Internal Audit

Stock Audit of Bank Borrowers: Procedure, Documents Required

Stock Audit of Bank Borrowers: Procedure, Documents Required

One of the most popular methods of financing regularly used by different bankers is working capital finance in the form of cash credit/overdraft facilities secured by the hypothecation of stock and debtors. In these situations, the borrowers must send stock and debtor information each month so that the banks can calculate drawing power after deducting the required margin.

Bankers appoint chartered accounting firms regularly to conduct stock audits, significantly when the exposure exceeds the predetermined threshold limit (typically over Rs. 100 Lacks), to verify such statements’ authenticity and accuracy. Stock and debtors are the primary security, so bankers appoint these firms to ensure that the statements are true and accurate.

Purpose of a Stock Audit

The banker’s primary goal in choosing the CA firm to undertake a stock audit is to determine whether the security (the debtors and shares of the borrower) used as collateral for the financing is secure and is valued appropriately.

Following is a summary of the numerous goals that a stock audit is meant to accomplish:

  • To assure adequate stock management, preservation, and storage.
  • To determine whether any obsolete stock is present and, if so, whether it has been separated and written off.
  • In order to confirm that the store is sufficiently insured against fire and other natural calamities (and, when applicable, against additional risks like theft, burglary, maritime, riots, etc., according to sanction terms).
  • To check that the stock statement given to the banker matches the physical stock
  • We are examining potential financial fraud.
  • To determine the causes of excessive qualifying remarks about stocks and receivables in the auditor’s report on the borrower’s balance sheet.
  • Confirming that the limitations sanctioned terms and conditions have been followed
  • To determine the reliability of the hypothecated stock.
  • To certify that financing is only based on the value of paid stock and that the borrower is the sole owner of the stock.
  • Evaluate the outstanding debtors according to the bank’s books and statements, the actions taken to collect long-overdue debts, and any indications that a debtor might become problematic.
  • Anything else that might be of interest to the bank.
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Steps involved in the stock audit

A stock audit must be performed at the borrower’s location. But before going to the borrower, you must understand the organisation, its banking practises, and its financial issues.

It is therefore advised to go to the specific branch where the borrower has an account in order to gather information about the sanction, account operations, the nature of the business, the performance of the borrower, and other fundamental details, as well as the comments and observations made by other auditors (such as internal auditors, concurrent auditors, etc.), in order to get a quick understanding of the borrower and its financial affairs. Before visiting the branch or the borrower’s office, make an appointment.

Visit to Borrower’s Branch

For each borrower, banks typically maintain two folders (rarely just one), one of which is used to store the original documents that the borrower has signed (such as the Demand Promissory Note, Hypothecation Deed, Guarantee Bond, etc.) and the other of which contains the application form, project report, sanction letter, audited financial statements1, previous stock audit report, and other materials.

Each month, the borrower submits stock statements, which are either retained in a separate file designated for keeping stock statements of all the borrowers or filed with the correspondence file. Stock auditors can learn more about the borrower’s activities and undertake an audit of the account by carefully examining both files, the account operations, and the DP Register about the terms of the sanction.

Documents Needed by Bank Branch Employees:

  • Letters of sanction and most recent renewal.
  • Stock Statements, most recent six.
  • Last six months’ worth of bank statements.
  • Report on turnover for the previous fiscal year and the current fiscal year (to date)
  • Copy of Forms Nos. 8 and 32 for the preparation or amendment of Charges or ROC search reports in the case of a Company.
  • OR CERSAI copy if dealing with a different entity.
  • Total Outstanding Balance on All Bank Accounts.
  • Register DP.
  • Use QMR/QMS/QIS/QPR for the previous two quarters.
  • Branch inspection results over the previous two quarters.
  • Recent three GST/excise returns (it may also be obtained from the borrower).
  • Report on the collateral securities’ valuation.
  • Audited FS for the most recent fiscal year that has finished (it may also be obtained from the borrower).
  • Quarterly/Half-yearly book debt Statement of book debt approved by CA.
  • Copies of the insurance policies for the primary and collateral securities may also be obtained from the borrower.
  • If the account statement shows significant transactions with the same party, then the parties’ relationships and authenticity should be confirmed there.
  • Any additional stock audit-related documentation is welcome in order to improve reporting or auditing.
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Visit to borrower and verification of stock. 

