Basic of Stock Audit

Published on:

Listen to this article
Check stock product in ware house


The exercise of stock audit was initiated by the banks in way back 1992 onwards, after Harshad Metha Scam. The idea is to verify the security offered to the banks against the various facilities by an independent authority w.r.t. its adequacy to cover the limits on a particular date.

Some of the banks have cover the limits Rs.5/- crore and above accounts on yearly basis while others covers accounts over Rs.1/-crore. Banks also initiated half yearly verification by the same agency.

Some banks also required, the visits should be conducted along with the bank official with an intention that, the bank official know the operations in the account and able to take decisions for that account quickly, as well as know the procedures adopted by the independent agency for verification, and the deficiencies if any observed while verification. 

The main purpose is:

An independent assessment on value of security. Checking of records kept for the security.

Assessment of drawing power on the date of visit.

Comparison of balances as on the date with value of security.

The changes in business activity and assessment of requirement is done correctly. Conduct of account, financial management.

Adequacy of insurance cover for security, primary as well as collateral. General observation on the operations of the borrower.

How to proceed.

Candid of young attractive asian woman, auditor or trainee staff working in warehouse store counting or stocktaking inventory by smart tablet. Asian entrepreneur, small business or SME concept.

Visit the branch to ascertain the conduct of a/c, sanction letter, deficiencies observed by the branch inspectors, RBI audit, con-current audit, various compliance, statement of security like stocks, book debts submitted.

Visit to the borrower place where the security is kept, factory, godown, job worker where the stocks are kept. Visit the borrower office to verify the security of book debts, invoices for valuation, statutory records, compliance for bank, discussion on deficiencies observed.Compilation of details and preparation of report.

Details to be collected:

From Branch:

Copies of, latest stock statement, latest sanction letter, latest QIS report submitted Observation by various auditors on account and its ratification if any.

Statement of overdue in Packing credit, devilment of L/C, guarantee etc. General review of operations, for excess, Ad voc allowed.

Compliance to terms of sanction during the financial year.

Balances in all a/c as on the date of visit.

From Borrower:

Copies of:

Insurance policy for primary and collateral security.

Invoices for valuation of security. 

Audited accounts of previous year.

Methods of valuation adopted for security statement submitted to bank.

Invoices for purchases in case of term loan.

Actual verification of security.

For Stocks:

Select the items to be verified on random basis from the stock statement submitted.

Check these items with the records available for correctness of quantity. 

Reconcile and arrive the stock as on the date of visit for selected items. 

Physically check the stocks, any variation should be adjusted with the stock shown in the statement submitted.

Check the valuation of these items with the records available.

Identify and note the stocks more than 180 days old, slow moving, out of order, rejected, non-moving stocks, generally the banks does not consider the value of these items in security while calculating the drawing power. 

For book debts:

Select the list of accounts to be checked from the total debtors list.

Test check the invoices, with dispatch of martial, Ascertain the method of adjusting the receipts in case receipts are not against a particular bill.

Verify the age of the receivables.

Verify the ledger accounts for selected debtors for last six months. w,r,t. sales, receipts, rejections , payment pattern, credit period etc.

Check all the balances of debtors from debtors ledger for the statement submitted.

Arrive at the Drawing Power; The parameters for security value taken for drawing power are given in the sanction letter.

Value of security:

 Stocks Less. Creditors for goods.Rs.

 Stock against L/C not paid.

 Slow, non-moving, rejected stocks.

 Net Stocks

 Less. Margin(As stipulated in sanction)

 Stocks for drawing power.(A)


 Less. Margin(As stipulated in sanction)

 Receivables for drawing power.(B)

  Drawing power.                                                           


 Bal in the account as on that date.

 Checking should confirm:

 The value of security not shown higher by,

 In case of stocks.

 Enter fictitious purchase bills, twice entry in stock record.

 Not entering the issues.


 Rejected, out of order, non moving stocks not separated.  

 Recording job work stock as own stocks.

 Physical stock not properly stored whereby unable to count , given on estimation basis.

 Entry of fictitious payment to creditors, to reduce the value. 

 In case of receivables:                    

 Recording of fictious sale bills or enter twice.

 Not entering of receipts against outstanding.

 Records sale bills where martial not dispatched.

 Non recording of goods return or rejected.

 Date of invoice not correct, difficulty in ascertain the age of receivables.                        

 Non genuine debtors parties.                                  

 Debts of sister concern included, which are already financed in respective firms.                      

 Records to verify:

1. Excise records for stocks are reliable, if maintained verify the same.

Name of the record                                Purpose

RG-23 Part I                                           For Raw martial & excisable items to ascertain value.

RG-23 Par II                                           For Raw martial & excisable items quantity to ascertain Qty.

RG-1                                                      Qty of finished stock for Qty, Sale price and duty component to ascertain value.

Annex Iv                                                  Stock send/ received from outside processorss

2. Physical verification for selected items is must.

3. Financial discipline of the borrower w.r.t submission of statements to bank, operation within the limit, No overdue .

4. Review of business activity for near future

My Experiences:

Asian man check agricultural equipment stock with smile

Few examples:.

1. A trader in chemicals shows early signals, however taken us to his godown for verification of stocks. The note book was maintained to show number of drums in the godown. When we ask the martial in the drums, he unable to explain and told the same is known to the owners only. We decided to take a count, the drums at the base are moved by simple hands indicate the same are empty, when asked, it was explained to us, that when the martial is sold they are kept down, and filled drums are stored above. We surprise how and 150 k.g. full drums stores in three and four upper layers.

I ask him to take a coin of Rs.5/- and hit all the drums for a count. When he hits, a big sound emerge indicating all the drums are empty.

The gown keeper finally admits the empty drums.

2. A visit is arranged to factory , the schedule is very tight, we should only get some hours in the factory premises. When we reached the destination and pickup by borrower instead of factory he first take us for lunch.

When a factory, he explained us how much clerical security offered to the bank, which is more than three to four times the funded limits.

He explained how such audit is burden to the borrower and unnecessary. The accountant was absent and systems are not working.

When we have round to the factory, a staff is continuously watching our movements and discussions we had with the workers.

Ultimately the visit ended with no verification to our satisfaction, we reported the same. The borrower called us an agent of new bank manager who has behind him for regularization of excess.

The account naturally turnout to NPA.

Hope the article give early guidance and basics of this assignment.


Leave a Reply

Please enter your comment!
Please enter your name here

Poonit Rathore
Poonit Rathore
My name is Poonit Rathore. I am a Blogger, Content-writer, and Freelancer. Currently, I am pursuing my CMA final from ICAI. I live in India.
Share to...