Definition
A post-completion audit is the process of comparing the actual cash flows generated by an investment with the forecasted cash flows that were projected prior to the investment. This type of audit helps identify any discrepancies between expected and actual performance and assesses the overall success of an investment. By doing so, it also aims at identifying past poor investment decisions and encourages the use of more realistic forecasts in future investment projects.
Examples
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Real Estate Development:
- A company forecasts that a new commercial property will generate $1 million in annual rental income. After the first year, the actual income is found to be $800,000. A post-completion audit will help understand why the forecast was inaccurate and how future investment estimates can be improved.
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Technology Start-Up:
- An investor finances a tech start-up expecting it to break even within three years. At the end of three years, the start-up is still not profitable. A post-completion audit will analyze various factors such as market conditions, operational inefficiencies, and other elements affecting performance.
Frequently Asked Questions
What is the primary purpose of a post-completion audit?
The primary purpose is to verify the accuracy of initial financial projections by comparing them with actual results, leading to better investment decision-making and planning.
Who conducts a post-completion audit?
It is usually conducted by internal auditors, finance teams within the company, or by third-party audit firms specializing in financial analysis.
What are the main benefits of conducting a post-completion audit?
Benefits include identifying past investment failures, enhancing accuracy in future forecasts, ensuring accountability, and optimizing resource allocation for better financial performance.
Over what time period should a post-completion audit be conducted?
The audit can be conducted shortly after the investment has ended or periodically throughout the investment’s lifecycle, depending on the specifics of the investment and the organization’s policies.
Can post-completion audits prevent future investment mistakes?
While not a guarantee, these audits can significantly reduce the likelihood of future mistakes by providing learnings and insights that improve forecasting and decision-making processes.
- Net Present Value (NPV): A method used in capital budgeting to evaluate the profitability of an investment or project.
- Internal Rate of Return (IRR): The discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
- Forecasting: The process of making predictions of future based on historical and current data.
- Variance Analysis: The quantitative investigation of the difference between actual and planned behavior.
- Cost-Benefit Analysis: A process by which business decisions are analyzed based on costs and benefits.
Online References
Suggested Books for Further Studies
- “Financial Intelligence, Revised Edition: A Manager’s Guide to Knowing What the Numbers Really Mean” by Karen Berman and Joe Knight
- “Financial Statement Analysis and Security Valuation” by Stephen H. Penman
- “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” by Aswath Damodaran
Accounting Basics: “Post-Completion Audit” Fundamentals Quiz
### What is the primary focus of a post-completion audit?
- [ ] To prepare future expenditure budgets.
- [ ] To identify accounting errors.
- [x] To compare actual cash flows with forecasted cash flows.
- [ ] To prepare tax filings.
> **Explanation:** The primary focus of a post-completion audit is to compare actual cash flows with forecasted cash flows to assess the accuracy of the initial projections and improve future forecasting.
### Who typically conducts a post-completion audit?
- [ ] Marketing team
- [ ] Sales team
- [x] Internal auditors or finance team
- [ ] HR department
> **Explanation:** A post-completion audit is usually conducted by internal auditors or the finance team within the company, or by external audit firms specializing in financial analysis.
### What outcome is expected from a post-completion audit?
- [ ] Increased sales volume
- [x] Improved accuracy in future forecasts
- [ ] Allocation of more marketing budget
- [ ] Decrease in operating costs
> **Explanation:** One of the main outcomes of a post-completion audit is to achieve improved accuracy in future financial forecasts and better investment decision-making.
### When should a post-completion audit be conducted?
- [x] Shortly after the investment period ends.
- [ ] Before the investment begins.
- [ ] Only upon project cancellation.
- [ ] Once a year, irrespective of investment lifecycle.
> **Explanation:** A post-completion audit is best conducted shortly after the investment period ends to assess actual performance against projections while the data is still fresh.
### Which of the following is NOT a benefit of post-completion audits?
- [ ] Improve accuracy in future forecasts.
- [x] Guarantee future investment success.
- [ ] Identify past investment failures.
- [ ] Enhance resource allocation.
> **Explanation:** While post-completion audits provide valuable insights, they cannot guarantee future investment success. They help identify areas for improvement in future projects.
### What aspect of a post-completion audit helps in making future predictions more realistic?
- [ ] Inflated cash flow expectations.
- [ ] Mild risk analysis.
- [ ] Ignoring past performance data.
- [x] Identifying discrepancies between actual and forecasted cash flows.
> **Explanation:** Identifying discrepancies between actual and forecasted cash flows helps in making future financial predictions more realistic.
### Which related term describes a quantitative investigation of the difference between actual and planned behavior?
- [ ] Cost-Benefit Analysis
- [ ] Forecasting
- [x] Variance Analysis
- [ ] Net Present Value (NPV)
> **Explanation:** Variance analysis is the quantitative investigation of the difference between actual and planned behavior, which is closely linked with post-completion audits.
### Why are post-completion audits significant in investment projects?
- [ ] They increase employee morale.
- [ ] They enhance annual reporting.
- [x] They identify bad investments and guide future realistic predictions.
- [ ] They shorten project timelines.
> **Explanation:** Post-completion audits are significant as they identify poor investments and guide managers to use more realistic predictions in future investment projects.
### How does a post-completion audit contribute to accountability?
- [x] By assessing the accuracy of initial financial predictions.
- [ ] By reducing operation budgets.
- [ ] By increasing the product price.
- [ ] By providing legal compliance advice.
> **Explanation:** A post-completion audit contributes to accountability by assessing the accuracy of initial financial predictions against actual outcomes, holding initial decision-makers accountable for their estimates.
### Which tool is used in capital budgeting to evaluate investment profitability and is usually reviewed during post-completion audits?
- [ ] Gross Profit Margin
- [ ] Liquidation Value
- [ ] Earnings Per Share (EPS)
- [x] Net Present Value (NPV)
> **Explanation:** Net Present Value (NPV) is a widely used tool in capital budgeting to evaluate the profitability of an investment and is often reviewed during post-completion audits.
Thank you for exploring the detailed explanation and fun quiz about the term “Post-Completion Audit”. Keep striving for excellence in your accounting knowledge!
