Model Audit Certificate
Executive Summary
Key Takeaways
- ✓ A model audit certificate is a formal written document confirming that a financial model has been independently reviewed.
- ✓ It is typically a condition precedent to first drawdown in project finance transactions.
- ✓ The certificate performs evidence, condition precedent, and risk allocation functions.
- ✓ Findings are classified by severity; critical findings must be resolved before the certificate is issued.
- ✓ The certificate covers only the scope described in it; it does not guarantee model correctness in all respects.
- ✓ Independence of the auditor is a fundamental requirement.
Definition¶
A model audit certificate (also referred to as a model audit report or model assurance certificate) is a formal written document issued by an independent auditor or model review firm confirming that a financial model has been independently reviewed, describing the scope of the review, identifying findings, and providing a level of assurance about the model's arithmetical accuracy and internal consistency.
In project finance, a model audit certificate is typically a condition precedent (CP) to financial close, meaning that lenders will not fund the first drawdown until the certificate has been delivered by an approved independent reviewer.
Why It Matters¶
The model audit certificate performs three functions simultaneously:
1. Evidence function: It provides lenders and investors with documented evidence that an independent expert has reviewed the financial model and identified or excluded material errors.
2. Condition precedent function: It satisfies a specific obligation in the loan agreement, clearing a legal requirement before drawdown can proceed.
3. Risk allocation function: By commissioning an independent review, the project company and its advisers create a documented record that reasonable steps were taken to verify the model. This affects the risk allocation between parties in the event of a subsequent dispute about model accuracy.
A model audit certificate is not a guarantee that the model is correct in every respect. It is a statement about the scope of the review conducted, the findings identified, and the level of assurance that can be provided within that scope.
Technical Background¶
Standard Contents of a Model Audit Certificate¶
While formats vary between firms and transactions, a model audit certificate typically contains the following sections:
| Section | Description |
|---|---|
| Addressees | Identifies the parties to whom the certificate is addressed (typically the lenders and the project company) |
| Model identification | Identifies the specific version of the model reviewed (version number, date, file name) |
| Scope of review | Describes what was reviewed and what was not reviewed |
| Methodology | Describes the approach taken to the review (automated testing, manual checking, formula tracing, etc.) |
| Summary of findings | Categorised list of findings identified during the review |
| Output verification | Confirms that specified key outputs (DSCR, LLCR, Equity IRR, debt sizing) have been recalculated independently |
| Qualifications and limitations | Statements about what the certificate does not cover |
| Signature and date | Signed by the authorised signatory of the reviewing firm |
Scope of Review¶
The scope defines what the independent auditor reviewed. A standard scope for a project finance model audit typically includes:
- Formula check: Verification that formulas are arithmetically correct and do not contain formula errors (e.g. wrong cell references, incorrect operator application)
- Circular reference check: Identification of circular references in the model
- Internal consistency check: Verification that the three financial statements (income statement, balance sheet, cash flow statement) balance and are internally consistent
- Assumption verification: Comparison of key assumptions in the model against the source documents (loan agreement, construction contract, offtake agreement)
- Output verification: Independent recalculation of key metrics (DSCR, LLCR, equity IRR) and comparison against the model's outputs
- Hardcoded number check: Identification of hardcoded numbers in formula sections
- Broken link check: Identification of any references to external files
Items typically outside scope include:
- Commercial reasonableness of assumptions (unless specifically requested)
- Tax advice or legal advice
- Verification of third-party forecasts or technical reports referenced in the model
- Assessment of whether the project will achieve its projected financial performance
Findings Classification¶
Findings are typically classified by severity. Common classification frameworks include:
| Classification | Description |
|---|---|
| Critical | Error that materially affects a key output (DSCR, equity IRR, debt sizing). Must be corrected before certificate can be issued. |
| Significant | Error that affects an output but not at a level that changes the investment decision. Correction recommended before financial close. |
| Minor | Technical issue (formatting, labelling, minor formula inconsistency) that does not affect outputs. Correction recommended but not required. |
| Observation | Note or comment that does not constitute an error. May include model structure recommendations. |
Different firms and transactions use different classification terminology. The key distinction is between findings that require correction before the certificate is issued and those that do not.
