Stock Audit Services
A stock audit checks that the inventory in your godown matches your books and the stock statement you give your bank. We prepare the records, coordinate the count and reconciliation, and get you ready for the bank’s stock auditor. A practising CA signs the audit report.
What it is
A stock audit is an independent check of inventory: raw material, work in progress, finished goods and often book debts too. The auditor verifies stock on a chosen date, ties it to the stock register, checks its valuation and compares the result with the stock statement you gave your lender.
Banks rely on these audits when they lend working capital, such as a cash credit limit, against the security of stock and receivables. The amount you can draw, called drawing power, is worked out from those stock statements. No single law orders one. But the Companies (Auditor’s Report) Order, 2020 (CARO 2020) makes statutory auditors report on inventory verification and on whether quarterly statements to banks match the books.
Who it applies to
Businesses with cash credit against stock
Picture a Faridabad fastener maker on a cash credit limit. Every rupee it draws rests on its monthly stock statement, and the sanction letter says when the bank will test it.
Companies with limits above ₹5 crore
Where CARO 2020 applies and working capital limits against current assets exceed ₹5 crore, the statutory auditor must say whether quarterly bank returns agree with the books.
Owners who want an internal check
With several godowns or suspected shrinkage, many owners order a count themselves, sometimes alongside an internal audit.
Why it matters
Draw the right amount
Overstate stock and you draw more than the security supports. Understate it and working capital sits idle.
Keep bank and audit reports clean
Gaps between the stock statement and the books show up in the bank’s audit report and in the CARO 2020 report on your accounts.
Spot losses early
Physical counts catch pilferage, damage and dead stock before they distort your profit.
What a stock auditor checks
| Area | What is checked |
|---|---|
| Physical stock | Count or sample count of items by location; condition; goods held for others or lying with job workers |
| Records | Stock register, purchase and sales registers, goods received and dispatch notes, GST returns |
| Valuation | Cost formula used, lower of cost and net realisable value, slow-moving and obsolete items |
| Stock statement | Figures given to the bank against the books, with a roll-forward or roll-back to the statement date |
| Receivables | Debtor ageing, overdue and disputed debts, which the sanction terms usually exclude from drawing power |
| Security | Insurance cover and its amount, hypothecation display boards, stock kept at declared locations |
The report closes with a recomputed drawing power and a list of observations. Where the bank appointed the auditor, the report goes to the bank. You can usually explain differences first.
Documents required
From your bank file
- Sanction letter with margin and drawing power terms
- Stock statements submitted for the period
- Last stock audit report
From your books
- Item-wise stock register with quantities and values
- Purchase, sales and production records
- Debtor and creditor ageing
- GST returns for the period
Other records
- Stock insurance policy
- List of godowns and job workers
- Valuation method and costing sheets
How it works
Read the sanction terms and last statement
We note the margin, which items and debtors are eligible, and the statement date to be tested.
Count the stock on site
Our team coordinates the count at each location with your storekeeper, noting damaged and slow-moving items.
Reconcile counts, books and the statement
We roll the count forward or back to the statement date and list each difference with its cause. Say a truckload left your unit on 30 June but was billed on 1 July. The statement and the books disagree, yet nothing is missing.
Test the valuation
We check that stock sits at the lower of cost and net realisable value, and that obsolete items are not carried at full cost.
Recompute drawing power and report
You get a report with the corrected drawing power, the gaps found and how to fix them before the bank’s next review.
Timelines
File stock statements on schedule
Your sanction letter fixes how often stock statements are due, commonly monthly or quarterly. Each one should match the books for the same date.
Expect the audit on the bank’s calendar
The bank decides when a stock audit happens, under its own policy and your sanction terms. Plan your records around that date.
Count before 31 March
For companies, CARO 2020 asks whether management verified inventory at reasonable intervals. A count close to 31 March also makes the statutory audit easier.
What happens if stock does not match
Your drawing power is cut
If the auditor finds less stock than declared, the bank recomputes drawing power downward. Any amount drawn above it has to be brought down under the sanction terms.
Your CARO report carries a remark
CARO 2020 asks whether discrepancies of 10% or more in aggregate for each class of inventory were found and dealt with, and whether quarterly bank returns agree with the books. If not, the auditor must give details.
You reverse GST credit
Under Section 17(5)(h) of the CGST Act, input tax credit is not available on goods lost, stolen, destroyed or written off. A real shortage means reversing that credit in your GSTR-3B return.
Frequently asked questions
What is a stock audit?
A stock audit is an independent check that your physical inventory matches your books and the stock statements given to your lender. The auditor counts stock, tests its valuation, reconciles it with the records and recomputes drawing power. A bank lending against stock usually triggers it, though owners also commission one for their own control. Doing one before the bank’s visit avoids surprises.
Is a stock audit compulsory by law?
No single law requires it, but banks make it a lending condition and CARO 2020 covers related checks. Under clause 3(ii), a company’s statutory auditor reports on physical verification of inventory and, where working capital limits exceed ₹5 crore against current assets, on whether quarterly returns to banks match the books. For most borrowers, it is part of the facility.
Who appoints the stock auditor?
For a bank stock audit, the bank appoints the auditor, usually from its own panel, and the report goes to the bank. You can also appoint a chartered accountant yourself for an internal check before the bank’s review. We do not act as a bank’s panel auditor. We prepare you so the bank’s auditor finds records that already agree.
What is drawing power?
Drawing power is the amount you can actually draw from a cash credit limit at a given time. It is worked out from the eligible stock and receivables in your latest stock statement, minus the margin set in the sanction letter and any items the bank excludes. If drawing power falls below your outstanding balance, the excess has to be paid down, so accurate statements keep your limit fully usable.
How is a stock audit different from a statutory audit?
A statutory audit gives an opinion on the full financial statements once a year under the Companies Act, 2013. This audit looks only at inventory and often receivables, at a specific date, mostly for a lender. The statutory auditor still reports on inventory under CARO 2020 clause 3(ii), so clean stock records help both reviews.
What if our stock statement does not match the books?
Find and explain the difference before the bank does. Common causes are goods in transit, unbilled dispatches, stock at job workers, or valuation done differently in the statement. For companies with limits above ₹5 crore, CARO 2020 requires the statutory auditor to give details where quarterly returns do not agree with the books. A reconciliation note filed with the bank usually settles timing differences.
How should stock be valued for the audit?
Inventory is valued at the lower of cost and net realisable value, under the accounting standard on inventories (AS 2, or Ind AS 2 for companies that follow Ind AS). The cost formula, such as FIFO or weighted average, should be applied consistently. Obsolete or damaged goods are written down. The bank’s own norms may also exclude certain items, so check your sanction letter as well.
Does a stock shortage affect GST?
Yes, a genuine shortage affects your input tax credit. Section 17(5)(h) of the CGST Act blocks ITC on goods lost, stolen, destroyed, written off or given away as gifts or free samples. So if the count confirms goods are missing, the credit claimed on them should be reversed in GSTR-3B. Timing differences are not shortages, which is why careful reconciliation comes first.
What it costs
Our fee plus the government fee that applies to your case, quoted before you commit. Tell us the situation and we will price it exactly.
The audit carries no government fee.
Ready to begin?
Share your sanction letter and last stock statement, and we will tell you where the gaps are before the bank’s auditor arrives.