The inputs and assumptions used in a valuation model must be revisited periodically. This is because the output of valuation models heavily depends on the inputs and assumptions used. To ensure that the output of valuation models are not out of sync, periodic stress testing must be carried out to ensure that the results of the model are robust. This process involves revisiting the inputs and assumptions used in the model to ensure they are still valid and relevant. This practice helps to maintain the accuracy and reliability of the model's output, thereby enhancing the credibility of the valuation process.

Choice B is incorrect. The statement that inputs and assumptions used in the model must not be changed is not a best practice in auditing valuation models. In fact, it's quite the opposite. Inputs and assumptions should be revisited periodically to ensure they are still relevant and accurate, reflecting current market conditions.

Choice C is incorrect. While it includes the correct statement that inputs and assumptions should be revisited periodically, it also incorrectly states that these elements must not be subjected to an external audit. External audits are a crucial part of ensuring accuracy and reliability in valuation models.

Choice D is incorrect. As explained above, both statements II and III are not considered best practices in auditing valuation models.

Things to Remember

• Valuation models are used to estimate the value of assets, liabilities, or businesses.
• Inputs and assumptions in valuation models can include factors such as discount rates, growth rates, and market data.
• Validation of inputs and assumptions is crucial to ensure the accuracy and reliability of the valuation model.
• External audits help provide an independent assessment of the valuation model's accuracy and compliance with relevant standards.
• Regular review and updates of valuation models are necessary to reflect changes in market conditions and ensure the model's relevance.