A stock audit is a bank-commissioned check of a borrower's inventory (and usually receivables) that are pledged or hypothecated as security for working capital. The auditor confirms the stock exists, is owned, is valued correctly and matches what the borrower reported to the bank.
Facts checked: 9 October 2026. Stock audits are driven by each bank's own policy and the sanction terms of the facility, so frequency and format vary by bank. This post does not quote a bank's thresholds.
Why banks do it
Working capital limits are secured on current assets. The borrower submits periodic stock statements, and the bank derives drawing power from them. If the statement overstates stock or includes old receivables, the bank lends more than the security supports. The stock audit is an independent check on that figure. You can model the link with the drawing power calculator.
What the auditor verifies
| Area | Procedure |
|---|---|
| Existence | Physical verification at each godown, factory and third-party location |
| Ownership and charge | Stock is free of other charges, not consigned or held for others |
| Quantity and value | Reconcile physical count to stock records and to the statement submitted to the bank |
| Valuation | Lower of cost and net realisable value, obsolete and slow-moving items identified |
| Receivables | Ageing, debtors beyond the bank's eligible period excluded, disputed and related-party balances flagged |
| Creditors | Creditors for goods deducted where the sanction terms require it |
| Insurance | Cover is adequate and bank's interest is noted |
Worked example
| Item | ₹ lakh |
|---|---|
| Stock per statement to bank | 480 |
| Less: obsolete / not found on count | 35 |
| Verified stock | 445 |
| Eligible debtors per statement | 220 |
| Less: debtors beyond eligible age | 30 |
| Verified debtors | 190 |
The statement overstated the security by ₹65 lakh. If the bank applied a margin on the statement figures, the verified drawing power is lower, and the report must show the difference so the bank can check whether the account is overdrawn. Related asset-classification effects can be tested in the NPA classification calculator.
What the report contains
- Scope, dates of visit, locations and persons met
- Reconciliation of physical stock to books and to the bank statement
- Valuation basis and adjustments
- Ageing of receivables and exclusions
- Insurance, statutory dues and other charge observations
- Conclusion on the correct drawing power and any irregularity
A structure to start from is the stock audit report template.
Common observations
- Stock statement prepared from books, not from a physical count
- Goods at third-party locations not disclosed
- Debtors included that are past the eligible period or already paid
- Stock purchased on credit but creditors not netted where required
- Insurance expired or not covering the full value
Frequently asked questions
Is a stock audit the same as inventory verification under SA 501?
No. SA 501 deals with the statutory auditor's attendance at stock count for financial statements. A bank stock audit is a lender-specific engagement against the sanction terms.
Who appoints the stock auditor?
The bank, from its empanelled firms. See the stock audit empanelment criteria.
Does the borrower pay?
Usually the cost is recovered from the borrower under the sanction terms. Check the sanction letter.
How is it different from concurrent audit?
Concurrent audit covers the bank's own transactions. See what concurrent audit is.
Next: audit process step by step and key audit matters.
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