What is a model audit?
Model audit is a test run on a financial model to make sure it does not contain any errors in the way it is set. The audit of the term model does not apply to the audit in its better known sense of the company's accounts. Instead, it refers to a model used to predict cashflow and other financial predictions.
The financial model is designed to map the relationship between different financial factors in the future period. The aim is to facilitate how the change in one factor would affect other elements and the results of the process. This is usually done through the computer table of the software.
A simple example of a financial model is the household budget table. This can show how to increase rental will affect the finance of the household. This would not only take into account the overall increase in expenditure, but also interest and fees for banks if this increase causes a serious problem with cash flows.
Most of the financial models used in business and accounting work work according to similar lines,Although with a much wider range of interconnected factors. The intention is to give creators a way to see the potential effects of different decisions. While the most common form of financial models includes some form of cashflow prediction, they can also be used for other types of calculation, such as calculating a fair price for options.
The model audit is a process performed to test that the financial model is set exactly. A successful model audit will mean that potential investors into projects can be sure that the forecasts carried out using a financial model are reliable. Such audits are particularly common in public and private sector partnerships.
There are two main things that can look for an audit of the model, depending on the wishes of people who have committed an audit. One of them is to simply explore the mathematical page that makes sure that the calculations will be reliable. In PRAxi often means examining each table folder to look for errors when setting it, which means it does not bring accurate results. The second possible element of the model audit is to check how the model takes into account the right factors. This may be a more subjective problem because the financial model is effectively trying to cover the infinite range of possible factors.