ppt on stock and book debt

1. CA. UDAY KULKARNI
STOCK AND BOOK DEBT AUDIT

2. About Stock & Book Debt
Audit-
 Related to Working Capital Finance.
 Stock & Book Debts Hypothecated as
Security for Working Capital Finance–
CC limit.
 It is specific, agreed upon
Engagement—
 Refer Standard on Related Service
(SRS) 4400.
 Auditor to report factual findings.
 Audit of Inventory and Book Debts.

3. Objectives -
(Bank Perspective)
 Examine, Evaluate-
 The Existence of Inventory and Book Debts.
 The ownership of Inventory and Book Debts (actionable
claim).
 Finance against Paid Stock.
 Handling & Storage of Inventory.
 Evaluation of Inventory and Book Debts System ,
Procedure.
 Adequacy of Internal Control in Inventory & Book Debts
Process.
 Verification of Inventory and Book Debts record to
confirm accuracy of Periodic Statement Submission to

4. Audit Process---
 Refer Engagement Letter- terms & conditions
 Frequency of Audit- Quarterly/ Half Yearly/ Yearly
 Reporting Format
 Visit Branch to -
 Collect Borrowers Profile- Ownership/ Address/Location of
Business Places/Email/Mobile.
 Understand the Nature of Business and Entity of Borrower.
 Understand Banking Operations- turnover in accounts-proper
utilization of limit-matching of account transaction with periodic
statement submitted.
 Understand various limits sanctioned- copy of sanction letter-
Various Security Obtained- Charges Created through Mortgage,
Pledge, Hypothecation.
 Types of Working Capital Sanction Limit- Securities-Inventory &

5. Audit Plan
 Number of Locations to be visited.
 Understanding various laws related to nature of
business/ Inventory/ Turnover etc.
 Preparation of Check list.
 Allocation of Staff.
 Documents to be prepared.
 List of Documents to be obtained.
 Communication with Borrower- Date of Visit-
Records required.

6. Field Work--
 Understand Business- Business Process- Activities carried out at
various locations.
 Manufacturing Process- Raw Material- Consumables- other
material- technical understanding- Manufacturing Capacity.
 Understanding of Input-Output Ratios.
 Understanding of Costing System.
 Understanding of Accounts Recording System.
 Understanding of Inventory System.
 Compliance of Accounting Standards- Revenue recognition-
Inventory Valuation- Recording of Purchases etc.

7. Field Work--
 Major Suppliers- Major Customers- Intergroup/Intercompany
Transactions/ Dependency.
 Location of Storage Facility- Technical Requirements-
Lighting- Air-conditioning- Transportation-Export
Precautions.
 Nature of Raw Material/ WIP/ Finished Goods- life - Size–
Quality Degradation - Impact on Weight and Value.
 Compare the physical quantity reported in periodic statement
with storage capacity with manufacturing capacity and life of

8. Field Work---
 Verify the flow of Inventory Record with Inventory
Process.
 Verify the Inventory Record with sample transactions.
Determine Cut off process.
 Aging of Inventory- Ascertain whether Slow moving,
non moving inventory is identified by Inventory System.
 Verify the A,B, C Classification of Inventory.
 Verify the costing record to ascertain the cost of
various inventory items- specifically for A class
inventory items.

9. Field Work--
 Compare the Inventory record with the Inventory presented in
various statutory statements- like taxation statement, statutory
reports etc.
 Verify the accuracy of such reporting.
 Based on above record verification, determine the %age of
physical verification of Inventory.
 Determine the accuracy of costing system and decide about
rate to be applied for valuation and value stock as per
applicable accounting standards.
 Verify in the costing system only relevant costs are considered
and not Margin.

10. Insurance of Inventory
 Insurance Amount.
 Valuation of Inventory for Insurance.
 Coverage of all locations of Inventory for Insurance.
 Bank Clause in Insurance policy.
 Coverage of transit Insurance.
 Perils covered in Insurance policy.

