- Get link
- X
- Other Apps
This article explains practical, expert-level strategies for detecting, understanding, and safely managing circular references in Excel so that you can audit complex spreadsheets and financial models with confidence.
1. What a circular reference really means in Excel
In Excel, a circular reference occurs when a formula directly or indirectly depends on its own result.
This can be explicit, such as a formula in cell A1 that references A1, or implicit, where a chain of formulas eventually loops back to the starting cell.
1.1 Direct vs indirect circular references
Understanding the difference between direct and indirect circular references is essential before you design any auditing strategy.
| Type | Description | Simple example |
|---|---|---|
| Direct circular reference | Cell refers to itself in a single formula. | A1 contains =A1+1. |
| Indirect circular reference | Formula depends on another cell that ultimately depends back on the original cell. | A1: =B1+1, B1: =C1+1, C1: =A1+1. |
1.2 Types of circular references from an auditing perspective
From an auditing viewpoint, not all circular references are equally dangerous.
| Category | Typical use case | Risk level | Auditor’s approach |
|---|---|---|---|
| Accidental | Typing error, copy/paste mistake, or poor referencing. | High | Find and eliminate. Circular reference is almost never justified. |
| Design flaw | Model logic was not fully thought through, resulting in feedback loops. | Very high | Redesign model; break logic into stages, remove the loop entirely. |
| Intentional with iteration | Goal seek–like behavior, tax-interest feedback, or convergence calculation. | Medium to high | Document clearly, control via iterative settings, test convergence. |
Note : A “designed” circular reference is only acceptable when it is documented, stable, and its behavior under iteration is fully understood by both the model author and reviewers.
2. Core Excel settings that control circular reference behavior
Excel can either block circular references or allow them with iterative calculation.
Auditors must verify that the workbook behaves as expected under the current global settings.
2.1 Iterative calculation settings
Navigate to:
- File > Options > Formulas (Windows)
- Excel > Preferences > Calculation (macOS; location may vary by version)
Key options:
- Enable iterative calculation: When checked, Excel will repeatedly recalculate formulas that participate in circular references.
- Maximum Iterations: Limits how many times Excel recalculates the workbook.
- Maximum Change: Minimum change between iterations before Excel considers results as “converged”.
| Setting | Example value | Auditing implication |
|---|---|---|
| Maximum Iterations | 100 | Too low may prevent convergence; too high can mask divergence and slow recalculation. |
| Maximum Change | 0.000001 | Smaller value gives more precise results but more iterations; too large may hide instability. |
Note : Iterative calculation is a global Excel setting, not workbook-specific. If you rely on circular references for one model, they can silently affect other workbooks opened on the same machine.
2.2 Auditing checklist for global settings
When auditing circular references in any workbook, always record the current global calculation configuration.
- Is Automatic calculation turned on or off.
- Is Enable iterative calculation checked.
- Current values of Maximum Iterations and Maximum Change.
- Any workbook-specific calculation modes (e.g., Data Table heavy models that force manual calculation).
3. Systematic strategies for discovering circular references
Auditing circular references in a large Excel model requires a repeatable process.
Relying only on error pop-ups is not sufficient for professional spreadsheet auditing.
3.1 Use Excel’s built-in circular reference tools
Excel provides a basic navigation tool for locating circular references.
- Formulas > Error Checking > Circular References.
This menu lists cells that Excel has identified as part of circular reference chains.
Selecting an item will jump directly to the involved cell.
Note : The circular reference list is not a complete visual map. It shows entry points but does not fully describe every link in the circular dependency chain. Use it as a starting point, not as your only evidence.
3.2 Trace precedents and dependents
Once you have identified a candidate cell in a circular reference, use audit arrows.
- Formulas > Trace Precedents to see inputs feeding into the formula.
- Formulas > Trace Dependents to see which cells rely on the result.
By alternating between precedents and dependents, you can map the loop.
3.3 Create a dependency map using helper tables
For complex models, a manual or semi-automated dependency map makes circular auditing more robust.
