Stock, Inventory & Receivables Audit

What is a stock and receivables audit?

A stock audit is an independent check of a business's inventory — whether it exists, is in the condition and quantity recorded, and is valued properly. A receivables audit does the same for money owed by customers: whether the debts are genuine, how old they are, and whether they're likely to be collected.

Most are commissioned by banks. When a business borrows against its stock and receivables through a cash credit or overdraft, the bank relies on these audits to confirm that the security it's lending against actually exists. Businesses also commission them internally, to catch shrinkage and control problems.

The key terms

Bank-driven audits revolve around a few concepts:

Drawing power

The amount a business can draw on its working capital limit, calculated from eligible stock and receivables after the bank's margins.

Stock statement

The periodic statement, often monthly, that the business submits to its bank showing stock and receivables.

Physical verification

Counting and inspecting stock at the business's premises, usually on a sample basis for large inventories.

Ageing

How long receivables have been outstanding. Banks usually exclude older debts from drawing power.

Obsolete and slow-moving stock

Stock that's damaged, expired, or hasn't moved for a long time, which may be excluded or valued lower.

Valuation

Stock is generally valued at the lower of cost and net realisable value.

Hypothecation

The bank's charge over the stock and receivables, which is why it audits them.

Why it matters

Stock and receivables are often a business's largest assets — and the easiest to misstate:

Banks require it

Lenders commonly require stock audits for working capital accounts above their policy thresholds, often annually.

Drawing power depends on it

Overstated stock or old receivables lead to excess drawing power, which the bank will correct — sometimes abruptly.

Shrinkage and theft

Physical counts expose losses that the books alone don't show.

Expired and damaged stock

Especially in pharma, food, and consumer goods, stock that can't be sold still sits in the books unless someone checks.

Collection risk

Old receivables are the first sign of customers who won't pay.

Accurate accounts

Stock and receivables directly affect reported profit. Errors flow into the financial statements.

Limit renewals

A clean stock audit history makes working capital renewals and enhancements smoother.

Who is this for?

Where a bank appoints the auditor, the audit is for the bank. We can also do an internal pre-audit review so you know what the bank's auditor will find.

Types of stock and receivables audit

The purpose shapes the scope:

What we'll need from you

Stock records

Stock registers or inventory reports by location, item, and batch.

Stock statements

Recent statements submitted to the bank.

Receivables ledger

Customer-wise balances with invoice dates, for ageing.

Valuation basis

How stock is valued, with purchase costs and recent sale prices.

Access to premises

Access to warehouses and godowns for physical verification.

Sanction terms

The bank's sanction letter, with margins and eligibility conditions.

Audit fees depend on the number of locations, the volume of stock, and whether the bank has prescribed a format.

How the audit works

A typical stock and receivables audit runs like this:

1. 1

   Understand the facility

   We review the sanction terms, margins, and the bank's reporting format.

2. 2

   Reconcile records

   Stock statements are reconciled with the stock register and books.

3. 3

   Verify stock

   Stock is physically verified at each location, on a sample or full basis.

4. 4

   Check condition and valuation

   Obsolete, damaged, expired, or slow-moving stock is identified, and valuation checked.

5. 5

   Review receivables

   Receivables are aged, confirmed on a sample basis, and doubtful debts identified.

6. 6

   Report

   The report shows verified stock and receivables, eligible amounts, drawing power, and observations.

After the audit

A stock audit usually leads to some changes:

Drawing power adjustment

The bank may adjust drawing power based on the audited figures.

Correct stock statements

Future statements should follow the audit's basis for eligibility and valuation.

Write off bad stock

Dispose of or write down expired and damaged stock in the books.

Chase old debts

Follow up aged receivables, and provide for those unlikely to be recovered.

Improve controls

Introduce periodic counts, expiry tracking, and ageing reviews.

Insurance

Make sure stock is insured for its correct value, as banks usually require.

Benefits and responsibilities