Quick answer: A stock audit is an independent verification, ordered by a lending bank, of the inventory and receivables a borrower has hypothecated as security for working-capital limits. The auditor checks physical stock, valuation, debtor quality and the drawing power calculation, and reports any shortfall or irregularity to the bank.
Banks lending cash credit or overdraft limits against stock and book debts rely on the borrower’s monthly stock statements. A stock audit gives the bank independent comfort that the security actually exists and is correctly valued.
We have conducted stock audits for banks over many years; here is what the process involves.
When do banks order a stock audit?
- Periodically for working-capital limits above the bank’s threshold
- At renewal or enhancement of limits
- When stock statements show unusual movements
- When an account shows signs of stress
What the auditor verifies
- Physical verification of stock at godowns, factories and warehouses on a test-check basis
- Valuation — at cost or market value, whichever is lower, as per the sanction terms
- Slow-moving, obsolete or damaged stock
- Debtors — age-wise analysis, excluding those beyond the permitted period
- Creditors — deducted from stock for arriving at paid stock
- Drawing power — recomputed after margins and compared with the statement
- Insurance — adequacy and bank clause on stock policies
- Hypothecation boards and other sanction conditions
How businesses can prepare
- Keep stock registers updated and reconciled with books
- Maintain an age-wise debtors list and creditors list as on the audit date
- Keep purchase and sales invoices accessible
- Ensure insurance policies are current and cover full stock value
- Label and segregate slow-moving or rejected stock
Frequently asked questions
Who pays for the stock audit?
This depends on the bank’s policy and the sanction terms; often the cost is borne by the borrower.
What happens if the auditor finds a shortfall?
The bank may reduce the drawing power, ask the borrower to regularise the account, or take other action depending on the severity.
How often is a stock audit done?
Usually annually for eligible accounts, but banks may order it more frequently for larger or stressed accounts.
Related: Audit & Assurance · Accounting & bookkeeping