STOCK AUDIT PROCEDURESAT THANE MIDTOWN CPE STUDY CIRCLE - 15TH JUNE, 2013 By CA Arvind Joshi Bcom. FCA, DISA (ICAI), CISA (USA) Working Capital finance is provided by Banks against Security of Stock & book debts. Borrowers are submitting monthly statements of Stock & Debtors as well as quarterly/ periodic information in prescribed format about their business performance, sales/purchases, insurance & other details. Drawing power is identified on the basis of the monthly statement to ensure that there are no over drawings in the account. Being the primary security, bankers are interested in assurance about the genuineness, correctness, safety & enforceability of their security. Stock Audit normally conducted as per the Bank’s policy at frequent time intervals specifically where the exposure exceeds the predetermined threshold limit (generally over Rs. 100 Lacs). Stock Audit helps in Prevention and early detection of Frauds. Main objective of Stock Audit: 1. Proper Preservation/storage of Stock. 2. Whether obsolete & non-moving stock has been segregated. 3. Whether stock is adequately insured against all major perils. 4. Whether physical stock confirming with the stock statement submitted to the Banker. 5. Whether stock is owned by Borrower and Finance is made available against value of paid stocks only. 6. Age-wise & Party-wise Book-Debts analysis submitted to the Bankers tallied with the Books. 7. Compliance of terms & conditions of finance Procedure followed: 1. Obtain details from Bank & borrower 2. Conduct actual verification at the borrower’s office/ site 3. Discuss findings with borrower & Bank 4. Issuing of Stock Audit Report Details to be obtained from Bank 1. Sanction Letter. 2. Stock /Book-Debt Statement for the last 3 months. 3. Last QIS /QMR (i.e. Quarterly Information Statement / Quarterly Monitoring Report). 4. Last Debtors/Stock Statement certified by C.A. of the borrower, as normally required by Bank normally on Quarterly/ half-yearly basis 5. Bank statement for last 3 months. 6. Copy of constitution of entity i.e. partnership deed, Memorandum/Articles of Association etc., whichever applicable. 7. Balance Outstanding in all accounts of the borrower. 8. Credit Turnover i.e. summation of the account for the last 6 months (excluding cash deposits, transfers from other financial institutions, cheque returns, etc.) 9. Particulars of Collateral Security to be checked. 10. In case of a Company, Copy of Form No. 8 & 32 for creation/modification of charge with ROC. related business risks. 9. 3.e. Internal control procedures in respect of stock & purchases 10. . for Primary (i. Minimum & maximum levels etc. Stock as per statement to be tallied with books & records 2. time interval for valuation and adequacy & sufficiency of procedures thereof. Agreement of Hypothecation.P. Letter of continuity. or net realisable value whichever is less or any other relevant valuation method followed. Observe & verify physical maintenance and storage of stock and adequacy of facilities at the borrowers place. 4. 7. non moving/ slow & rejected items from stock register.to-date for all materials? 9. accounting policies. Check Remarks & pending compliances in respect of Internal/ concurrent/ Statutory Auditors. Stock and Book Debts) as well as Collateral Security.. containing Bank Hypothecation Clause. including entity’s internal controls. Are inventory records kept up. To understand following: Relevant Industry. Identify stock for more than 180 days. ownership & governance structure. etc. regulatory & other factors Nature of entity – its operations. Verify excise records like RG23 Part I & part 2. 6.11.. 12. 4. Systems / procedures implemented by borrower to identify the slow and nonmoving stock items. Method of valuation of stock Actual verification Verification of Stock: 1. Insurance Policy. Invoices of Purchase and Sales. Letter of Acceptance. Stock Register. internal controls . its adequacy & Internal controls to safeguard stock. Other supporting documents and Overall Internal Control to be checked. 5. Method of valuation of stock.. 5. Are surplus and scrap items properly recorded and controlled? 8. Check Documentation such as Demand Promissory Note. 8. SA 315 – “Identifying & Assessing the Risk of Material Misstatement through understanding the entity and its environment” It requires that the Auditor should understand the entity & its environment. Details to be obtained from Borrower 1. 3. Audited financial statements for the last financial year. Stock generally valued at average sales price less G. Stock/Book-Debts statement as on the date of inspection. Policy of the borrower in respect of Stock levels like reorder level. RG1 etc. Figures of Purchase & Sales for the Last 6 months and also for the current month till the date of inspection. Trial Balance or Provisional Balance-sheet as on the date of inspection... 