If it's a pretty built-out model, check to make sure EBITDA ties across the operational build-up, guts of the model, summary outputs, etc.
 

Hit f2 10 times on every cell in a flickering manner to make it look like you are doing stuff

Lol jk. Best thing to do is to try to recalculate stuff back of the envelope or in a different fashion, and make sure you get to same result

 

There are a few key points necessary for auditing other people’s models:

1.) No matter what the model looks like/functions, it is not your model. Bitch about how horrible it is to all superiors so they understand you are superior to the other person. 2.) Put no diligence and effort into actually validating the model, again, this entire exercise is just meant to make the other person look inferior. 3.) Spend the time you would have spent trying to check the model to kiss your boss’s ass.

Or at least these are some of the things I learned from some of the directors where I work :).

 

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