Working capital finance in the form of cash credit against the security of hypothecation of stock and debtors is one of the most common methods of finance frequently adopted by various bankers. The borrowers in such cases are expected to submit the details of stock available, Balance of debtors and Creditors (Also known as unpaid stock) every month on the basis of which Drawing Power after reducing the prescribed margin as mentioned in sanction letter is calculated by the banks. Stock and debtors being the primary security, bankers for ascertaining the genuineness & correctness of such statements appoint empaneled chartered accountant firms to conduct stock audit specifically where the exposure (credit facilities) exceeds the predetermined threshold limit (generally over INR 5 Crores). This threshold limit can be different for every bank.
We as an auditor should obtain the below-mentioned documents
- Constitutional documents (deed, roc docs & certificate)
- Management representation letter from the borrower
- Engagement letter from the Bank
- Last year's Audited Financial Statement & Audit Report
- Last 2 Years Stock Audit Report
- Copies of concurrent audit reports related to the period covered under audit
We as an auditor should consider the following points while conducting the Audit
- Appraisal Note
- Sanction letter
- Physical verification of the site
- Invoices (sale & purchase)
- Whether stock register is maintained properly like quantity, rate and values are mentioned properly.
- Details of obsolete or nonmoving stock
- Insurance of stock and bank clause on policy cover note. Also, policy cover not is available on record and all risks are covered in the policy.
- Latest Review or renewal of the account
- Frequent overdrawing over Drawing power or sanctioned limit
- Latest visit report by the bank branch officials
- Display of bank board on the godown or site
- Whether Drawing power calculation is correct (As per sanction letter) and DP register is updated regularly
- Defects pointed out by the concurrent or internal auditors
- Letter of intent
- CIBIL or commercial report or external credit rating
- Whether stock and book debt statement has been submitted on time (as per sanction letter)
- Method of valuation followed for inventory with detailed working
- Whether sales have been routed through bank accounts
- Compliance of Income Recognition & Assets Classification Prudential norms (IRACP)
- Scrutiny of Collateral property (Verification of original documents, Memorandum of Deposit, Valuation Report not more than 3 years old, legal search report (LSR/TSR), Insurance & CERSAI report)
- List of debtor & creditor (direct confirmation as per SA:505)
- Debtor aging as per sanction letter
- Margin requirement as per sanction letter (25%, 40% as the case may be)
- Challans paid of various statutory dues (ESIC, PF, Property Tax, GST, Any other cess)
- Total exposure i.e. Oher facilities availed by the client from bank
- Charge on the stock and collateral property
- Whether Gate register is maintained or note
- Procedure and Physical verification of inventory by management as per para 3 of Companies Auditor’s Report Order, 2020 (CARO 2020)
- GST return for the period covered under audit
The author can also be reached at ramanujan.ca@gmail.com
Disclaimer: The information provided by the author in the article is for general informational purposes only. All information provided is in the good faith, however we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability or completeness of any information in the article.
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