Process of Stock Audit :

 Prior to Visit Date:

After getting the schedule for the stock audit immediately call the borrower for confirming the
location and intimating about your arrival.

 General Rules :
1. At the time of visit, it is compulsory to wear formal clothes only
2. Carry your ID Proof with you.
3. Kindly collect all the documents in soft copies.
4. Don’t leave the client’s place without taking permission from RTS.
5. Photos to be clicked at the unit (approximately 20-25 Photos including the
following):

The date and time stamp and longitude and latitude of your location should be
displayed in all photos.(Use GPS Map Camera)

1. Stock - 10 Photos
2. Plant & Machinery
3. Property - Door/Flat no. Of Building
4. Functioning of unit
5. Borrower Name board
6. Bank hypothecation board
7. Selfie (at unit)
8. Unit officials (assisting for audit)
9. Other, if any

NOTE: This Process mentioned below is only for guidance purpose, the process
may change subject to nature of business.
 Mandatory Steps : - On visit Date

Call and confirm Reach the Capture your selfie with

with borrower borrower’s place borrowers name board (Clearly
about your arrival at predetermined visible) through GPS MAP camera
for Stock audit. time. (preferably app.
by 11 am)

Ask borrower for the

visit date Stock,
Debtors and Creditors
summary. [DO NOT Once you enter the Inform RTS about your
CONDUCT PHYSICAL premises try to arrival at borrowers
VERIFICATION IF understand the business place.
STOCK SUMMARY of the borrower. Spend
NOT PROVIDED BY 15-20 mins with concern
CLIENT] person.

After conducting stock

Inform borrower to verification immediately
send the pending Conduct Stock Verification send the PV Sheet
documents through (Note – 1) (Qty/Rate/Amount) to
email. RTS.

Conduct

Now fill the Ask borrower whether 1. Debtor’s Verification (Note – 2)

checklist asking the they have sent all the 2. Sister Concern Verification
relevant details to documents through mail (Note – 3)
borrower.
3. System Verification (Note – 4)

4. Insurance Verification (Note - 5

If Yes If No

Confirm it Ask the reason to borrower

with RTS. and inform the reason to RTS.
  Note 1 :
 Process of Stock Verification:
If Unable to identify
Identify Top 80% the method for
Now, using
value wise stock verification, Contact
professional judgment
from Stock RTS regarding
identify method for
Summary. problem faced.
verification of stocks.

If High Value If High volume

Items. but less value Fill the PV sheet with the
items. stocks verified stating
proper Quantity, Rate, and
Amount.

Verify 100% Verify on

Items. Sample Basis.

Once you are satisfied Identify whether there is

with stock verification any slow moving/Old
inform to RTS and go for Stock or not.
next step.

If Yes If No

Identify If there is difference of more than 6 months Verify stock on

between the purchase invoice date and visit date, classify sample basis.
it as old stock and mention its value and quantity in
checklist

If identified ask whether it is deducted from Stock as per

stock statement or not
 Additional Points in regards to physical stock verifications :
a. Inventory items of higher value and major proportion of stock held should be checked
thoroughly. Items of lesser value could be checked according to their relative weightage.

b. Stock stored in boxes should be verified by opening box. Auditor should not blindly trust
on the basis of customer’s word.

c. Slow moving, non-moving, obsolete, damaged stock: Slow moving and dormant stocks
should be critically evaluated for their realistic value. It should be verified whether any
material held in inventory has become obsolete and is no more usable in production. In
case of damaged goods, extent of damage shall be assessed and its salvage value
determined.

d. Stock at Third Party locations / specialized/Licensed / Bonded warehouses /on job

work: Stock lying at third party locations / warehouses and included in inventory should
be verified by storage receipts / holding statements/ confirmations and other
documents. Issue of material for job work must be evidenced by documents like Goods
Dispatch Note, Gate Pass and other related documents. Costing of such material should
be checked.

e. Stocks of Third Party at borrower’s location: Stocks received from other parties for job
work do not form part of the borrower’s inventory and as such should be excluded from
valuation. Stocks received from other parties for job work should be verified from Goods
Inward Note, Gate Inward Register and other related documents.

f. Goods in Transit: Inward Goods in transit should be verified from suppliers / third party
confirmations, like courier confirmation / Lorry receipt /Airway bill documents
confirming dispatch of goods from the supplier location. The auditor shall find out
whether these goods are paid for i.e. advance payments for these goods are made
before considering them for drawing power calculations.

g. Sold stock pending delivery: Sold items, kept in the godown pending delivery do not
belong to the borrower and as such should be excluded from borrower’s inventory.

h. Sales Return / Rejections: Goods returned from customers are part of borrower’s stock.
They should be verified with Goods inward note, Inward Gate Pass and linked to
corresponding sales invoice. If the goods are returned due to damage, defective product
or substandard quality, valuation of such items should be verified. Similarly, Purchase
returns / online rejections should be considered if payment for the same has been made
and the same are recoverable from the suppliers as per terms of purchase.
i. General Conditions of storage: Auditor shall assess the quality of storage condition of
the godown/warehouse to assess the storage of material

j. Storage condition, layout and maintenance:

The auditor should also comment on the condition of the plant, its location,
effectiveness of maintenance activities etc.

k. Maintenance of Stock, Production and other records:

The auditor should get a list of records maintained by the borrower. The method
adopted for allocation of material, labour and overhead cost should be stated by the
borrower. The updation of records, quality / correctness of the records maintained and
system adopted should be test checked. The Auditor should check / reconcile stock
balances with the latest stock statements submitted by the borrower.
 Note 2 :

 Process of Debtor’s Verification:

Debtors
Verification

General Debtors
Verification

Identify Top 10 Debtors should be Verify sales transactions

Debtors from visit supported by their from debtors ledger along
date debtors list. respective ledger. with invoice generated.

Check sales made before 6 months from the Ask for additional supporting for sales
date of visit, For this debtors, verify the made such as: E-Way Bill, Transportation
payment received for the sales made from the Invoice, Weigh bridge bill, Challan (This
bank statement (Bank statement credit side). may Vary as per nature of business).

Identify types of
debtors..

Domestic Debtors Export Debtors

Ask whether any bills are discounted

or not and comment accordingly in
checklist.
 Note - 3

 Process of Related party transaction Verification:

Related Party
Debtors
verification.

Ask Borrower for name Check name

Check name from
of sister concern. from ABS
3CA/3CD. For this mail
tax audit report to RTS schedules from
and take his/her help. notes to
accounts.

If sales made to Check name from

sister concerns - Ask for the sister concern MCA(Website -
Check sales ledger, check for sales https://www.mca.gov.in/mca
invoice, Bank transaction in the ledger foportal/viewCompanyMaste
statement credit rData.do) in case of Private
side (If amount Limited, Public Limited, LLP.
received). (take help of RTS)

If amount not received,

Check the debtors list
whether it shows the
name of the Sister concern
as a debtor or not and
comment accordingly in
checklist.
  Note - 4

 Process of System Verification:

Also ask them to

Now Compare Ask for Latest 2
If show system data
Latest stock Months/Quarter
Differences as on stock
Stock statement
statement data statement date for
Observed. they have
with System Data. Debtors, Creditors
submitted.
and Stock.

inform RTS about Mention it on

If Major
the difference and checklist along with
differences
Reason for reason for
observed.
difference. difference.

Also verify the

If Minor Inform RTS about system data and
Differences the difference. Stock statement for
observed. some other months.

Mention it on
checklist along with
reason for
difference.
Insurance
a. Adequacy: The auditor should check adequacy of insurance on primary and
collateral securities. The Auditor should check whether all stocks belonging to the
borrower are adequately insured.
b. Coverage: The auditor should check whether all aspects of risks, including industry
specific risks are covered. Auditor should also comment on timely renewal of insurance
policies.
c. Bank Clause: The auditor should check whether the insurance policies include the
bank clause and whether the policies are in force.