Post audit definition
/What is a Post Audit in Capital Budgeting?
Post audit refers to an analysis of the outcome of a capital budgeting investment. This analysis is conducted to see if the assumptions incorporated into the original capital proposal turned out to be accurate, and whether the project outcome was as expected. The results of this audit are then incorporated into future capital budgeting decisions, thereby improving the decision-making process. A post audit may also be used to see if any managers who submitted budget proposals might have deliberately inflated the benefits to be derived from their proposals.
Example of a Post Audit in Capital Budgeting
Grimm Manufacturing approved a capital investment project in 2020 to expand its production capacity by purchasing new automated equipment for $2 million. The initial capital budgeting analysis projected the following:
Annual additional revenue: $1 million.
Annual additional operating costs: $400,000.
Expected net cash inflows: $600,000 per year.
Payback period: 3.3 years.
Internal Rate of Return (IRR): 15%.
In 2024, Grimm conducts a post audit to assess how the project performed relative to these expectations. The findings from this post audit are as follows:
Actual revenue and costs. The post audit reveals that the new equipment generated an average of $800,000 in additional annual revenue instead of the projected $1 million due to lower-than-expected sales demand. However, operating costs were also lower, averaging $350,000 per year.
Net cash inflows. The actual net cash inflows turned out to be $450,000 per year ($800,000 revenue - $350,000 costs), which is $150,000 less than the initial projection of $600,000.
Payback period. Due to the lower cash inflows, the actual payback period was 4.4 years instead of the expected 3.3 years, indicating a slower return on investment.
Internal rate of return (IRR). The post audit recalculates the IRR based on actual cash flows and finds it to be 10% rather than the projected 15%, suggesting the investment was less profitable than initially expected.
A key lesson learned was that the sales forecast was overly optimistic. More conservative estimates could improve accuracy in future capital budgeting decisions. Also, cost control was effective, highlighting a potential area of strength for the company.
The post audit provided Grimm with valuable insights into forecasting accuracy and cost management. It revealed that while the project was less profitable than anticipated, cost management partially offset lower-than-expected revenues. This analysis will help the company refine its capital budgeting process for future investments.
What is a Post Audit in Accounts Payable?
Post audit can refer to an analysis of a supplier’s relationship with a customer, by the customer’s internal audit team. The focus of this audit is on whether the supplier is dealing with the customer in a fair and equitable manner. Here are some of the issues that a payables post audit might address:
Allowances not given. Has the supplier ignored any allowances that should have been granted to the customer?
Pricing differences. Are there unexplained differences between the prices quoted to the customer and the prices actually charged to it?
Shipments not combined. Did the supplier have the opportunity to combine shipments to the customer and did not do so, thereby charging more freight costs to the customer?
Excessive defects. Did the supplier ship goods to the customer that were unusually defective in relation to normal quality standards?
The outcome of a payables post audit can be a retroactive charge to the supplier, or the decision to stop doing business with the supplier entirely.