Stock audit of bank borrowers: Procedure, Documents Required

Stock audit of bank borrowers: Working capital finance in the form of cash credit/overdraft facility against the security of hypothecation of stock and debtors is one of the most common

Raju Choudhary

Stock audit of bank borrowers

Stock audit of bank borrowers: Working capital finance in the form of cash credit/overdraft facility against the security of hypothecation of stock and debtors is one of the most common modes of finance frequently adopted by various bankers. The borrowers in such cases are expected to submit the details of stock and debtors every month on the basis of which Drawing Power after reducing the prescribed margin is calculated by the banks.

Stock and debtors being the primary security, bankers for ascertaining the genuineness & correctness of such statements appoint chartered accountant firms at frequent time intervals to conduct stock audit specifically where the exposure exceeds the predetermined threshold limit (generally over Rs. 100 Lacks).

Stock audit of bank borrowers

The stock audit involves audit of latest stock and debtor’s information of the borrower and the report should give the position of stock and debtors ideally on the date of visit. Further it will also make examination of past data submitted by the borrower to the bank and appearing in the books of accounts of the borrower, to check reliability of information submitted by the borrower.

Objectives of Stock Audit

The banker appointing the CA firm for conducting stock audit has main objective of ascertaining whether the security (borrower’s stock and debtors) against which finance has been made is safe and is valued correctly.

The various purposes expected to be achieved through stock audit may be summarized as follows:-

  • To ensure proper preservation/storage and handling of stock. ·        
  • To identify whether there exist any obsolete stock & if yes, whether it has been segregated & written off.
  • To verify whether the stock is adequately insured against fire and other natural calamities (in appropriate cases against other risks like theft, burglary, marine, riots etc. as per sanction terms) ·
  • To ascertain whether physical stock tally with the stock statement submitted to the banker
  • Checking for diversion of funds.
  • To find out reasons when there are too many qualifying remarks about stocks and receivables in the Auditor’s report on the Balance Sheet of the borrower
  • Ensuring that the terms and conditions of limit sanctioned have been complied
  • To ascertain whether hypothecated stock is realizable.
  • To confirm that stock is owned by the borrower and finance is made against value of paid stock only. ·
  • To examine the age wise debtors outstanding as per books and as per statement submitted by the bank, steps taken for recovery of long pending debtors and likely instances of debtors turning bad, if any.
  • Any other matters of interest to the bank.

Steps involved in stock audit –

Stock audit is necessarily required to be conducted at the borrowers place for obvious reasons. But before visiting the borrower, understanding the entity, its banking operations and financial affairs is must.

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 Auditors, Concurrent Auditors etc) to have a brief understanding about the borrower and its financial affairs. You should get an appointment before visiting the branch as well as borrowers office.

Visit to Borrower’s Branch –

Banks generally has the system of maintaining two folders (in few cases only one folder) for each borrower of which one is used for keeping original documents executed by the borrower (viz. Demand Promissory Note, Hypothecation Deed, Guarantee Bond etc.) while other folder contains Application form, project report, Sanction Letter, Audited Financial Statements, previous stock audit report etc.

Stock statements submitted each month by the borrower are filed with the correspondence file or may be kept in a single file meant for keeping stock statements of all the borrowers. Scrutiny of both the files along with the account operations and DP Register with reference to terms of Sanction helps stock auditors to gain insight about the borrower’ affairs and conduct audit of the account.

Important:- If the borrower operates any other bank account e.g.-Term loan, you have to verify for diversion of funds.  ·

Documents Required From the Bank Branch Officials:

  • Sanction Letter and latest renewal letter.
  • Stock Statements (latest 6).
  • Bank Statement for the last 6 months.
  • Turnover report for last financial year and current financial year (till date)
  • In case of Company, Copy of Form No. 8 & 32 for creation/ modification of Charge or ROC search report.


CERSAI copy in case of other than company.

  • Balance Outstanding in All Accounts with the bank.
  • DP register.
  • QMR/QMS/QIS/QPR for the last 2 quarters.
  • Branch inspection report (for last 2 quarters).
  • Latest 3 GST/excise returns(It could be taken from borrower also).
  • Valuation report for collateral securities.
  • Audited FS for the last financial year ended (It could be taken from borrower also).
  • Half yearly/Quarterly book debt CA certified book debt statement.
  • Insurance policy copy for both primary and collateral securities (It could be taken from borrower also).
  • If the major transactions with same party reflects in account statement, than relation with such party and genuineness of such transaction should be verified at party place.
  • Any other document related to stock audit to conduct more effective audit or reporting.

