A note before we begin. Over the past two years I have been compiling everything I have learnt across six hundred plus stock and receivables audit engagements into a professional reference series for practitioners. The series covers manufacturing and trading entities, NBFCs and housing finance companies, jewellery manufacturers, stock broking and securities firms and a separate FAQ volume addressing the questions that come up repeatedly across all sectors. There is also a dedicated volume on early warning signals and red flags, and a practitioner’s handbook on licences and approvals for manufacturing entities, something I have been working on with particular care because the licensing dimension of stock audits is the area where I most frequently see avoidable mistakes being made.
This article distils, in checklist form, the do’s and don’ts I have arrived at over these years. It is not exhaustive, a full treatment of any of these areas takes a chapter, sometimes more, in the books but for a working practitioner who needs a single-page reference to pin above the desk, this should serve as a useful starting point. I have organised the checklist by stage of the engagement, because the same engagement has different priorities at different points, and habits that protect you at one stage do not necessarily help at another.
Stage 1: When the Engagement Is Received
This is where most reports go wrong, and it happens before the auditor has even visited the borrower. The decisions made in the first 48 hours after receiving the allotment letter shape everything that follows.
| Do | Don’t |
| Read the allotment letter carefully and confirm the scope, period, and any specific instructions from the bank | Do not assume the engagement is identical to last time (if repeated) just because the borrower is the same. |
| Request the sanction letter immediately if it has not been provided – this is the most important document in the entire engagement | Do not start work without seeing the current sanction letter |
| Verify that all banks’ sanction letters are available if it is a multi-banking or consortium arrangement | Do not assume all lender members have identical terms – they rarely do today |
| Check that your firm’s empanelment with the appointing bank is current and your conflict-of-interest position is clear | Do not accept engagements where there is any professional or commercial relationship with the borrower beyond the audit |
| Acknowledge the allotment letter to the bank within two working days | Do not delay acknowledgement; some banks track response time as part of empanelment performance metrics |
| Send the Letter of Requirement to the borrower well before the field visit | Do not arrive at the borrower’s premises without having sent the LOR; you will spend the first day waiting for documents |
| Block the appropriate team strength for the engagement based on size and complexity | Do not send a single article assistant to handle a Rs 500 lakhs facility on a quarterly basis |
Stage 2: Pre-Visit Preparation
The hours spent in preparation save days during the field visit and weeks during the reporting phase. This is the stage every senior practitioner takes seriously and every junior practitioner skips.
| Do | Don’t |
| Study the borrower’s previous two stock audit reports if available – look at trends, recurring observations, and management responses | Do not start each engagement as if it is the first audit; the history tells you where the risks have been |
| Review the borrower’s most recent audited financial statements and CARO report | Do not treat the audited financials as outside the stock auditor’s scope – they are an essential reference. |
| Map the facility structure – every limit, every sub-limit, every margin, every consortium member’s specific stipulations | Do not assume the facility is a single CC limit; modern manufacturers typically have eight to twelve different sub-limits |
| Prepare a margin comparison sheet if there are multiple lenders with differing stipulations | Do not default to the appointing bank’s margins without checking what other lenders prescribe |
| Identify the sector-specific compliance documents you will need (CTO, factory licence, BIS certification, FSSAI for food sector, drug manufacturing licence for pharma, etc.) | Do not arrive expecting “compliance” to be one item in the LOR; sector-specific licences vary significantly |
| Understand the borrower’s specific business model – procurement cycle, production cycle, sales cycle, working capital cycle | Do not begin verification without understanding what you are actually verifying and why it sits where it sits |
| Brief your team thoroughly before the visit on the borrower’s profile, the facility structure and the specific items to focus on | Do not delegate field work to juniors without proper briefing; the quality of the report depends on the quality of the briefing |
| Confirm the date, time, and locations of the visit with the borrower in writing | Do not rely on verbal arrangements; written confirmation prevents last-minute changes that disrupt the engagement |
Stage 3: Physical Verification of Stock
This is the most visible part of the engagement and the part where the borrower watches the auditor most closely. Discipline here builds professional credibility that lasts across multiple engagements.
