The postaudit

The last step in the capital-budgeting process is a postaudit review that should be performed by a person not involved in the capital-budgeting decision-making process. Such a person can provide an impartial judgment on the project's worthiness. This step should be performed early in the project's life, but enough time should have passed for any operational bugs to have been worked out. Actual operating costs and revenues should be determined and compared with those estimated when the project was originally reviewed and accepted. The postaudit review performs these functions:

  • Let management know if the projections were accurate and if the particular project is performing as expected regarding cash inflows and outflows.
  • May identify additional factors for management to consider in upcoming capital-budgeting decisions, such as cash outflows that were forgotten in a particular project.
  • Provides a review of the capital-budgeting process to determine how effectively and efficiently it is working.

The postaudit provides information that allows management to compare the actual results of decisions with the expectations it had during the planning and selection phases of the capital-budgeting process.