Stock and Debtors being the primary Security in Cash Credit, Bankers have started appointing C.A. Firm to conduct stock audit, where the exposure exceeds threshold limit (i.e 100 lacs or 500 lacs ,as per the Banks’ policy), in way back 1992 onwards after Harshad Mehta scam.
Stock Audit helps in Prevention and early detection of Frauds.
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.
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.
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 relavant valuation method followed.
· Identify and note the stocks more than 180 days old, slow/non-moving items, rejected items, etc. As generally the Banks don’t consider the value of these items in security while calculating D.P.
· Reconcile the vale of stock submitted in the statement as on the DATE OF INSPECTION (say 23rdJan, 2012) with that of last stock statement submitted (say 31st Dec., 2011).For e.g.
Stock as on 23rd Jan., 2012
= Stock as on 31stDec., 2011 + Purchases During 31stDec. to 23rd Jan. (–) Cost of Sale(i.e. Sales less G.P.) for the same period.
· Drawing Power Should be arrived at follows:
Stock | XXXX.XX |
Less(-)Creditors for purchase | XX.XX |
Paid Stock | XXX.XX |
Less(-)Obsolete/ Non-moving items | 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.
· 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 followes:
Debtors upto 90 days (or as per sanction terms) | XXXX.XX |
Less(-)Prescribed Margin (%) | XX.XX |
D.P. on Book-Debts | 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 isn’t 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.