Principles of Financial Modelling

CHAPTER 11Model Review, Auditing and Validation

INTRODUCTION

This chapter discusses model auditing and related areas. Generally speaking, the context is that one is dealing with a model that has been built by someone else. The chapter aims to provide a structure to the definitions of possible objectives, outputs and activities of such processes.

OBJECTIVES

In model review contexts, it can useful to consider three generic types of objectives and outputs. These are presented in this section (as the author's definitions, which are not generally agreed standards).

(Pure) Audit

This involves the documentation of aspects of the model, without changing it, nor passing any direct judgement on it. The typical output is a description, including items relating to:

• Structural characteristics. These include noting the number of worksheets, the presence of links to other workbooks, and the visibility, accessibility and protection of worksheets, columns, rows or ranges.
• Layout and flow. These could include the location of input cells, the extent to which the audit paths are short or not, whether there are circular references (or circular logic) and so on. It may also be worth noting whether the outputs are clearly identifiable, and whether there is any in-built sensitivity analysis (such as using DataTables). The extent to which calculations flow between worksheets can also be noted.
• Formulae and functions. Here, one may note the functions used, the number of unique formulae, and the ...