What is stock audit?

In our previous posts we talked about (1) Tax audit, (2) What is a forensic audit?  (3) What is a Legal Audit? (4) Concurrent Audit System in bank. (5) What is a statutory audit? In this post let us study what is a stock audit.

Inspection of assets charged to the lender at a regular interval is an important and desired activity of banks for monitoring and ensuring the end-use of funds.  Besides carrying out unit inspections, banks study the borrowers’ books of accounts, conducting meaningful scrutiny of quarterly progress reports and also the no-lien accounts maintained with other banks at regular intervals. Further, every bank has a ‘stock audit policy’ under which all its branches shall arrange a ‘stock audit’ of the accounts which are enjoying working capital facilities beyond certain limits. This is in addition to routine stock inspection carried out by the concerned branch.

According to the stock audit policy of the banks, the external auditors appointed by the bank shall inspect assets charged to the bank once or twice in a year as desired by the bank. In case of consortium advances, the leader bank of the consortium appoints external auditors for physical verification of quantities and condition of items held in the borrowal unit/godown or warehouse and reports deficiencies if any in assets charged to the lenders.  Here we have to remember that the Stock auditor is auditing only the stock/inventories of the units as entrusted by the bank and the audit of receivables is not done by them. The purpose of this check is to provide an audit or to know the position of existing stock. External Auditor’s report is also a source of stock discrepancy information.

The appointment of a stock auditor is generally made by the RO/ZO in the case of Nationalised banks and in the case of co-op banks sometimes concurrent auditors only are asked to conduct stock audits of select borrowers of the branch who are enjoying certain working capital credit limits. The minimum limit for conducting stock audit varies from bank to bank according to their risk perception. Normally, it varies between a minimum working capital exposure of Rs.1 crore to 5 Crore. Mostly,  co-operative banks go for stock audits for exposures above 1 crore and Nationalised banks prefer stock audits for their exposure beyond 5 crore. Some Banks exercise more prudence in respect of stock audit. They go for stock audits of NPAs at lower exposures compared to standard accounts and also include the accounts for stock audits which are taken over from other Banks.

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