| Do | Don’t |
| Conduct physical verification on the basis of agreed cut-off and freeze-on date with the borrower | Do not allow inventory movements (receipts or dispatches) during the verification without recording them in the cut-off register |
| Visit all stock locations which covers bank’s requirement (generally 50%), including third-party warehouses and consignment locations | Do not skip a location because it is “far” or “small”; either visit it or disclose in the report that it was not visited |
| Take photographs of the inventory with date stamps at each location | Do not rely on memory or on the borrower’s photographs; contemporaneous documentation is your professional protection |
| Get count sheets signed by both the audit team and the borrower’s representative at each location | Do not accept the borrower’s stock register figures without independent counting on a sample basis |
| Test count a meaningful sample size based on stock value concentration and risk – not just a token quantity | Do not test count only the easy items; the difficult items are where the discrepancies hide |
| Check the physical condition of the goods – damaged, deteriorated, obsolete, slow-moving | Do not record only the quantity; record the condition and the visible signs of slow movement |
| Compare physical counts with stock register and with the stock statement submitted to the bank | Do not accept discrepancies without investigation and management explanation |
| Note storage conditions, particularly if they affect saleability (humidity, temperature, contamination) | Do not ignore observable warehouse issues even if they appear “outside the scope” – they affect realisable value |
| Verify pledged stock separately, with the warehouse keeper’s records, not the borrower’s | Do not apply the same verification approach to pledged and hypothecated stock; the controls are different |
| Document any goods held at locations not belonging to borrower | Do not include such inventory in the eligible stock for DP |
Stage 4: Receivables Verification
The debtor side of the engagement gets less attention than the stock side, but it is often where the larger DP errors are made – because receivables verification depends entirely on documentary review and is harder to do superficially.
| Do | Don’t |
| Prepare an independent debtor ageing based on invoice dates, not on the borrower’s pre-prepared ageing | Do not accept the borrower’s ageing schedule without verification against underlying invoices |
| Apply the debtor cut-off prescribed in the sanction letter – 60, 90, 120 days, whatever it is | Do not apply a “standard” 90-day cut-off without checking the specific sanction terms |
| Identify and separately disclose related-party debtors with names, amounts, and ageing | Do not bury related-party debtors in the general ageing schedule |
| Exclude receivables backed by bills discounted, sale invoice discounting, or post-shipment credit from the eligible debtors for CC DP | Do not double-count receivables that are already financing other facilities |
| Send debtor confirmations for significant balances on the bank’s instructions, where the engagement provides for it | Do not rely entirely on the borrower’s debtor master without external confirmation for material balances |
| Investigate large credit notes issued post-period that reverse a significant portion of the period-end debtors | Do not ignore post-period credit notes; they may indicate quality disputes or revenue recognition issues |
| Compare debtors per books with debtors per the stock statement and reconcile differences | Do not accept the two as identical without verification |
| Note unbilled revenue separately and report it as a distinct item, with the sanction letter’s treatment clearly stated | Do not include unbilled revenue in eligible debtors without sanction letter backing |
Stage 5: Creditor and Liability Analysis
The treatment of creditors in the DP computation has changed significantly over the years and remains an area where sanction letter language is often vague. Auditors who apply yesterday’s methodology to today’s sanction letter produce reports that are technically wrong.
| Do | Don’t |
| Apply the specific creditor treatment prescribed in the sanction letter – trade creditors only, all sundry creditors, creditors beyond the accepted period, or whichever formulation is used | Do not apply the “old” practice of deducting only creditors in excess of the accepted level if the sanction letter prescribes deducting the entire creditor balance |
| Identify LC liabilities for imports and apply the treatment specified in the sanction letter | Do not assume LC-backed imports are either paid stock or unpaid stock without checking the sanction terms |
| Separate related-party creditors from arm’s-length trade creditors | Do not lump them together; the credit officer needs to see related-party balances and ageing distinctly |
| Disclose buyer’s credit and supplier’s credit liabilities separately | Do not include them in the general creditors without explanation |
| If the sanction letter is silent on a particular category of creditor (expense creditor, statutory creditor, advance from customers), present the DP both with and without that category | Do not make an assumption about the treatment in either direction without sanction letter backing |
| Reconcile creditors per books with creditors per the stock statement | Do not accept material differences without investigation |
Stage 6: Drawing Power Computation
This is the deliverable. Everything else in the engagement supports this number. The discipline of presenting the DP transparently is what separates a professional report from a procedural one.
