Goods
In respect of hypothecated goods, the auditor should check the quantity and value of goods hypothecated with reference to the statement received from the borrower. He should also examine the reasonableness of valuation. Letter of hypothecation should also be examined by the auditor. If the value of the goods is higher than the amount mentioned in the letter of hypothecation, the bank’s security is only to the extent of the latter. Auditor should also verify that the Bank has system of maintenance of proper register in this regard as also system of scrutiny of stock/book debt statement furnished by the borrower.
The auditor should also check nature of goods hypothecated/pledged. If the goods are of perishable nature, it will not have market value.
In case of goods/book debts, movable assets hypothecated , auditor should also examine whether the Bank has system in place for periodical inspection of such goods/debts/assets and records of borrowers by its own officer or by external agencies like firm of Chartered Accountants. Whether proper register is maintained in this regard and timely action is taken whenever there is an adverse remark in the inspection report. Auditor should also check that there is adequate insurance cover in respect of goods /assets hypothecated and there is a bankers’ clause in the policy.
In respect of goods pledged with the bank, the auditor should check the statement received from the borrower regarding the quantity and value of goods pledged by him. He should test check the godown registers and the valuation of the goods. If there is any outstanding delivery order against the goods as on the balance sheet date, the same should be deducted from the total quantity in hand in ascertaining the value of the goods constituting the security. The auditor may also examine the key movement register to verify the movement of goods inwards and/or outwards.
Sometimes, goods are in the possession of third parties, such as clearing and forwarding agents, transporters, brokers, warehouse-keepers, etc. If these parties have given an undertaking to the bank that they will hand over the goods or sale proceeds thereof to the bank only, i.e., they have ‘attorned’ to the bank the advances made against such goods should be considered as secured. In such cases, certificates should be obtained by the bank from such third parties regarding quantities on hand on balance sheet date. The valuation of such goods should be checked by the auditor. In case the borrower is a company, the auditor should examine the certificate of registration of charge on the goods hypothecated with the Registrar of Companies. It may be mentioned that in case of pledge of goods, registration of charge is not necessary.