From the Knowledge Centre
Internal Audit and Bank Stock Audits: When They Are Required and What They Check
"Internal audit" and "stock audit" are often confused with the statutory audit. They serve different purposes, are commissioned by different people and report to different audiences.
Internal audit: who must have one
Under Section 138 of the Companies Act, 2013 and Rule 13 of the Companies (Accounts) Rules, 2014, these companies must appoint an internal auditor:
| Company | Thresholds (any one, in the preceding financial year) |
|---|---|
| Listed companies | All |
| Unlisted public companies | Paid-up capital ≥ ₹50 crore; turnover ≥ ₹200 crore; outstanding loans from banks/FIs ≥ ₹100 crore; or outstanding deposits ≥ ₹25 crore |
| Private companies | Turnover ≥ ₹200 crore; or outstanding loans from banks/FIs ≥ ₹100 crore |
The internal auditor may be a Chartered Accountant, a Cost Accountant or another professional decided by the Board. The internal auditor can be an employee, but must be independent of the statutory auditor's role.
What a useful internal audit covers
A good internal audit goes beyond checking vouchers. Typical areas:
- Procure-to-pay – vendor selection, purchase approvals, three-way matching, duplicate payments
- Order-to-cash – credit limits, pricing, discounts, collections, credit notes
- Inventory – receipts, issues, physical verification, slow-moving and obsolete stock
- Payroll – headcount reconciliation, attendance, statutory deductions
- Statutory compliance – GST, TDS, PF/ESI and labour laws
- IT controls – user access, segregation of duties, audit trail and backups
- Internal financial controls – documented risk-control matrices and testing, which also support the statutory auditor's reporting
The output should be a short list of prioritised observations, each with an owner and a target date, not a thick report nobody reads.
Bank stock audit
Banks lending against inventory and receivables, through cash credit or overdraft limits, appoint stock auditors, usually once or twice a year for larger accounts. The auditor checks:
- Stock statements submitted to the bank, against the books and a physical inspection
- Valuation of stock – at the lower of cost and market value, excluding obsolete, slow-moving or unpaid stock
- Receivables – ageing, and exclusion of debts beyond the bank's eligible period (often 90 or 180 days)
- Drawing power – computed after applying the margins stipulated in the sanction letter
- Insurance – adequacy of cover and the bank clause
- Sanction conditions – compliance with covenants such as stock statement submission and periodic financials
Getting through a stock audit smoothly
- Submit stock statements that match the books, not rough estimates.
- Keep a stock register with locations, and an ageing of receivables.
- Separate out goods held on behalf of others, and goods not yet paid for.
- Keep insurance policies current, with the bank's interest noted.
- Address observations from the previous audit before the next one.
The information in this article reflects the law as on the date of publication and is for general guidance only.