What Is a Stock Audit?
Each month or quarter, a business with a cash credit limit tells its bank how much stock it holds, and once in a while the bank sends someone to check.
A stock audit is an independent check, usually by a chartered accountant appointed by a bank, that the stock a borrower has reported actually exists, is in usable condition and is valued correctly. In India it is most often tied to cash credit and other working capital loans, where that stock is the bank’s security.
Who Checks the Stock
Three parties have a reason to check stock, and the reason differs each time:
- The bank. Lenders check the stock pledged against a cash credit limit. Each bank’s credit policy sets the trigger, often limits above about Rs.5 crore, though many banks audit smaller accounts too. The sanction letter fixes the schedule.
- The company’s statutory auditor. Under CARO 2020, a company covered by CARO that had working capital limits above Rs.5 crore, secured on current assets, at any point in the year must have its auditor report whether the quarterly statements given to the bank agree with its books.
- The owner. Some businesses commission one before a loan renewal, a partner leaving or a sale.
How the Audit Process Works
| Step | What happens |
|---|---|
| Count | Items are counted on the day, often by sample |
| Match | The count is compared with the stock statement and the books |
| Age | Slow and non-moving stock is flagged |
| Value | Rates are checked against purchase bills |
| Cover | Insurance, storage and the bank’s display board are seen |
| Report | Drawing power is worked out again and sent to the bank |
For you, drawing power is the figure that matters. It is the amount you may actually draw against your limit, worked out from eligible stock less what you still owe suppliers for it, and then cut by the bank’s margin.
Drawing power = (eligible stock − unpaid supplier bills) × (1 − margin)
Stock Audit vs Inventory Audit
Both involve counting, which is why the two get confused.
| Aspect | Stock audit | Inventory audit |
|---|---|---|
| Ordered by | Usually the bank | The business itself |
| Purpose | Protect the loan’s security | Catch loss and errors |
| Output | Drawing power and a report | Corrected stock records |
| Timing | Set by the sanction terms | As often as you choose |
Our page on the inventory audit covers the internal kind, and the inventory audit checklist works for both.
Stock Audit Example
A home furnishings wholesaler in Panipat has a cash credit limit of Rs.1.2 crore and owes the bank Rs.1,04,20,000. In July 2026 the bank’s auditor checks its June stock statement.
| Line | Working | Amount |
|---|---|---|
| Declared | Stock in the June statement | Rs.1,86,40,000 |
| Counted | Found and valued by the auditor | Rs.1,79,25,000 |
| Old stock | Older than 180 days, so ineligible | Rs.12,80,000 |
| Creditors | Unpaid supplier bills for stock | Rs.38,60,000 |
| Paid stock | Counted less old stock and creditors | Rs.1,27,85,000 |
| Draw power | 75% of paid stock | Rs.95,88,750 |
Note: this is an invented example for illustration only. The wholesaler is not real, and the 180-day cut-off and 25% margin are illustrative, so check your own sanction letter.
Counting all its stock as eligible, the wholesaler expected drawing power of Rs.1,10,85,000. The audit cut that by Rs.14,96,250, and because the account already owes more than the new figure, Rs.8,31,250 has to be brought down. A working capital requirement calculator helps check whether a limit like Rs.1.2 crore still fits the business.
Where Borrowers Get Caught
Most bad audits are not fraud. They usually start with a stock statement copied forward from last month by a busy accountant, with the total rounded up to a neat figure and the unpaid supplier bills quietly left out because nobody had them to hand.
And old stock is the other trap. Bales or cartons that have not moved in six months still count in your books, but a bank will often treat them as dead stock and give them no value at all. And goods sitting in a second godown the bank was never told about may simply not be counted.
When an audit finds a gap, the sanction letter usually spells out what follows: penal charges, a lower limit, or an account marked irregular until the gap is closed. Our guide on how to secure a loan for your restaurant business covers the wider borrowing side.
Check Your Stock Before the Auditor Does
What a stock audit mostly tests is whether your own records were right all along.
For retail businesses, Petpooja Invoice offers centralised inventory management with real-time stock tracking and stock transfer, so the figure on the stock statement comes from records, not memory.
For restaurants, Petpooja POSS puts inventory on item-wise auto deduction with day-end inventory reports, which gives a running figure to set beside a physical count.
Count your ten costliest items this week and see how close the records come.
Frequently Asked Questions
Not quite. A stock audit is usually ordered by a bank to protect its loan, while an inventory audit is one a business runs on itself to catch loss and errors.
Usually the bank, which picks a firm from its own panel, most often chartered accountants. Who pays the fee depends on the bank and the sanction terms.
Usually once a year, on the schedule the sanction letter fixes, and often more for larger limits. But a bank can order an extra one if the stock statements look wrong.
The bank resets drawing power to the audited figure. Anything drawn above it has to be repaid, and penal charges may apply under the sanction terms.
Only if a lender asks, or the owner commissions one. A shop running on its own money faces no such check, though GST still expects accurate stock records.