Condition Precedent Process¶
The model audit certificate CP process in a standard project finance transaction follows these steps:
- The project company's financial adviser prepares the financial close model
- The lenders' loan agreement specifies that a model audit certificate from an approved auditor is a CP to first drawdown
- The project company commissions the audit from an approved firm (approved by the lenders)
- The auditor reviews the model and issues a draft report identifying findings
- The project company resolves Critical and Significant findings
- The auditor confirms resolution and issues the final signed certificate
- The certificate is delivered to the lenders as evidence of CP satisfaction
- Lenders confirm CP satisfaction and fund the first drawdown
Model Version Control¶
The certificate must identify the exact version of the model that was reviewed. A model that is modified after the certificate is issued — even to correct a finding — should trigger a supplemental review or updated certificate. The loan agreement will typically specify the process for post-certificate model amendments.
Audit Considerations¶
1. Independence¶
The auditor issuing the certificate must be independent of the project company, the financial adviser who built the model, and the equity sponsors. Independence requirements vary by transaction and may be specified in the loan agreement. An auditor who also advised on model construction cannot issue an independent certificate for the same model.
2. Approved Auditor List¶
Lenders typically specify that the model auditor must be from a list of pre-approved firms. Before commissioning a model audit, confirm whether the loan agreement specifies approved auditor requirements.
3. Certificate vs Report¶
Some transactions require a short form certificate (a letter confirming that the model has been reviewed and key outputs confirmed). Others require a full form report (a detailed document describing the methodology, all findings, and the resolution of each finding). Clarify the required format before commencing the review.
4. Re-certification After Amendments¶
If the model is amended after the certificate is issued — to update assumptions, correct findings, or reflect changes to the transaction structure — a re-certification process is required. The original certificate cannot be relied upon for an amended model.
5. Scope Creep Risk¶
A model audit certificate covers only the scope described in the certificate. Lenders or other parties who rely on the certificate for purposes beyond its stated scope (for example, relying on an arithmetical verification certificate to draw conclusions about the commercial reasonableness of assumptions) are exceeding the assurance provided.
Common Errors¶
| Error | Description | Risk |
|---|---|---|
| Wrong model version certified | Certificate issued for version that differs from model used at close | Lenders rely on assurance for a different model |
| Critical findings not resolved | Certificate issued with unresolved critical findings | Known errors remain in the model at close |
| Scope misunderstood | Parties rely on certificate for assurance outside its stated scope | Lenders exposed to unreviewed risk |
| Certificate not updated after model amendment | Model changed post-certificate without re-certification | Certificate does not cover the model actually used |
| Auditor not independent | Reviewing firm advised on model construction | Conflict of interest; independence compromised |
Best Practices¶
Engage the model auditor early in the financial close process — ideally while the model is still in a late draft stage, not at final draft. Early engagement allows findings to be resolved before time pressure at close creates pressure to proceed with known errors.
Establish a clear version control protocol so that the auditor can confirm which version has been reviewed and the project company can confirm that no unauthorised changes have been made since the review.
Agree the scope of the review with the lenders before commencing, to ensure that the certificate will satisfy the CP as documented in the loan agreement.
Continue Reading¶
Prerequisites¶
- What Is a Project Finance Model Audit? — the parent pillar
Related Pillars¶
Related Technical Guides¶
Related Glossary¶
How OXXON tests thisRun a free structural check with FMAE
Frequently Asked Questions
Who commissions the model audit certificate?
The project company typically commissions the model audit and pays for it, but the lenders approve the auditor and the certificate is addressed to the lenders. In some transactions, the lenders commission their own model audit directly.