Visit to borrower and verification of stock –  

Once the basic information is collected from the bank branch, it is time to visit the borrower. It is advisable to carry audit questionnaire at the time of visit so that no important point / area is missed out (You should draft a detailed questionnaire with help of audit format). Visit to borrower involves verification of stock and debtors, inquiry about internal control, and analysis of past results and bank operations. Although audit is related to stock and debtors only, understanding of overall financial scenario and inquiry as to sister concerns & their businesses may also help the stock auditor to finalize the report in a better manner.

Before you start stock verification you need to understand the nature of goods, especially with regard to the storage- whether stored at multiple locations, whether they are deteriorating nature etc.

The process involved in manufacturing, production and ascertaining whether any part of the work is to be sent out of the entity for further processing.

Physical verification of stock

  • Godown inspection with regard to its location, condition, rent payments (if godown on rent), maintenance etc.
  • Actual counting of stock and match it with book figures) reconciliation with the book figures if there is any difference.
  • Check on record- Opening stock, purchases, production, sales and closing stock.
  • Age wise analysis of stock and movement of stock.
  • Check abnormal increase/decrease in stock.


You have to verify all major creditors and debtors.

Documents required from the Borrower:

  • Stock position as on date of Verification.
  • Trial balance or Provisional Balance Sheet as on date of Verification.
  • Copy of latest audited balance sheet.
  • Insurance Policy (Incl. Bank Hypothecation Clause for primary as well as secondary Collateral Security.
  • Figures of Purchase and Sales for last 6 months as well as for current month till date of Verification.
  • Invoices of Purchases & Sales, Stock Register & other supporting Documents for verifying internal controls.
  • Method of valuation followed for Inventory with detailed working.
  • Copy of latest Excise/GST Returns filed.
  • Break up of Sales into export and domestic.
  • Details of non-moving and obsolete stock and also stock held for more than 6 months.
  • ABC analysis of stocks based on the value of annual consumption of major items. (Only if Available)
  • Products manufactured with details of licensed capacity, installed capacity and actual utilized capacity.
  • Month wise details of purchases and sales, stock, debtors and creditors for last 6 months
  • Major creditors (operational) and debtors and their transaction should be verified on random basis.

Common irregularities / observations in stock audit –

The common irregularities that may be observed by the CA firm during stock audit can be summarized as follows –

Observations about statement submission & Scrutiny

  • Stock Book Debts statements not submitted/ submitted but not within time.
  • Inadequate details viz. rate, quantity and amount of different type of stock items not stated in the statement.
  • DP Register not written up to date
  • Age wise analysis of Debtors not given / done.
  • Debtors over 90 days (or as per sanction) considered for drawing power.
  • Drawing power not correctly calculated.
  • Latest visit report by branch official not on record.
  • Operations in the accounts not scrutinized with reference to projections,
  • QIS statements, audited accounts etc. not in records.
  • Defects pointed out by the Internal Auditors / Concurrent Auditors are not complied.
  • Account not renewed / belated review.

#Observations about account operations –

  • All sales as per financial statements not routed through account.
  • Account not operated actively.
  • Cash withdrawal during current period is abnormal.
  • Frequent overdrawing in the account.
  • Balance over drawing power although within Sanctioned Limit.

Observations about Insurance coverage –   ·

  • Under insurance of stock.
  • Insurance expired and not renewed.
  • Premium for renewal policy paid but policy not on record.
  • Insurance Policy without Bank Clause.
  • No coverage of all risks as per sanction.
  • Wrong items / description of goods on insurance policy.
  • Location of goods wrongly stated.
  • All locations of stock not covered.

General Observations –

  • Stock book not maintained/ not updated.
  • Obsolete stock not excluded from stock figures submitted to bank.
  • Deteriorating stock turnover ratio.
  • Stock, debtors, and creditors figures submitted at the year end in stock statement and as per financial statement not matching.
  • Confirmation for inventory with third party not obtained or physical verification of Inventory not done.
  • Material received from third parties for job work not excluded while calculating drawing power.

Findings of Stock Audit and its uses –

Stock audit by external CA firm is one of the important tools of credit monitoring for the bank. Apart from ensuring safety of realizable security, it also helps the bank to discipline the borrower or may act as a warning signal against probable future NPA. It may aid the bank to take timely remedial measures to avoid substantial future losses. It also highlights the weaknesses, if any in the existing monitoring system of the branch through comments about maintenance of DP register, scrutiny of statements, and review of accounts and compliance of audit findings.

Over and above, stock audit also has the utility for the borrower. Comments about insurance inadequacies, wrong product description and locations stated in the policies, if rectified timely may save the borrower from avoidable future losses.

Therefore, in my opinion unlike Statutory Audit where there is thrust only on the compliance under respective statute, the Stock Audit is a knowledge value addition exercise for both – bankers as well as borrowers.

By – Umesh Kundara

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