One simple approach is to list key calculation cells with their direct precedents in a helper sheet.
| Cell | Formula | Direct precedents (addresses) | Comments |
|---|---|---|---|
| Sheet1!D10 | =D5 + E10 | Sheet1!D5, Sheet1!E10 | Part of interest calculation loop. |
| Sheet1!E10 | =D10 * TaxRate | Sheet1!D10, Sheet2!B3 | Tax calculation referencing D10. |
Even this small table makes it easier to explain the circular logic to reviewers.
3.4 Use structured naming for critical cells
Named ranges improve readability when auditing chains.
For example:
Interest_Expenseinstead ofSheet1!D10.Debt_Closing_Balanceinstead ofSheet1!C10.
In a formula bar, a circular dependency such as:
Interest_Expense = Debt_Closing_Balance * Interest_Rate Debt_Closing_Balance = Debt_Opening_Balance + New_Debt - Principal_Repayment + Interest_Expense is easier to understand when compared with raw cell addresses.
4. Evaluating whether a circular reference is acceptable
Once you have discovered circular references, the next step is to classify and decide how to treat them.
4.1 Key decision questions
- Does the circular reference implement a necessary feedback mechanism (e.g., interest-on-debt loops, iterative allocation) or is it accidental.
- Does the model converge quickly to a stable value under iterative settings.
- Is the circular logic documented in the workbook and in the accompanying methodology.
- Can the same behavior be implemented with a non-circular design (e.g., manual goal seek, dedicated iteration table, or external tool).
4.2 Quick convergence test
To test convergence, capture model outputs as iterations increase.
- Set a small Maximum Iterations (e.g., 5) and note the key result.
- Increase to 20 iterations and compare the same result.
- Increase further (e.g., 100) and see whether the result stabilizes or drifts.
If the outputs change significantly as you increase iterations, the circular reference may be numerically unstable and should be redesigned.
Note : If a circular model is highly sensitive to the number of iterations, the outputs are unlikely to be robust enough for decision-making or regulatory reporting.
5. Strategies to redesign or control circular references
In many cases, the safest auditing strategy is to remove the circular reference altogether, or to isolate it into a controlled mechanism.
5.1 Breaking the loop using calculation stages
One common pattern is to break the feedback loop into separate calculation stages, using prior-period values instead of current-period values.
Example scenario: Interest expense depends on closing debt balance, which itself depends on interest.
A circular design might be:
Closing_Debt_t = Opening_Debt_t + New_Debt_t - Principal_t + Interest_t Interest_t = Closing_Debt_t * Rate A non-circular approximation can be:
Interest_t = Opening_Debt_t * Rate Closing_Debt_t = Opening_Debt_t + New_Debt_t - Principal_t + Interest_t This breaks the circular reference by using the opening balance to calculate interest.
The model may slightly underestimate or overestimate interest, but it becomes stable and audit-friendly.
5.2 Controlled iterative blocks
For more sophisticated models, you can isolate circular logic into a dedicated block or sheet that acts like a small iterative engine.
- Use a compact table where each row represents an iteration step.
- Reference the previous row’s result rather than the same row’s output.
- Use helper cells to display the difference between iterations.
Example layout:
| Iteration | Debt balance | Interest | Change vs prior |
|---|---|---|---|
| 0 | =Initial_Debt | =Debt * Rate | N/A |
| 1 | =Prior_Debt + Interest - Principal | =Debt * Rate | =Current_Debt - Prior_Debt |
| 2 | =Prior_Debt + Interest - Principal | =Debt * Rate | =Current_Debt - Prior_Debt |
Here, you can visually inspect whether the change converges towards zero across iterations.
5.3 Replacing circular references with built-in tools
Sometimes, circular calculation is only used to “solve for” a single unknown.
In that case, consider replacing it with Excel’s dedicated tools:
- Goal Seek (Data > What-If Analysis > Goal Seek) to solve for a single variable.
