Gevaria & Associates

Chartered Accountants

STOCK AUDIT MANUAL

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.
CA Parth Gevaria
1, Shyama Apartments, Opp. Excise Bhavan, Ambawadi, Ahmedabad - 15
(079) 2630 3609; +91 7600 60 22 70; caparthgevaria@outlook.com

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
Value of inventory as on reported date

Less : Value of Obsolete inventory

(-)

Less : Inventory not rank for DP

(-)

Total Value of Inventory for DP

Less : Margin @ 20%

(-)

Drawing power (Inventory)

Book Debts
Value of Book Debts as on reported date

Less : Book Debts more than 90 days old

(-)

Less : Doubtful Debts

(-)

Total Value of Book Debts for DP

Less : Margin @ 20%

(-)

Drawing power (Book Debts)

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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.

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Stock Audit is conducted to ensure :

Proper Preservation/storage of Stock.
Whether obsolete & non-moving stock has been segregated.
Whether stock is adequately insured against all major perils.
Whether physical stock confirming with the stock statement submitted to the
Banker.
Whether stock is owned by Borrower and Finance is made available against value
of paid stocks only.
Age-wise & Party-wise Book-Debts analysis submitted to the Bankers tallied with
the Books.
PROCEDURE:
DETAILS TO BE COLLECTED / CHECKED :
(A)

FROM BRANCH:

Sanction Letter.
Stock /Book-Debt Statement for the last 3 months.
Last QIS /QMR (i.e. Quarterly Information Statement / Quarterly Monitoring
Report).
Last Debtors/Stock Statement certified by C.A. (as required by Bank such
as Quarterly , half-yearly)
Bank statement for last 3 months.
Copy of constitution of entity i.e. partnership deed, Memorandum/Articles
of Association etc., whichever applicable.
Balance Outstanding in all accounts.
Credit Summation for the last 6 months (excludes cash deposits, transfers
from other financial institutions, cheque returns, etc.)
Particulars of Collateral Security to be checked.
In case of Company, Copy of Form no. 8 & 32 for creation/modification of
charge .
Check Documentation such as Demand Promissory Note, Agreement of
Hypothecation, Letter of Acceptance, Letter of continuity, etc.
Check Remarks of Internal/concurrent/Statutory Auditors.
(B)

FROM BORROWER:

Stock/Book-Debts statement as on the date of inspection.

Trial Balance or Provisional Balance-sheet as on the date of inspection.
Audited financial statements for the last financial year.
Insurance Policy, containing Bank Hypothecation Clause, for Primary (i.e.
Stock and Book Debts) as well as Collateral Security.
Figures of Purchase & Sales for the Last 6 months and also for the current
month till the date of inspection.
Invoices of Purchase and Sales, Stock Register, Other supporting
documents and Overall Internal Control to be checked.
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ACTUAL VERIFICATION AND VALUATION :

(i)

STOCK:

Items of Stock mentioned in stock statement to be physically verified and tallied

with books of account and also with Excise Records, if items are excisable, as
Excise records are more reliable such as RG-23 PART-1, RG-23 PART-2, RG-1,etc.
Stock should also be tallied with Civil Supply Register in case of SUGAR MILLS,
OIL MILLS, etc.
Check for Unpaid Stock, if any.
The Stock should generally be valued at AVERAGE SALE PRICE less G.P. OR
Net Realizable Value, whichever is lower or other relevant valuation
method followed.
Identify and note the stocks more than 180 days old, slow/non-moving items,
rejected items, etc. As generally the Banks dont consider the value of these
items in security while calculating D.P.
Reconcile the value of stock submitted in the statement as on the DATE OF
INSPECTION (say 23rd Dec, 2014) with that of last stock statement submitted (say
30th Nov., 2014).For e.g.
Stock as on 23rd Dec., 2014
Nov. to 23

rd

=
Stock as on 30th Nov., 2014 Purchases During 30th
Dec.) Cost of Sale(i.e. Sales less G.P.) for the same period.

Drawing Power should be arrived at follows:

Stock
Less(-)Creditors for purchase
Paid Stock
Less(-)Obsolete/ Non-moving items

XXXX.XX
XX.XX
XXX.XX
XX.XX

Net Paid Stock

XXX.XX

Less(-)Prescribed Margin (%)

XX.XX

D.P. ON STOCK

XXX.XX

(ii)

BOOK DEBTS:

Select the list of accounts to be checked from the list of Total Debtors submitted
to bank.
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Test check the invoices.

Verify the age of receivables in accordance with the terms of sanction.
Verify the Ledger accounts for selected Debtors for last 6 month w.r.t. Sales
receipts, rejections, payment pattern, credit period, etc.
Check all the Balance of Debtors from debtors ledger for the statement
submitted.
Drawing Power should be allowed as follows:
Debtors upto 90 days
XXXX.XX
(or as per sanction terms)
Less(-)Prescribed Margin (%)
D.P. on Book-Debts

XX.XX
XXX.XX

IRREGULARITIES GENERALLY FOUND :

Stock Statements / QIS not submitted in time or not submitted in

prescribed format or submitted with inadequate details.
Stock/Book-Debt statement Submitted isnt certified by C.A. (as required
by Bank such as quarterly, monthly)
Stock Statement received from Party filed in a routine way without
scrutiny.
Debtors more than 90 days (or as per sanction terms) considered for
calculating D.P.
D.P. not calculated as per margin prescribed in Sanction Letter.
Insurance Policy without Bank hypothecation clause, policy expired and
not renewed, Under insurance of stock or insurance policy not on record.
Collateral Security not adequately insured.
Stock on Job-work and Obsolete / Non-moving stock included in Stock
figures submitted.
Long pending Debtors shown as below 90 days (or as per sanction terms).
Stock/Book Debt figures submitted at the year end and as per financial
statement not matching.
Bank name plate not displayed.
Amount receivables from Sister Concern/ Associate concern considered for
calculating D.P.
Stock register not maintained / not updated.
Balance over D.P. although within sanction Limit.
Borrower having operations with other Banks and Realisation from Debtors
routed through such other account.
Operation in account not scrutinized with reference to projections, QIS,
audited accounts, etc.
Defects pointed out by internal / concurrent/ statutory / earlier stock
auditor is neglected.

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