| Do | Don’t |
| Show every exclusion explicitly with the rupee amount | Do not present the DP as a single net figure without showing the build-up |
| Reconcile the DP with the borrower’s stock statement DP and explain the differences | Do not present the auditor’s DP in isolation; the bank needs to see how it compares with what the borrower reported |
| Include EPC-funded inventory, PCFC-funded inventory, PO-financed inventory as separate exclusions from CC eligible stock | Do not double-count assets across facilities; this is the single biggest source of DP errors |
| Exclude bills-discounted receivables from CC eligible debtors | Do not include discounted bills in the CC DP computation – the bank has already financed them |
| Apply margins as prescribed in the sanction letter | Do not apply “standard” margins that differ from the sanction terms |
| Treat WCDL as a sub-limit of CC if the sanction letter so prescribes, and add WCDL outstanding to CC outstanding before comparing with DP | Do not treat WCDL as a separate term loan if the sanction letter classifies it as a CC sub-limit |
| Quantify any overdrawn position clearly and prominently | Do not bury an overdrawn position in the body of the report – the cover page should reflect it |
| Present the DP under the appointing bank’s terms with a margin-mapping table/ note showing how other lenders’ terms would produce different results | Do not ignore other lenders’ differences; the appointing bank needs to know whether it is the conservative or generous member |
Stage 7: Compliance and Licensing Verification
This is the area where I see most reports fall short, and where the licensing handbook in my book series spends the most pages. The stock auditor is not a compliance certifier, but checking basic licence validity is well within the auditor’s scope and is one of the most valuable things the bank receives from the engagement.
| Do | Don’t |
| Check the validity of basic licences as on the audit date – CTO, factory licence, BIS certification (if mandatory), insurance policy, MCA charge registration | Do not assume validity from the licence number; check the expiry date specifically |
| Note the expiry date of each licence, not just the issue date | Do not record only when a licence was issued; record when it expires |
| Treat an expired licence with pending renewal as expired as on the audit date, with the pending renewal noted as a management representation | Do not accept “renewal is in process” as equivalent to “valid” |
| State licensing observations in factual, documentary language | Do not use language like “the borrower is in non-compliance” or “the borrower is in violation of the law” |
| Report licensing observations in the “Other Observations” section if the prescribed format does not have a specific section for them | Do not skip licensing observations because the bank’s format does not have a checkbox for them |
| Disclose if a requested document was not produced by the borrower | Do not silently accept non-production; that silence costs the bank visibility |
| Build familiarity with sector-specific licences relevant to the sectors you most frequently audit | Do not attempt to certify regulatory compliance – that is outside the stock auditor’s scope and competence |
Stage 8: Insurance Verification
Insurance verification is fifteen minutes that can save the bank lakhs. It is also fifteen minutes that most reports do not spend.
| Do | Don’t |
| Verify the sum insured against the stock value as on the audit date and quantify any shortfall | Do not state “insurance is in place” without comparing sum insured with stock value |
| List the insured locations and compare them with the stock locations in the stock statement | Do not assume all stock locations are covered by the policy |
| Check that the bank clause is endorsed on the policy and names the correct bank | Do not assume the bank clause is current; the borrower may have refinanced and not updated the policy |
| Note the policy expiry date and whether renewal has been done if it is approaching expiry | Do not treat a policy valid on the audit date as adequate if it expires next week without renewal evidence |
| Note any obvious warranty issues observable during the visit (non-functional fire extinguishers, breaches of storage warranties) | Do not perform a fire safety inspection or certify insurance adequacy – these are outside the stock auditor’s scope |
| Distinguish between fire-only policy and comprehensive policy; note absence of theft cover if relevant to the inventory profile | Do not assume “insurance” means full peril coverage |
Stage 9: Reporting and Communication
The report is the only thing the bank sees. Everything else – the procedures, the documentation, the verification – exists to support the report. A perfectly conducted audit communicated poorly is a wasted engagement.
| Do | Don’t |
| Address the report to the appointing bank with a clear restriction clause limiting its use | Do not let the report be a general-purpose document; it is a private communication |
| Place the credit signal – DP position, overdrawn or within limits, by how much – on the cover or executive summary | Do not bury the headline finding in the middle of the report |
| Quantify every observation in rupees wherever possible | Do not present observations in qualitative language alone when a number is available |
| Use factual, findings-based language (“we verified,” “we computed,” “we observed,” “we note”) | Do not use statutory audit language (“in our opinion,” “we certify,” “true and fair view”) |
| Disclose every limitation – locations not visited, documents not produced, confirmations not received | Do not leave limitations to be discovered later; disclose them upfront |
| Maintain a professional and measured tone even where observations are adverse | Do not editorialise, moralise, or use emotive language about the borrower |
| Include the audited balance sheet reconciliation for March audits | Do not treat the audited financials as outside scope; they are an essential cross-check |
| Prepare the report within the timeframe specified by the bank | Do not delay submission; banks track delivery time as part of empanelment performance |
Stage 10: Working Papers and Documentation
Working papers are the auditor’s professional shield. They are also the area where, in disciplinary reviews, practitioners are most often found wanting.
| Do | Don’t |
| Maintain working papers contemporaneously during the engagement, not after the report is submitted | Do not reconstruct working papers after the fact when questions are raised |
| Keep copies (physical or digital) of every document examined – sanction letter, stock statement, debtor ageing, creditor listing, licences, insurance policy | Do not rely on memory or on borrower confirmations; keep the documentary evidence |
| File signed count sheets, photographs with date stamps, debtor confirmation responses | Do not omit the documentation that would protect you if the engagement is later questioned |
| Maintain correspondence with the borrower and the bank during the engagement | Do not rely on verbal exchanges; written communication is what survives audit reviews |
| Retain working papers for the period specified under ICAI requirements | Do not destroy working papers prematurely; the standard retention period applies |
| Index and organise the working papers so they are retrievable if needed years later | Do not keep working papers as a loose collection; structure them by engagement and by section |
Stage 11: Ethical and Professional Conduct
These are not stage-specific items – they apply throughout the engagement. But they are worth listing separately because they are where the most damaging professional risks arise.
| Do | Don’t |
| Maintain independence from the borrower throughout the engagement | Do not accept hospitality, gifts, or favours from the borrower beyond what is incidental and customary |
| Report adverse observations even if the borrower’s management requests their removal | Do not suppress findings to maintain a comfortable relationship with the borrower |
| Maintain confidentiality of the borrower’s business information | Do not share information obtained during the engagement with third parties or use it for personal purposes |
| Report findings only to the appointing bank, the intended recipient | Do not share the report or its findings with the borrower’s competitors, with other banks not in the consortium/ multiple-banking, or with any unauthorised party |
| Decline engagements where you lack the sector expertise to perform competent work | Do not accept engagements outside your competence; build expertise first or refer the engagement |
| Acknowledge errors when discovered and correct them appropriately | Do not conceal errors once they come to light; the cover-up is always worse than the original error |
| Maintain professional language and behaviour in all interactions with the borrower’s staff | Do not use the auditor’s position to embarrass, intimidate, or pressure the borrower’s employees |
| Charge fees in accordance with the bank’s agreed schedule and your firm’s policy | Do not negotiate fees or benefits with the borrower; the bank is the appointing institution and the source of the fee |
A Final Note
The do’s and don’ts above are not a substitute for professional judgment, sector knowledge and engagement-specific thinking. They are habits and disciplines that experienced practitioners develop over years of doing this work. The reason I have laid them out in checklist form is that, in the pressure of an active engagement – with the borrower’s staff watching, the bank’s deadline approaching and a dozen things competing for attention – the auditor needs ready reference points. Not paragraphs to read, but lists to scan.
The full treatment of each item, the sector-specific nuances, the working examples, the model reporting paragraphs, and the regulatory references are what the book series is designed to provide. The checklist is the entry point. The books are the destination.
For practitioners who are new to stock audit work, my suggestion is to print the table for each stage above, keep it in your engagement folder and tick the items as you work through them. After three or four engagements, the items become habitual and the checklist becomes invisible. That is the goal – not to follow a checklist forever, but to internalise the habits until they become the natural way you work.
After six hundred plus audits, I still keep something like this in front of me at every engagement. The discipline is not for the difficult cases. The discipline is for the easy ones, where the temptation to take shortcuts is the strongest, and where the shortcuts cause the most damage when they go wrong.
Disclaimer and Limitation
The views expressed in this article are the personal views and professional observations of the author based on his experience in stock and receivables audit practice. They are not intended to constitute legal advice, regulatory guidance, or a definitive interpretation of any law, rule, standard, or professional pronouncement.
The do’s and don’ts listed in this article are illustrative of the practices the author has found useful over many engagements. They are not exhaustive, and each engagement requires the auditor’s specific professional judgment based on the engagement terms, the sanction letter, the bank’s requirements, and the specific facts of the borrower’s situation.
Nothing in this article supersedes any ICAI pronouncement, Standard on Auditing, statutory provision, RBI direction, or bank policy. The applicable framework shall prevail in all cases.
The author accepts no liability for any consequence arising from the application of any view discussed in this article.
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