ALL ABOUT STOCK AUDIT

 

 

 

Banks provides working capital financing facility to its customers such as cash credits, overdraft etc. According to the details of stock and debtors balances of clients furnished to bank, borrowers drawing power is determined after deducting required margin amount there from. Hypotication of stock and debtors balances being the primary security offered to bank against the fund allowed to be overdrawn , bank appoints Chartered accountants to conduct stock audit of borrowers in order to certify the genuineness of statements and transaction (such as details regarding stock and debtors balances).

 

APPOINTMENT OF STOCK AUDITOR

 

The appointment of stock auditors is generally made by the regional or zonal offices in case of nationalized banks, while in case of co-op banks sometimes concurrent auditors only are asked to conduct stock audit of select borrowers of the branch. 

 

OBJECTIVES OF STOCK AUDIT

 

The basic objective of bankers appointing CA firms for conducting stock audit is to ascertain whether security (stock and debtors) against which finance has been made is safe and is valued correctly. These are various other purposes required to be achieved while conducting stock audit.

1. To ensure that stock is owned by borrower and finance is available only against paid stock.

2. Prior hypothecation has been realized.
3. To ensure that stock is insured against fire and other natural calamities.
4. To ensure proper preservation / storage and handling of stock.
5. To identify whether there exits any obsolete stock, if yes whether it has been segregated and written off.

6. To check physical stock tallies with stock statement submitted to banker.

 

STEPS INVOLED IN STOCK AUDIT

 

1 Stock audit is necessarily required to be conducted at the borrowers place for obvious reasons.

2 But before visiting the borrower, understanding the entity, its banking operations and financial affairs is must.

3 Therefore, it is advisable to visit the respective branch where the borrower is having the account so as to gather the information relating to Sanction, account operations, nature of business, performance of the borrower and other fundamental information along with the comments / observations noted by other auditors (like Internal Inspectors, Concurrent Auditors etc) to have a brief understanding about the borrower and its financial affairs.

4 Transactions of sister concerns are not fake and misleading to increase sales deliberately.

5 After conclusion of visit, stock audit report in prescribed form if available is required to be prepared. In case of absence of format questionnaire prepared can itself act as report.

 

FORMAT OF STOCK AUDIT REPORT

 

Format for stock audit report may vary from bank to bank. Some banks have customized stock audit report formats while others may hint only the important areas to be reported by stock auditors. Irrespective of the formats, it is good to have questionnaire to be prepared by stock auditor covering following important areas of stock audit.

1. Compliance with terms and condition of sanction.
2. Timely and adequate submission of stock statements & other important financial information.

3. Account operation – overdrawing, credit summation
4. Drawing power calculated by bank and by auditor if differ, reasons for discrepancies along with reason.

5. Verification of stock.
6. Insurance coverage.etc

6. Methods of valuation of stock, time intervals of valuation.
7. Systems / procedures implemented by borrower to identify the slow and non-moving stock items.

 

COMMON IRREGULARITIES FOUND DURING STOCK AUDIT

 

1. Stock Book Debts statements not submitted / not submitted in time.
2. Inadequate details viz. rate, quantity and amount of different type of stock items not stated in the statement.

3. Under insurance of stock.
4. Insurance expired and not renewed.
5. Insurance Policy without Bank Clause.
6. All sales as per financial statements not routed through account
7. Account not operated actively.
8. Drawing power not correctly calculated.
9.  Latest visit report by branch official not on record.
10. Wrong items / description of goods on insurance policy.
11. Age wise analysis of Debtors not given / done. Debtors over 90 days (or as per sanction) considered for drawing power.

12. All locations of stock not covered.
13. DP Register not maintained up to date.
14. Defects pointed out by the Internal Auditors / Inspectors / Concurrent Auditors are not complied with.

15. In insurance policy, wrong address of warehouse is quoted.