7. Borrower’s Management information system.etc 2. 6. requisitions for release of stock against receipt / deposit of amount. Verify transactions in the selected accounts for last 6 months specifically in respect of receipts. payment pattern etc. Stock against which pledged facility is given should not be considered for DP of normal facility. proper accounting. Compliance with terms and conditions of sanction. As a good practice discuss the findings with the borrower & bank before submission of report. rejections. insurance arrangements etc. 17. Verification of Book Debts: 13. Arrive at Drawing power – Debtors upto 90 days ( or as per sanction letter ) less prescribed margin 19. Other factors to be verified 20. security arrangements for stock. Debtors for which project finance. 21. Account operations – overdrawing. 2. Timely & adequate submission of stock statements & other important financial information. Bank’s name plate displayed or not 25. Reconcile value of stock submitted as per the statement as on the date of inspection with last stock statement submitted ( Stock as per last statement + purchases during the period – cost of sales for the same period ) 11. credit summation and cash withdrawals. Drawing power calculations by banks and by the auditors & discrepancies.10. bills discounting is sanctioned should be excluded from debtors for DP. the accounts. recovery of charges. Formats are sometimes specified by the bank.. Test check invoices w. In case of bills discounting facility. verify stock records kept. 18. Adequate Insurance of stock & collateral securities 24. Project Finance – period of finance. 22. 5. no over run of time as well as costs etc… 23. Physical maintenance and storage of stock and adequacy of facilities at the borrowers place. utilisation of funds.t. recovery of bills on due dates. . In case of pledge facility. 26. discounting only of bills against which goods have actually been delivered to the customer.r.t. credit period. 4. No specific format.r. Operations in the account w. receiving of funds in proper time. if any along with the reasons. Arrive at Drawing Power – Net paid stock less prescribed margin (Net paid stock = Stock as per statement – creditors for purchases – obsolete/ non moving stock) 12. Check balance of all debtors from ledger with the statement submitted by the borrower. 15. QIS/ MIS & Audited accounts submitted by the borrower. Points to be covered in reports normally are as follows: 1. Select accounts to be verified from the list submitted to bank 14. Other details as may be specified by the Bank. Submit report to the Bank only. Verify age of receivables 16. 3. Statements not submitted in prescribed format or with inadequate details 3. 8. 21. Statements submitted not certified by CA. Charge not registered with ROC 27. Verification of Debtors……. Stock register not maintained/ updated regularly. 25. Stock of all locations not considered in statement. 6. its adequacy & Internal controls to safeguard stock. Borrower’s Management information system. Wrong address on insurance policy. Stock includes that received for labour job. Amounts receivable from sister & associate concerns included in receivables 16.6. Stock statements. 23. time interval for valuation and adequacy & sufficiency of procedures thereof. 9. Statements submitted by the borrower never scrutinised by the Bank & filed as it is. Systems / procedures implemented by borrower to identify the slow and nonmoving stock items. Turnover/ sales/ receipts routed through other banks – operations with other banks without permission/ sanction of bank 22. etc Common irregularities observed in stock audit 1. 4. QIS not submitted in time 2. 15. 19. Balance allowed though within limit is below the DP. Deficiencies as pointed out by internal/ concurrent & statutory auditors not properly attended. Collateral security not insured. Method of valuation of stock. Improper valuation of stock. 5. 9. 8. 20. 24. 18. 26. Adequacy of Insurance of stock. Inadequate/ under insurance 10. Accounts not updated……etc . Stock/ book debts figures as per ledgers & that as per statements not tallying. Bank’s name plate not displayed. Wrong calculation of DP 7. projections & Audited statement of accounts. Capital investments from cash credit account. No Bank’s clause on insurance policy. address on insurance. 7. Statement as submitted does not match with Audited financials. 17. Comprehensive policy covering all kind of risks etc. 12. 10. Diversification of funds for purpose other than sanctioned for. Operations in account not scrutinised with QIS. 11. Bank’s clause. Stock of all locations not covered by insurance. 14. Statements submitted includes Debtors more than 90 days or non moving/ slow/ rejected stock. 13.