AMRCO Pre Approval Audit Model

AMRCO Pre Approval Audit Model

AMRCO Pre Approval Audit Model arose at Amrco when was made an investment request from one of its departments of the amount of 50 million dollars, having been afterwards reported at Harvard Business Review by Robert Lambrix and by Surendra Singvhi, treasurer and planning director respectively. The models’ aim is to evaluate the capital investment requests before its approval, identifying and evaluating the main assumptions underlying the predictions to a capital investment request.

How to use the model:

The instructions to use the model are the following:

  1. Create an audit team: the audit team should have between 3 to 5 members and include people from several departments, such as the marketing area, project area, production area and financial area. Should not be included people from top management neither from the interested departments. At least, should be given 5 weeks to complete the auditing.
  2. Identify and describe the main assumptions: the team should evaluate the main assumptions of the proposal, having in special attention its validity and its likelihood. For that, the team should analyze the existent internal documentation and other material that supports the predictions. Some assumption examples that should be analyzed:
Area Assumptions
Capital Investment Costs estimate

Process viability

Capacity

Market Served market dimension

Positioning

Price

Competitors’ activity

Coherence with other programs

Financial Costs and margins projections

Coherence with the company’s standards and policies

Strategy Market penetration strategy

Suitability to the company’s and departments’ strategy

Risk and sensibility analysis Investments convenience

Results interpretation

  1. Discuss problems: if substantial problems are identified by the audit team, should reunite with the authors the proposals and discuss these problems. In certain cases and whenever it’s identified unreasonableness in the assumptions, can be needed from the proposals authors to change these.
  2. Prepare the audit report: should be prepared a synthesis report, coordinated by the responsible for the audit team, in which are identified the main assumptions and evaluated its likelihood. Should also be highlighted the most significant differences that are referent to the project.
  3. Revision and Delivery: the audit team responsible reviews the audit report with the responsible of the department that originated the investment proposal. The report is afterwards delivered to the deciders and the audit team is dismissed.
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