Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
Banks lend against stock and debtors that the borrower reports, and over-reported figures inflate drawing power.
Compare the monthly stock statement with the books and with a physical count, test valuation and ageing, and recompute drawing power on the verified figure.
Monthly stock statements, stock register, purchase and sales records, debtors ageing, insurance policy and the bank sanction terms.
A stock audit report showing verified stock and debtors, the difference from the statement, and the revised drawing power.
A stock audit is an independent check, usually demanded by the bank that has given you a working-capital limit such as a cash credit, that the stock and debtors in your monthly stock statement actually exist and match your books. The bank cares because those figures set your drawing power: how much of the limit you can use.
It is not a statutory audit. No law requires it; your loan sanction letter does.
Who appoints the stock auditor, and how often?
The bank usually appoints a chartered accountant firm from its own panel. When and how often depends on the bank’s policy and the size of the limit, and is written into the sanction letter. Many banks ask once a year, some twice. The bank may also order a surprise audit if your stock statements look odd, for example if stock rises sharply while sales fall.
What does a stock auditor check?
| Area | What is checked | What goes wrong |
|---|---|---|
| Physical stock | Count of a sample against the stock register | Goods listed but not on site |
| Valuation | Cost or market value, whichever is lower | Stock valued at selling price |
| Slow-moving stock | Items unmoved for months | Old, unsaleable stock still counted |
| Insurance | Policy in force, bank named, cover enough | Policy lapsed or cover below stock value |
| Debtors | Ageing, confirmations, sample receipts in bank | Old dues included that the bank excludes |
| Stock statement vs books | Statement total against the ledger | Statement prepared from estimates |
Worked example: a ₹6,05,000 difference
Meera Traders submits a stock statement to the bank showing stock of ₹86,40,000.
- The books show ₹82,10,000. Difference: ₹4,30,000. The statement was prepared from an estimate before month-end entries were posted.
- The physical count comes to ₹80,35,000. A further difference of ₹1,75,000 against the books: damaged cartons never written off.
Total gap: ₹4,30,000 + ₹1,75,000 = ₹6,05,000, which matches ₹86,40,000 minus ₹80,35,000.
If the bank keeps a margin of 25 percent on stock (margins vary by bank and sanction), drawing power falls by 75 percent of ₹6,05,000, that is ₹4,53,750. If Meera Traders has already drawn up to the old figure, it is now over its drawing power by that amount.
The auditor also checks insurance. If the stock policy covers ₹75,00,000 while verified stock is ₹80,35,000, the stock is under-insured by ₹5,35,000, and the report will say so.
How do you keep the audit from becoming a scramble?
- Prepare the monthly stock statement from the closed books, not from estimates.
- Count high-value items every month and post write-offs promptly.
- Keep the debtors ageing current and confirm large balances every quarter.
- Reconcile the bank statement every month, so receipts from debtors are already matched when the auditor samples them.
- Keep the insurance policy and its renewal date on file.
A borrower whose stock register, party ledgers and bank statement agree all year usually finds the stock audit takes a day or two rather than a week.
What to read next
- Debtors and creditors reconciliation
- Statutory audit reconciliation checklist
- What is a statutory audit and does my company need one?
- Related: reconciliation software India
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →