Model Checker

Step 3: Integrity Checks

Balance Sheet:

• Total Assets = Total Liabilities + Equity (every period)
• If imbalanced, quantify the gap and trace where it breaks
• Check that retained earnings rolls forward correctly: Prior RE + Net Income - Dividends = Current RE
• Verify goodwill and intangibles flow from acquisition assumptions (if M&A model)

Cash Flow Statement:

• Ending cash from CF = Cash on BS (every period)
• Operating CF + Investing CF + Financing CF = Change in Cash
• D&A on CF matches D&A on IS
• Capex on CF matches PP&E rollforward on BS
• Working capital changes on CF match BS movements (AR, AP, inventory)

Income Statement:

• Revenue builds tie to segment/product detail
• COGS and gross margin are consistent with assumptions
• Tax expense = Pre-tax income × tax rate (check for deferred tax adjustments)
• Share count ties to dilution schedule (options, converts, buybacks)

Circular References:

• Check for circular references (interest expense → debt balance → cash → interest)
• If intentional (common in LBO/3-statement models), verify the iteration toggle works
• If unintentional, trace the loop and suggest how to break it

Step 4: Logic Checks

Reasonableness:

• Do growth rates make sense? (100%+ revenue growth without explanation = red flag)
• Are margins within industry norms? Flag outliers
• Does terminal value dominate the DCF? (>75% of EV from TV is a yellow flag)
• Are projections hockey-sticking unrealistically?
• Does EBITDA growth compound to an absurd number by Year 10?

Sensitivity & Edge Cases:

• What happens at 0% growth? Negative growth?
• Does the model break with negative EBITDA?
• Do leverage ratios go negative or exceed realistic bounds?
• Are there any divide-by-zero risks?

Cross-Tab Consistency:

• Do linked cells actually match their source? (copy-paste errors are common)
• Are date headers consistent across all tabs?
• Do units match (thousands vs. millions vs. actuals)?

Step 5: Common Bugs by Model Type

DCF:

• Discount rate applied to wrong period (mid-year vs. end-of-year convention)
• Terminal value not discounted back correctly
• WACC uses book values instead of market values
• FCF includes interest expense (should be unlevered)
• Tax shield double-counted

LBO:

• Debt paydown doesn't match cash sweep mechanics
• PIK interest not accruing to debt balance
• Management rollover not reflected in returns
• Exit multiple applied to wrong EBITDA (LTM vs. NTM)
• Fees and expenses not deducted from Day 1 equity

Merger Model:

• Accretion/dilution uses wrong share count (pre- vs. post-deal)
• Synergies not phased in correctly
• Purchase price allocation doesn't balance
• Foregone interest on cash not included
• Transaction fees not in sources & uses

3-Statement:

• Working capital changes have wrong sign convention
• Depreciation doesn't match PP&E schedule
• Debt maturity schedule doesn't match principal payments
• Dividends paid exceed net income without explanation

Step 6: Report

Generate a model audit report:

Summary:

• Model type and overall assessment (Clean / Minor Issues / Major Issues)
• Number of issues found by severity

Issue Log:

Severity Definitions:

• Critical: Model produces wrong output (BS doesn't balance, formulas broken)
• Warning: Model works but has risks (hardcodes, inconsistent formulas, edge case failures)
• Info: Style and best practice suggestions (color coding, layout, naming)

Step 7: Output

• Issue log table (in chat or Excel)
• Annotated model with comments on flagged cells (if user provides the file)
• Summary assessment with fix priority

Important Notes

• Always check the BS balance first — if it doesn't balance, nothing else matters until it does
• Hardcoded overrides are the #1 source of model errors — search aggressively for them
• Sign convention errors (positive vs. negative for cash outflows) are extremely common
• Models that "work" can still be wrong — sanity-check outputs against industry benchmarks
• If the model uses VBA macros, note any macro-driven calculations that can't be audited from formulas alone
• Don't change the model without asking — report issues and let the user decide how to fix