Once the bank branch has provided the necessary data, a visit to the borrower entails checking the stock and debtors, asking about internal controls, and examining previous performance and bank activities. Even though the audit only relates to supply and debtors, having a general awareness of the financial situation and asking about sibling companies’ operations can still be helpful to the stock auditor in shaping the report’s conclusion.

Before you begin stock verification, you must comprehend the nature of the items, particularly about storage, if they are stored at different places, whether they are decaying naturally, etc. and the heart of the warehouse.

Manufacturing, production, and determining whether any portion of the job should be moved outside the Company for additional processing.

Stock physical verification

  • Inspection of the go-down with reference to its location, state, rent obligations (if the go-down is rented), maintenance, etc.
  • Actual stock counting and comparison with book figures; reconciliation, if necessary, with the book figures.
  • Open stock, purchases, production, sales, and closing stock should all be checked against the record.
  • Analysis of stock movement and stock prices by age.
  • Verify any unusual stock growth or decline.
  • The stock book is not updated or kept.
  • Obsolete stock is not excluded from the stock data provided to the bank.
  • The stock turnover ratio is declining.

Results of the stock audit and its applications

One of the crucial tools for the bank’s credit monitoring is the stock audit performed by an outside CA firm. In addition to ensuring the security is realisable, it aids the bank in reprimanding the borrower or may serve as a warning indication for potential future NPA. It might help the bank take prompt corrective action to prevent substantial future losses. Through comments on the upkeep of the DP register, examination of statements, evaluation of accounts, and compliance with audit results, it also draws attention to any deficiencies in the branch’s current monitoring system.

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Additionally, a stock audit is helpful to the borrower. Complaints regarding inadequate insurance coverage and inaccurate descriptions of products and locations in the policies are promptly addressed. In that case, it may prevent the borrower from suffering needless losses.


A borrower’s reported inventory and collateral must be accurate, and a stock audit of bank borrowers ensures this. The audit helps reduce risks for both the lending institution and the borrower by adhering to a thorough process that includes detailed on-site inspections, cross-referencing with financial records, and validation of stock documentation. The necessary framework for an exhaustive and trustworthy assessment is laid forth by the required documents, which include inventory reports, financial records, and loan agreements. Ultimately, this procedure protects the interests of all parties and improves transparency, confidence, and the lending relationship between the bank and its borrowers.

Frequently Asked Questions (FAQ)

  1. What are the Documents Required for Stock Audit?

     Order Letter.
     Stock Statement for the prior month, fully attested by a CA.
     Last three months' worth of bank statements.
     Check the specifics of the collateral security.
     For the Company, a copy of Form No.
     The unpaid balance on all outstanding Bank accounts.

  2. What is the verification of stock in an audit?

    The stock audit is physically examining stock based on kept records. As a result, the audit performed on a company's stock includes checking for and identifying inconsistencies (if any), identifying variances, and reporting as necessary. The terms stock audit and stock verification have equivalent meanings.

  3. Who is eligible for a stock audit?

    At the time of application, the individual stock auditor must be at least 25. In the case of businesses, the owner or any of the partners must be younger than 25. However, the applicant's or proprietor's age cannot exceed 65 at the time of empanelment.

  4. What is the process of a stock audit of a bank?

    One or two cycles make up the timeframe. Historical data and book values are required to comprehend the company process and dependability. The three stages of the stock audit are data verification, site inspection, and data and pertinent information analysis.

  5. What is the limit for stock audits by banks?

    The minimum working capital exposure typically ranges from Rs. 1 crore to Rs. 5 crore. Cooperative banks often use stock audits for directions over $1,000,000, and Nationalised banks typically use stock audits for exposures over five crores.

  6. What is the purpose of a stock audit?

    A stock audit's main objective is to compare financial data with actual counts, as was already said. Auditors monitor the inventory counting procedure when conducting a stock audit to ensure it is carried out effectively.
    Every corporate organisation must undergo stock auditing at least once a year as a regulation requirement.

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