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)
