Amy has a master's degree in secondary education and has taught math at a public charter high school.
In this lesson, you'll learn how using the post-audit method can be a valuable tool in evaluating whether a capital budget is performing as expected. You'll also see how this method can help a company reach its capital budgeting goals.
A capital budget is a budget for a large project over a long period of time, usually more than a year. For example, a toy company may want to purchase new machinery and construct a new warehouse to build and store more new toys. This is a large project that can take quite some time to finish. It requires a good chunk of the company's resources as it progresses. This is a project that requires capital budgeting.
Post-Audit of a Capital Budget
Once a capital budget is in place, it's important for businesses to evaluate whether this budget is working out or not. With regular evaluations, if a budget isn't working out, the company will have time to fix the problem and resume its budgeting efforts.
For example, say the toy company is setting aside a certain amount of money each month towards the budget, and the company is also earning interest on this money through stock investments. If, after an evaluation, the company finds that its budgeting efforts have not met the monthly or yearly goal, the company can look to the post-audit for an analysis of where the problems are and how they can be addressed.
In the post-audit method of reviewing the budget, not only is the budget itself looked at, but the information and data used to prepare the budget is looked at, too. The post-audit method considers whether the information used to forecast the budget is appropriate and accurate. Let's see how the toy company evaluates its budget using the post-audit method.
Evaluating the Capital Budget
For example, let's say the toy company has a capital budget of $800 each month. This means that the company can spend $800 on its warehouse and new machinery each month.
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If a post-audit review finds that the company has spent $750 per month on its warehouse and machinery project, then the capital budget performed as expected. If, on the other hand, it finds that the company spent $900 per month ($100 per month over budget), then the budget and the information used to prepare the budget need to be analyzed.
The company might look into other contractors to see if they can do the job for less. Also, the company might find out that there are errors in record-keeping. It might find that what was labeled as a machinery project expense was actually an unauthorized gift expense. A post-audit analysis of the capital budget can lead to changes in company processes (for example, putting into place a more stringent expense approval process) or changes in what kind of data is used to prepare and carry out a capital budget project.
Why Is It Useful?
Evaluating a capital budget via the post-audit method is very helpful, as a company can find problems with the budget and the information used to prepare it before it is too late. If budgeting issues are not fixed, then the company may not be able to finish its large projects, such as the building of a new warehouse.
A capital budget is a budget for a large project over a long period of time, usually over a year. The post-audit method evaluates a budget after a period of time to see if it's met the budgeting goals or not. It also analyzes the information used to prepare the budget - is it accurate and appropriate for preparing a budget? Depending on the results of the post-audit review, it's then up to the company to make changes to its capital budget or how it's prepared, if needed.
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