- Solver add-in for more complex optimization or constraints.
This approach converts a persistent circular dependency into a one-time calculation that can be reviewed and documented.
6. Documentation and control standards for circular models
High-quality spreadsheet governance requires that any circular logic is fully documented.
6.1 Minimum documentation requirements
- Clear description of why the circular reference exists and what financial or operational logic it represents.
- Location of key circular cells (sheet name, cell references, and named ranges).
- Current iterative calculation settings (Maximum Iterations, Maximum Change).
- Evidence of convergence testing and sensitivity analysis.
- Guidelines for users on whether they may change iteration settings.
6.2 Visual flags and safeguards
To make circular references obvious to users and auditors:
- Use consistent cell styles or colors for circular reference cells and related inputs.
- Create a dedicated “Model Settings” or “Assumptions” sheet containing:
- A summary of circular logic.
- Copies of current Excel calculation settings.
- Instructions on how to re-enable iteration if it is accidentally switched off.
- Add comments or notes directly on key circular cells.
Note : Many audit issues arise because users are unaware that circular references are active. Make the existence of such logic unmissable in your workbook design.
7. A practical auditing workflow for circular references
The following step-by-step workflow can serve as a reusable checklist when reviewing any complex Excel file.
7.1 Step-by-step circular reference audit checklist
- Capture environment settings
- Record Excel version, calculation mode, and iterative calculation parameters.
- Run a full calculation
- Press F9 to recalc the workbook and note any circular reference warnings.
- List all circular references
- Use Formulas > Error Checking > Circular References.
- Create a table of all reported cells.
- Map each loop
- Use Trace Precedents/Dependents to follow the chain.
- Capture the path in a helper table or diagram.
- Classify each circular reference
- Accidental, design flaw, or intentional with iteration.
- Test convergence and stability
- Vary Maximum Iterations and Maximum Change.
- Record key outputs at each setting.
- Redesign or isolate
- Remove accidental and flawed loops.
- Isolate intentional loops into controlled iterative blocks.
- Document and communicate
- Update model documentation to describe all remaining circular logic.
- Share findings with stakeholders and agree on usage rules.
FAQ
Are circular references always bad practice in Excel?
Circular references are not always bad, but they are always high-risk and require explicit justification.
Accidental circular references created by typing errors or broken links should be eliminated immediately.
Intentional circular references may be acceptable when they implement a necessary feedback mechanism, converge reliably under well-controlled iterative settings, and are thoroughly documented in the model.
How can I quickly find all circular references in a large workbook?
Start with Excel’s built-in menu under Formulas > Error Checking > Circular References to obtain a list of affected cells.
Then create a small audit table listing each cell, its formula, and its precedents.
Use Trace Precedents and Trace Dependents to follow the chains and identify full loops.
For very large models, you may also consider using specialized spreadsheet auditing add-ins that can build dependency maps automatically.
What are safe default values for Maximum Iterations and Maximum Change?
Reasonable starting points are around 100 iterations and a Maximum Change of 0.000001, but there is no universal “safe” setting.
The appropriate values depend on the scale and sensitivity of your model.
As an auditor, your responsibility is to test convergence under different settings and to confirm that key outputs do not materially change when you tighten or relax these values within a realistic range.
How do I explain circular references to non-technical stakeholders?
A simple explanation is that a circular reference is a calculation that feeds back into itself, similar to a thermostat that adjusts the heating based on the current temperature.
Emphasize that, in spreadsheets, this feedback can be useful but must be controlled to avoid unstable or misleading results.
Provide a short summary of where the circular logic exists in the workbook, why it is needed, and what tests have been performed to ensure stability.
Should I disable iterative calculation when auditing someone else’s workbook?
Temporarily disabling iterative calculation can be helpful to surface hidden circular references and see the resulting error messages.
However, you must always restore the original settings after testing and clearly document any changes you have made during the audit.
When iterative calculation is integral to the model’s design, coordinate with the model owner before changing the settings to avoid confusion or unintended side effects.