Preparing for a Stock Audit: What Banks Actually Check

Why banks require stock audits

For businesses with working capital facilities secured against inventory (and often receivables), banks periodically commission an independent stock audit to verify that the security backing the facility actually exists, is correctly valued, and matches what's been reported in your stock statements.

What the auditor is actually checking

• Physical existence — a genuine physical verification of inventory quantities, not just a review of records
• Valuation — whether the value assigned matches an appropriate basis (cost or realisable value, whichever is relevant) and isn't inflated relative to actual condition
• Reconciliation with stock statements — whether what's physically present matches what's been reported to the bank in periodic stock statements
• Ageing and obsolescence — identifying slow-moving, obsolete, or damaged stock that shouldn't be counted at full value as security
• Hypothecation records — confirming the stock is properly recorded as security and isn't double-hypothecated to another lender

What tends to raise concerns

• Discrepancies between reported and physically verified quantities
• Stock statements that consistently lag actual inventory movement
• Obsolete or slow-moving stock still being valued and reported at full value
• Poor warehouse record-keeping that makes verification difficult

How to prepare

• Keep stock records current and reconciled to physical counts on an ongoing basis, not just before an audit is scheduled
• Segregate and clearly flag slow-moving or obsolete stock rather than leaving it mixed in with current inventory
• Ensure warehouse locations are organised well enough for an external auditor to actually verify counts efficiently

A business with clean, current stock records rarely finds the stock audit process disruptive — it's almost always the businesses with loose day-to-day inventory discipline that find these audits stressful.

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