What happens if the auditor identifies a critical error?
The project company and its financial adviser must correct the error and resubmit the corrected model for verification. The auditor will confirm that the finding has been resolved before issuing the certificate. This process can delay financial close if errors are identified late in the process.
Does a model audit certificate confirm that the project will perform as modelled?
No. A model audit certificate confirms that the model is arithmetically correct and internally consistent, and that key outputs have been independently recalculated. It does not constitute a view on whether the project will achieve its projected financial performance. The commercial reasonableness of assumptions is typically outside the standard scope of a model audit.
Is a model audit certificate required for all types of financing?
No. Model audit certificates are standard in project finance and infrastructure transactions involving multiple lenders. In bilateral lending, real estate transactions, and corporate finance, the requirement varies by lender, transaction size, and complexity.
Related Articles
Financial Close
Financial close is the contractual milestone in a project finance transaction at which all conditions precedent (CPs) to the financing are satisfied or waived, all financing documents are executed, and lenders fund the first drawdown of debt. It marks the transition from the development and negotiation phase of a project to the construction and execution phase. Financial close is also referred to as financial closing or closing date. It is distinct from commercial close, which refers to the execution of the underlying commercial agreements (offtake, concession, construction contract) before financing is confirmed. In the context of financial modelling, financial close is the date from which the base case financial model is locked, the debt terms are crystallised, and the model becomes the contractual reference document against which covenant compliance and drawdown conditions are tested.
Audit Methodologies for Financial Models
Financial model audit methodologies fall into three primary categories: manual line-by-line review, automated structural analysis, and deterministic rule-based checking. Each methodology differs in scope, speed, consistency, and the types of errors it is designed to detect. The appropriate methodology depends on transaction complexity, time constraints, and institutional risk appetite.
Project Finance Model
A project finance model is a financial model built to analyse the economics of a capital project that is financed on a non-recourse or limited-recourse basis. In a non-recourse structure, lenders rely solely on the cash flows generated by the project — and the security over the project's assets — for repayment of the debt. They have no recourse to the equity sponsors' wider balance sheets. The project finance model is the primary analytical tool through which all parties — sponsors, lenders, advisers, and government agencies — evaluate the project's financial viability, structure the debt, negotiate terms, and, after financial close, monitor the project's ongoing financial performance.
LLCR (Loan Life Coverage Ratio)
The Loan Life Coverage Ratio (LLCR) is a project finance metric that measures the ratio of the net present value (NPV) of all projected cash available for debt service (CADS) over the remaining loan life to the current outstanding debt balance. It is a forward-looking coverage ratio that tests whether the project has sufficient projected cash generation to repay all outstanding debt. The LLCR formula is: LLCR is expressed as a ratio: an LLCR of 1.25x means that the NPV of projected cash available for debt service is 1.25 times the outstanding debt balance.
What Is Model Risk?
Model risk is the risk that a decision is wrong not because the underlying business or investment case was flawed, but because the model used to evaluate it was. It is a distinct category of risk from market risk, credit risk, or operational risk, and it applies to any organisation that relies on a financial model, spreadsheet or otherwise, to support a material decision. Most published model risk content addresses statistical and regulatory capital models used inside banks. This page defines model risk specifically as it applies to Excel based financial models, the kind used every day for investment decisions, lending, and transaction evaluation, which is a related but distinct problem from the quantitative model risk literature most search results return.
Conditions Precedent
Conditions precedent (CPs) in project finance are the contractual requirements that must be satisfied, waived, or deferred before a lender is obliged to advance funds under a loan facility. CPs are set out in the financing agreements and typically include: provision of executed project documents, evidence of regulatory approvals, insurance certificates, legal opinions, and in most institutional project finance transactions, an independent financial model audit certificate confirming that the financial model has been reviewed and that specified checks have been completed. Financial close cannot occur until all material CPs have been satisfied.