CMA Role in banking sector as Stock Auditor – Detailed

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Cost and Management Accountant play pivotal role in Stock Audit of various industries, but the role in banking sector is more crucial. Empanelment in banking sector is a altogether different experience. After Conducting Concurrent Audit and Stock Audit for various banks I would like to share some practical aspects of the same.

In the context of rapid growth of credit, effective supervision & monitoring of advances have assumed considerable importance in Indian Banking Sector. In case of working capital finance, one of the measures that is deployed by the lenders for ensuring the end use of funds and monitoring the borrowal account is the system of periodical Stock Audit by the independent qualified Stock Auditors.

Stock Audit policy

Before conducting stock audit it is necessary to study the policy of the particular Bank. The Credit Audit & Monitoring Department is responsible for drafting of Stock Audit policy and also for periodical review of the relative policy and processes.

The document termed as “Stock Audit Policy”, codifies the policy and the procedure involved in the Stock Audit function. This has been compiled after taking into account changes that have taken place in the lending scenario and monitoring systems.

The Objective

The main objective of stock audit is to ascertain whether the security (borrower’s stock and debtors) against which working capital finance has been made is safe and is valued correctly. It is the duty of the Stock auditor to verify the physical existence and absolute ownership of inventory / movable property charged to the bank and to examine the genuineness of the Sundry Debtors list submitted by the borrower

The various purposes expected to be achieved through stock audit may be summarized as follows

  • To carry out physical examination of stock to ascertain the quality, value and age of the inventory thereby identifying whether there exist any obsolete stock & if yes, whether it has been segregated & written off and excluded while arriving the drawing power
  • To verify whether the stock is adequately and properly insured against fire and other natural calamities (in appropriate cases against other risks like theft, burglary, marine, riots etc. as per sanction) and kept in secured manner
  • To ascertain whether physical stock tally with the stock statement submitted to the banker. (This is the grey area and Auditor’s Responsibility is enormous.)
  • To ascertain whether hypothecated stock is realizable.
  • To physically verify the value of paid Stock (by excluding the total value of unpaid stock with reference to the level of Trade Creditors and the total value of stock procured under the Non Fund based credit limits viz., FLC( Foreign letter of credit) /ILC (Inland letter of credit)/ BG) available in the borrower’s location and confirm the same together with the eligible Book Debts are sufficient to cover the total amount outstanding in the Working Capital Limits (Fund based) along with the required level of margin.
  • To verify whether the value of stock (procured under Non fund based limits) available on the date of physical verification along with the eligible Book Debts emanated from the sale of such goods is sufficient to cover the total amount of Bill Liability under the Non fund based limits including Bank Guarantee Limit for Supply of Goods
  • To verify related records / registers / Books of accounts such as Stock Register, Purchase Register, Sales Register, Purchase Invoices, Sales Invoices, Credit Notes, Debit Notes etc., maintained by the borrower.
  • To ensure proper preservation / storage and handling of stock.
  • To ensure the stock under hypothecation have not been hypothecated to other Banks.
  • To examine the end use of the funds and verify whether any diversion of funds, interlocking of funds among sister concerns.
  • To confirm whether all the sanction conditions are complied.
  • To confirm that stock is owned by the borrower and finance is made against value of paid stock only.
  • To examine the age wise debtors outstanding as per books and as per statement submitted by the borrower, steps taken for recovery of long pending debtors and likely instances of debtors turning bad, if any.
  • To ensure the timely submission of Stock / Book Debts statement, QIS statement etc.,

Stock Audit coverage

The borrowal accounts having working capital limits of both Fund based and Non Fund based Limits where the primary security is hypothecation of Stock and / or Book Debts come under the purview of Stock Audit. In exceptional cases, Stock Audit may be conducted for the working capital limits below based on the specific request of Credit Department Moreover, in case of NPA borrowal accounts having Working Capital limits where the primary security of stock and/ or Book Debts are available are also come under the purview of Stock Audit.

Fund Based limits: Fund Based Limit includes all types of Working Capital Limits sanctioned such as Cash Credit (Stock), Cash Credit (Book Debts), Overdraft, Term Loan / Demand Loan (For Working Capital purpose), Bill limits Packing Credit Limit, Key Loan, Ware House Receipts Loan, etc.

Non Fund Based limits: Non Fund Based Limits sanctioned for Working Capital purposes such as Bank Guarantees, ILC (DA terms) / FLC (DA terms), etc., for the supply of goods on credit terms.

Advances under Consortium / Multiple Banking arrangement In case of advances coming under Consortium / Multiple Banking arrangement, the Bank may fall in line with the Leader of the Consortium or Highest lender, as the case may be.

In certain industries, business activities and projects, by the very nature of the business model, the primary security charged to the Bank is though tangible, not easily verifiable. In such cases, the Stock Audit should be conducted by outsourcing Stock Auditor who is having special/ specific knowledge about the nature of goods or knowledge of the industry. Specialized Auditors i.e. auditors having knowledge / expertise of the industry are considered to the extent possible so as to achieve efficient and effective stock audit mechanism.

Outsourcing of Stock Auditors:

Stock Auditors are appointed taking into the consideration of the firm’s constitution, experience etc. Some of the stock / goods may be graded depending on the composition, durability and other technical specifications which cannot be assessed by layman. Chartered Engineer who is technically / professionally qualified, may be engaged by Stock Auditors with prior permission.

Periodicity of Stock Audit Stock

Audit should be conducted for the eligible borrowal accounts once or twice in a year. It should be ensured that there is no omission either in the eligible accounts or in the area of coverage.

It is the responsibility of Credit Audit & Monitoring Department to review the Stock Auditors who are in the Bank panel every year by placing a review note to Managing Director & Chief Executive Officer.

Reporting System & Submission of Final Certificate:

The Stock Auditor should verify the borrower’s unit/ godown as to their position on Stock / Book Debts and submit the report immediately in triplicate (3 copies) two copies to Credit Audit & Monitoring Department, one copy to the respective Regional Office through the Branch and one copy to the branch.

The Final Certificate should be submitted by the branches within prescribed limit say one month from the date of receipt of the stock audit report by the concerned branch. The concerned Regional Office should verify the full compliance and obtain Final Certificate from the respective Branches and submit the same to Credit Audit & Monitoring Department. The entire process till the getting Final Certificate from the respective Regional Office is being monitored at the Credit Audit & Monitoring Department

By CMA Pradnya Chandorkar