Meaning
Inspection processes conducted at a borrower’s physical location verify the existence and quality of collateral supporting a loan. Conducting a field examination audit provides a deep look into the books and records of a company to confirm that the financial reporting matches the physical assets. Examiners test the internal controls and the accuracy of the inventory counts.
Asset Verification
Verifying the physical presence of goods involves a wall to wall count or a statistical sample of high value items. Inspectors compare the part numbers and quantities found on the warehouse floor against the electronic ledger. Discrepancies found during this phase indicate potential weaknesses in the inventory management system.
Documentation Review
Reviewing shipping logs and purchase orders ensures that the invoices submitted for financing represent valid and completed sales. The examiner looks for evidence that the customer has accepted the goods and that no side agreements exist. This step prevents the inclusion of pre billed or consignment inventory in the borrowing base.
Sampling Procedure
Testing a representative portion of the accounts receivable aging report identifies concentrations and delinquent accounts. The auditor selects specific invoices for confirmation with the end customer to prove that the debt is acknowledged. Failure to provide clear evidence for a sampled item leads to a larger sample size or an immediate reduction in the eligible collateral value.
The final report details every exception found and sets the tone for the next credit committee review.