11. Field Work--
 Ensure-
 Ownership of Inventory.
 Insurance of Inventory with various clauses- Valuation of
Inventory for Insurance purpose- consistency.
 Third Party/ Group entity Inventory is excluded.
 Movement of Inventory as per entity flow- FIFO,
LIFO,HIFO etc.
 Valuation of inventory at various stages of production.
 Exclusion of obsolete stock, non moving, slow moving
stock.
 Expiry date of inventory if applicable.
 Capacity and Condition of Storage Facility and its
sufficiency , ownership, security, any disputes etc.

12. Trade Credit Under ECB
 Trade Credit under ECB- Trade Credits refer to
the credits extended by the overseas supplier,
bank and financial institution for maturity up to
five years for imports into India.
 Suppliers’ credit relates to the credit for imports
into India extended by the overseas supplier.
 Buyers’ credit refers to loans for payment of
imports into India arranged by the importer from
overseas bank or financial institution.

13. Book Debt Audit--
 Understanding of Sales Process- Sales Network-
Dumping of Stock at Distributors.
 Revenue Recognition- Accounting Standards
 Goods in Transit
 Credit Policy
 Major Customer
 Sales Discount Policy
 Debtors value calculation- at Sales Price or at COG
Price. ( Sales less Margin)

14. Book Debt Audit--
 Verification of Sales records and verification of various
reporting in taxation returns or statutory reports.
 Verification of Debtors with Periodic Statement
submitted to bank.
 Cut Off Process Recognition.
 Debtors aging analysis- Credit Rating- Insurance if any.
 Related Party Transactions.
 Advances received from Debtors.
 Confirmation from Debtors.
 Verification of book debt hypothecation agreement with
bank for compliance of transfer of property act.

15. Operation of W.C. Limit--
 Verification of Debit and Credit Transaction in W.C.
Limit account of bank.
 Confirmation of debit and credit transactions with
Inventory and Debtors transactions.
 Related Party transactions like advances, purchases
etc.
 Repayment of other loans and advances.
 Cash transactions.

16. Common Observations
 Inadequacy of Internal Controls.
 Absence of Costing System or Unsatisfactory Costing System.
 Unable to confirm cost elements at different stages of inventory.
 Incomplete Inventory Records.
 Absence of classification and aging of Inventory and Debtors.
 Non Confirmation from Debtors.
 Mismatch of Periodic Statement and Accounting Records.
 Incomplete accounting records.
 Mismatch in W.C. Limit account and sales-purchase transactions.
 Related Party Transactions.
 Unexplained cash withdrawals, advances payments etc.
 Under Insurance of Inventory.
 Dispute related to Debtors and Creditors.
 Third Party Inventory Records.
 Mismatch of Inventory and Debtors as per Periodic Statement and Final Financial
Statements.

17. Ratio Analysis
 Periodic Ratio Analysis.
 GP/NP Ratio
 Working Capital Turnover Ratio
 Debtors Turnover Ratio
 Inventory Turnover Ratio
 Current and Quick Ratio
 Z Score Ratio

18. PARTICULARS AMOUNT
RS.
INVENTORY ( Excluding third party, job work, obsolete, slow –non moving
Inventory)
XXXX
Less :- Stocks belonging to sister concerns for which no payment has been
made.
XXXX
Less :- Trade Creditors XXXX
PAID STOCK VALUE XXXX
Less :- Margin on Inventory as per Bank Sanction Letter XXXX
NET PAID STOCK VALUE (A) XXXX
TRADE DEBTORS (Excluding advances to Related Parties, third parties,
deposits etc)
XXXX
Less :- Debtors More than 90 or 180 Days as per Bank Sanction Letter XXXX
NET DEBTORS XXXX
Less :- Margin on Debtors as per Bank Sanction Letter XXXX
DEBTORS AVAILABLE (B) XXXX
DRAWING POWER CALCUATION ( Bank Specific)