Why banks require stock audits
Where a working capital facility is secured against stock and receivables, the bank's exposure is only as good as the value of that stock actually on the ground. A stock audit gives the bank independent verification that the inventory declared in the borrower's stock statement genuinely exists, is in the condition and quantity claimed, and is valued reasonably — rather than relying solely on the borrower's own monthly statements.
For the business being audited, a clean stock audit report supports the facility's continuation or renewal; discrepancies — quantity shortfalls, obsolete stock still valued at cost, or a mismatch between the stock statement submitted to the bank and what's actually on the books — can affect the drawing power calculated against the facility.
What a stock audit typically covers
- Physical verification — a count (full or sample-based, depending on the volume) of stock at the location, checked against the stock register.
- Valuation review — confirming stock is valued on a consistent and reasonable basis, and identifying slow-moving, obsolete or damaged stock that may be overvalued.
- Reconciliation with the stock statement — comparing the quantity and value physically verified against what was declared to the bank in the most recent stock statement.
- Insurance coverage check — confirming stock is adequately insured and that the insured value is reasonable against the actual holding.
- Movement and documentation review — checking that stock inward and outward movements are properly documented, particularly for high-value or fast-moving items.
- Storage and condition assessment — a practical check on how and where stock is stored, which affects both valuation and insurability.
Documents and access required
- Latest stock statement submitted to the bank, and stock statements for the preceding few months for trend comparison.
- Stock registers or inventory management system records.
- Purchase invoices for recent additions to stock, to verify cost basis.
- Sales invoices and delivery records, to test stock movement.
- Insurance policy covering the stock, with the sum insured.
- Physical access to the godown, warehouse or storage location — this is the one requirement that can't be substituted with documents alone.
The stock audit process, step by step
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Scope confirmation
Where the bank has specified a format or particular areas of focus in its sanction letter, the audit is scoped to match that before the site visit is scheduled.
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Site visit and physical count
Stock is physically counted or sampled at the location, with the method (full count versus sampling) depending on the volume and nature of the inventory.
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Valuation and condition check
Counted stock is valued and reviewed for condition — identifying anything slow-moving, damaged or obsolete that may need to be flagged separately from good, sellable stock.
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Reconciliation against the stock statement
The physically verified position is compared against the most recent stock statement submitted to the bank, and any variance is investigated and explained.
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Report to the bank or management
Findings, including any discrepancy and its likely cause, are set out in the report format the bank requires, or in a management report for a voluntary engagement.
Practical notes from our engagements
- Stock statements drifting from reality over successive months. A stock statement copied forward with small adjustments, rather than genuinely updated each month, is the most common reason a stock audit turns up a bigger variance than expected.
- Obsolete stock still valued at original cost. Slow-moving or damaged stock carried at full value inflates the drawing power calculation and is one of the first things a stock auditor is expected to flag.
- Multiple storage locations not all disclosed. Where stock is held across more than one location, all of them need to be covered by the audit — a location left out isn't verified, whatever the stock statement says about it.
- Access arranged at the last minute. A stock audit needs someone at the location who can open storage areas, produce records, and answer questions about the counting method used — arranging this in advance makes the visit considerably faster.
How we handle a stock audit
We confirm the bank's specific reporting format before the visit, so the report is usable by the bank without a second round of clarification. The physical count and reconciliation are carried out at the location itself, and any variance between the count and the stock statement is investigated on the spot where possible, rather than left as an unexplained figure in the final report.
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Frequently asked questions
Is a stock audit legally mandatory?
No, not under any single statute — it's most commonly a condition attached to a bank's working capital facility, though a business can also commission one voluntarily.
How often does my bank require a stock audit?
This is set by the bank's own sanction terms and varies by facility size and the bank's internal policy — check your sanction letter for the specific frequency required.
What happens if the stock audit finds a shortfall against the stock statement?
The bank typically adjusts the drawing power calculated against the facility to reflect the verified position, and may ask for an explanation or corrective action depending on the size of the variance.
Does the auditor need to visit every storage location?
Yes — a location not visited isn't independently verified, so all locations holding stock covered by the facility need to be included in the scope.
Can obsolete stock still be included in the value reported to the bank?
It can be disclosed, but a stock auditor is expected to flag it separately from good stock, since carrying obsolete stock at full value overstates what's actually available as security.
Who typically requests a stock audit — the bank or the business?
Usually the bank, as a condition of the facility, though a business can commission its own stock audit for internal control purposes independent of any bank requirement.