Inventory Audit

Banks with working capital facilities secured by stock require periodic inventory audits to verify the drawing power (DP) stated in stock statements is supported by actual physical stock. RBI's IRAC norms require classification as NPA if drawing power is overstated and the account remains overdrawn. Stock audit is typically a condition in the working capital sanction letter.

A physical inventory audit involves: (1) stock count (surprise or pre-announced) with count sheets; (2) verification against the borrower's stock register and bin cards; (3) identification of slow-moving, obsolete, or damaged stock to exclude from DP; (4) valuation review (FIFO/weighted average — AS 2 / Ind AS 2); (5) reconciliation with the last stock statement submitted to the bank. The auditor certifies the value of eligible stocks.

AS 2 and Ind AS 2 require inventory at the lower of cost and net realisable value (NRV). Cost includes purchase price, conversion costs, and directly attributable overheads. FIFO and weighted average are permitted — LIFO is not allowed under either standard. NRV write-downs must be reviewed each period and reversed if conditions change.

Common red flags: (a) stock statements showing consistent full DP utilisation without seasonal variation — possible inflation; (b) large aged stock (>180 days FMCG, >365 days industrial) at full cost without NRV markdown; (c) stock at multiple locations with no inter-location transfer records; (d) third-party held stock included in DP without a tripartite agreement; (e) GST ITC claims inconsistent with reported stock levels.

For bank-mandated audits, the bank either appoints from its empanelled panel or requires the borrower to engage an empanelled firm — fee borne by the borrower. For internal management audits (supply chain decisions, insurance valuation, ERP reconciliation), the company appoints its own auditor. In both cases, the report is addressed to the appointing party.