KLM & Co., Chartered Accountants, were appointed as statutory auditors of S Ltd. During the audit of bank borrowings, the auditors examined the…
CA Intermediate · Auditing and Ethics · MTP · September 2026
KLM & Co., Chartered Accountants, were appointed as statutory auditors of S Ltd. During the audit of bank borrowings, the auditors examined the Cash Credit (CC) facility sanctioned by a bank to the company. The sanctioned limit of the CC account was ₹ 45,000. As per the latest stock statement submitted to the bank, the company reported stocks having a realizable value of ₹ 50,000. Out of these stocks, ₹ 15,000 represented unpaid stocks financed by sundry creditors. The bank stipulated a margin of 20% on eligible stocks. The company also reported debtors of ₹ 45,000, out of which debtors amounting to ₹ 5,000 were considered ineligible for the purpose of computing drawing power. The bank prescribed a margin of 50% on eligible debtors. The auditor was required to verify the correctness of the drawing power computed for the CC account and determine the amount that could actually be drawn by the company. Compute the drawing power available to S Ltd. and comment thereon.
Suggested Answer and Working Notes:
Computation of Drawing Power for CC A/c of S Ltd. Particulars of current assets Amount (₹) DP Amt (₹) (A) Stocks: Stocks at realizable value 50,000 Less: Unpaid stocks: – Sundry creditors 15000 15000 Paid for stocks 35000 Margin @ 20% 7000 28000 (B) Debtors: Total Debtors 45000 Less: Ineligible debtors 5000 Eligible debtors 40000 Margin @ 50% 20000 20000 Total Drawing Power 48000 The sanctioned limit given in the question is ₹ 45000 whereas drawing power as per the above working is ₹ 48000. So, drawing power would be restricted to sanctioned limit i.e., ₹ 45000. In the given case, although the drawing power computed on the basis of eligible stocks and debtors amounts to ₹ 48,000, S Ltd. cannot avail credit beyond the sanctioned CC limit of ₹ 45,000. Therefore, the effective drawing power available to the company would be restricted to ₹ 45,000.
Topics: Audit of Banks
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