What are essential model audit checks to ensure accuracy and consistency?

• A. Check that the income statement balances.
• B. CFO/CFI/CFF sums equal change in cash.
• C. Balance sheet balances each period, CFO/CFI/CFF sums equal the change in cash, reconciliation of net income to cash flow, and depreciation matches capex.
• D. Depreciation must equal capex.

Answer: (C)

The essential idea here is that a reliable model must be internally consistent across all three financial statements and tie asset investments to the cash movements and income recognition. First, the balance sheet has to balance every period, meaning assets equal liabilities plus equity. Second, the cash balance should move exactly as the cash flow statement shows, so the sum of cash flow from operating, investing, and financing activities equals the change in cash. Third, there needs to be a clear reconciliation from net income to cash flow, so accrual profits are translated into cash by adjusting for non-cash items like depreciation and by capturing changes in working capital. Fourth, depreciation should be consistent with the asset base created by capex, reflecting how new capex adds to assets and drives future depreciation, ensuring the numbers flow logically from investment through expense recognition.

Why this combination is the best: it captures the full chain of how profits become cash, how new investments affect future cash and income, and how the balance sheet stays in balance over time. This is stronger than just balancing the income statement, or only enforcing that cash flows sum to the change in cash, because it also requires a coherent link between assets, cash, and earnings. And while depreciation and capex are related, they are not required to be equal in every period; the key is that depreciation mirrors the asset base affected by capex, not that depreciation exactly equals capex in the same period.

In short, this set of checks ensures consistency across the statements, aligns cash with the reported activities, and ties investment to expense in a logical, auditable way.