Stock Audit

A cash credit limit against hypothecation of Stock & Debtors is very commonly adopted as a mode of finance. In such case the borrowers are required to submit stock statements showing details of Stock (RM, WIP, Consumables, FG) & Debtors so that banks can calculate the eligible drawing power of the borrower. Under a stock audit a chartered account firm is appointed to serve following objectives:

a. Ensuring that physical stock matches with the stock statements submitted by the borrower to the bank.

b. Ensuring that the stock is owned by the borrower and borrowed finance is utilized for the purpose for which it is taken.

c. Identifying the quality of debtors based upon the ageing analysis made and ensuring the correctness of method adopted for valuation of stock.

The Stock audit report is to be prepared as per the format specified by the bank. However for audit purpose the auditor should prepare a list of things which are required to be checked under stock audit.

The auditor may cover the following points under stock audit:

Documentation:

1. Documentation in respect of charging of security should be proper.

2. Whether documents are properly vetted by advocate or legal departments as per the norms of bank.

3. Whether adequate stamps are affixed on documents.

Operation & Performance of account:

1. The account should be regularly/actively operated.

2. The limit should be reasonably utilised. It should not remain unutilized for a longer period.

3. The transaction of purchase and sales should be routed through account.

4. There should not be abnormal cash withdrawals. Also the cash withdrawals are supported by appropriate sanction.

5. The interest should be served in time.

6. No. of time the account was excess drawn and whether excess drawn was reported to the appropriate authority.

7. The operation of account should be scrutinized with the Quarterly Information Statements (QIS) submitted by the borrower to the bank.

8. The no. of cheques returned.

9. There should not be a belated renewal or review.

10. Points raised by the concurrent auditor in respect of account should be complied in time.

11. The primary & Collateral securities should be adequately insured as per the terms of sanction. Expired insurance should be renewed on time.

12. Bank's name plate should be displayed on hypothecated assets.

Drawing Power:

1. The stock and book debt statement should be regularly submitted by the borrower.

2. The DP should be adequately maintained by the bank. It should have been calculated on regular basis and same should be compared with maximum outstanding balance.

3. Overall observation as to quality of book debts. For this purpose age wise analysis of debtors should be made and adequate provisions should have been made on bad debtors.

4. The method adopted for valuation of inventory should be accurate and the same should not result into over valuation of inventory.

5. Also check whether any procedure adopted by the borrower for identifying and monitoring the slow moving / non moving inventory.

Drawing power can be calculated as per following statement:

Inventory

Book Debts

Extensive Audit:

1. Confirmation from third party for inventory and book debts can be taken.

2. Ensuring that material received from third party for job work is excluded while calculating DP.

3. Movements of inventory can also be checked with returns submitted to Excise and Sales Tax Department.

4. Advances received from debtors should have been considered while computing DP.

5. Operation with other banks should have been permitted by the bank.

All above discussion is exhaustive and may include other aspects while actually performing the audit. The purpose of stock audit is to monitor the borrower account by the bank through a third party auditing firm. This ensures the discipline maintained by the borrower with the account concerned and also highlights the weakness in the monitoring system of the bank.

I hope the discussion made will qualify for a consideration.