Documents Required and Point of Considerations for the Stock Audit

If you are running your own business then you must consider the option of a Stock Audit. It is a necessary tool for you to ensure that the stocks of your company are up to date. It helps you avoid unnecessary problems and complications. In this article, we will discuss, “Documents to be obtained & Points to Consider for Stock Audit”.

Key Abstract

Working capital financing in the form of cash credit against the security of hypothecation of stock and debtors is a popular technique of finance used by many lenders. Borrowers in such instances are needed to provide information of stock available, balance of debtors and creditors (also known as unpaid stock) every month, on the basis of which banks compute Drawing Power after decreasing the prescribed margin as specified in the sanction letter. Bankers engage empanelled chartered accounting companies to undertake stock audits precisely when the exposure (credit facilities) surpasses the specified threshold limit to assess the veracity and correctness of such claims (generally over INR 5 Crores).

Concept of Stock Audits

Stock auditing is a regulatory procedure that every corporate organization is required to complete at least once a year. The stock audit procedure primarily entails counting physical stock exhibiting the defined premises and confirming the same with computed stock held by the company. The rationale and objective for doing this is to reconcile the disparities between book stock and physical stock by passing relevant adjustment entries. However, it may also include inventory value at times, depending on the terms of reference or the engagement letter of the assignment. When proceeding, it is critical to recall and keep in mind the objective for why the audit is being undertaken, because various audits may take different approaches, which will ultimately depend on the goal.

Objective of Stock Audits

The main objectives of Stock Audits are to,

• Pinpoint and put aside the stocks moving at a staggering pace, dead stocks and scraps
• Identify the mismatches between calculated stocks available in books and physical stock available in reality
• Update the records as per physical stock or change the physical stock as per book stock
• Ensure due preservation and management of stocks

Reasons for Stock Audits

The following are the reasons for Stock Audits,

• To update the stock details
• To identify the discrepancy between book stocks and physical stocks
• They keep the physical stocks in sync with the book stocks
• To ensure the proper preservation and handling of stocks

Documents to be obtained for Stock Audit

Before beginning an audit, an auditor should gather the following documents:

• Bank letter of engagement
• Constitutional documents (deed, roc docs & certificate)
• Borrower’s Management Representation Letter
• Audited Financial Statements and Audit Report from the Previous Year
• Stock Audit Report for the Previous Two Years
• Copies of concurrent audit reports pertaining to the audited period

Process of Stock Audits

The process of Stock Audits mainly involves the counting of physical stocks presenting the specified premises. Further, verify the same with computed stocks that are maintained by the company. This is done to correct the discrepancies present in the book stocks when compared to the physical stocks by passing them through necessary adjustment entries.

Benefits of Stock Audit

The benefits of Stock Audits are,

• Direct impact on costs and bottom line
• Preventing pilferage and fraud
• Identifying slow-moving, obsolete, dead and scrap stock
• Third-party independent opinion
• Identifying problems in the present inventory management process
• An accurate valuation of Inventory

Important points of consideration while conducting Audit

While conducting the audit, an auditor should keep the following aspects in mind:

• Note of Appraisal
• Letter of sanction
• Physical inspection of the place
• Billings (sale & purchase)
• Whether the stock record is adequately kept in terms of quantity, rate, and values.
• Information on outdated or non-moving stock
• Stock insurance and a bank provision on the policy cover note Furthermore, policy cover is not on file, and the policy covers all risks.
• The most recent account review or renewal
• Overdrawing often in excess of Drawing power or the sanctioned limit
• Bank branch authorities’ most recent visit report
• Bank board display on the go down or site
• Whether the drawing power estimate is proper (as per the sanction letter) and the DP record is routinely updated
• Defects discovered by concurrent or internal auditors
• Intention letter
• CIBIL, business report, or external credit rating
• Whether or not the stock and book debt statement was submitted on schedule (as per sanction letter)
• Inventory valuation method used with detailed workings
• Whether or not sales were routed through bank accounts
• Income Recognition and Asset Classification Prudential Standards Compliance (IRACP)
• Examination of collateral property (original document verification, Memorandum of Deposit, Valuation Report not older than three years, legal search report (LSR/TSR), insurance and CERSAI report)
• Debtor and creditor list (direct confirmation as per SA:505)
• According to the penalty letter, the debtor is getting older.
• Margin requirement specified in the punishment letter (25 percent , 40 percent as the case may be)
• Challans for different statutory dues have been paid (ESIC, PF, Property Tax, GST, Any other Cess)
• Total exposure, i.e. Other bank services obtained by the client
• Stock and collateral property are subject to a charge.
• Whether the Gate register is kept or not
• Procedure and physical inventory verification by management in accordance with Paragraph 3 of the Companies Auditor’s Report Order, 2020 (CARO 2020)
• GST return for the audited time period

Conclusion

Thus, you can see that stock audits can help you with the bottom line of your business. It helps you update your stock details. Further, it keeps helps you avoid being complacent regarding maintaining your books. Moreover, it keeps your business competent with regards to the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014. Stock Audit is a necessary tool for you to keep your business running smoothly.