Stock Audit for Bank Borrowers: Reconcile Three Numbers First

A stock audit compares physical stock with a record of it. Three different audits can apply to you: your bank's, your statutory auditor's (the auditor who signs your annual accounts), and an annual one the Reserve Bank of India (RBI) requires if a large loan turns bad. As of November 2026, the position is this.

Sources: Companies (Auditor's Report) Order, 2020, Ministry of Corporate Affairs, paragraphs 3(ii)(a) and 3(ii)(b), with the ICAI Guidance Note on CARO 2020 (June 2020) as secondary reading; RBI Commercial Banks – Income Recognition, Asset Classification and Provisioning Directions, 2025, paragraph 22, dated 28 November 2025 and updated to 1 October 2026; UCO Bank's public notice for stock auditors (10 February 2025) for the bank audit scope.

The ₹5 crore figure in CARO 2020 is the statutory auditor's reporting test. It is not the limit at which a bank orders a stock audit. That limit is the bank's own.

Where inventory is material, the statutory auditor attends your count. The auditor evaluates your count instructions, observes, inspects the stock and performs test counts. (ICAI Board of Studies deck reproducing Standard on Auditing 501).

A shortfall cuts drawing power by more than the shortfall itself whenever you owe suppliers for the stock. Many banks lend against paid stock, which is stock minus the unpaid trade creditors for it; confirm the basis in your sanction letter, because terms vary. A shortfall comes out of that smaller base.

UCO Bank's notice tells its auditors to verify "the value of paid Stock" by excluding unpaid stock and stock bought under letters of credit (a bank's written promise to pay the supplier) or bank guarantees.

Here is our model. The figures are illustrative, not from any borrower.

• Inputs: stock statement ₹5.00 crore; physical count ₹4.20 crore; margin 25%, so drawing power is 75% of paid stock; debtors left out to keep the stock effect visible.
• Formula: drawing power = (stock − unpaid creditors) × (1 − margin).

The stock shortfall is the same in both cases: ₹0.80 crore, or 16% of the statement. The percentage fall in drawing power is the shortfall percentage multiplied by stock divided by paid stock: 16% × 5 ÷ 4 = 20%, and 16% × 5 ÷ 2 = 40%. The margin cancels out.

The 16% gap is also above the 10% CARO line. If it sat in one class, say finished goods, your statutory auditor would have to report it.

Run five checks and keep a worksheet with three numbers per class of inventory. Number one is the figure on your last stock statement. Number two is the figure in your books at cost. Number three is the physical count, counted by you. Each check below has a pass and a fail.

Does the count match the books, class by class?

Pass: every class (raw material, work in progress, finished goods, trading stock, packing material) is within 10% of the books, and each gap is explained at item level. If you counted on a different date from the statement date, you have added receipts and deducted issues for the days in between. Fail: any class at 10% or more, or any gap you cannot explain. Our recommendation is to explain smaller gaps too, since the auditor tests items one by one.

Is the stock paid for?

Pass: unpaid trade creditors for goods are listed by supplier and deducted, and stock bought under letters of credit or bank guarantees is separated. Fail: your statement shows gross stock.

Is obsolete and slow-moving stock out of the figure?

Pass: it is segregated, written off or excluded when you work out drawing power. Bank auditors inspect for exactly this: quality, slow-moving and non-moving goods, and age. Fail: aged items are carried at full value.

Is every item where your bank expects it?

Pass: all stock sits at locations named in your security documents, is insured, and is not also charged to another bank. For stock held by a third party, you hold written confirmation of quantity and condition, because your statutory auditor will request it. Fail: stock at an unlisted godown, or unconfirmed stock at a third party. For stock you hold for others, see consignment inventory.

Is it valued at cost, not selling price?

Pass: each valued item traces to a purchase invoice or production cost, and semi-finished and finished goods are at factory cost. Fail: anything at sale price. Closing stock is opening stock at cost plus purchases, less the cost of goods sold, never purchases minus sales value. The method you use (first in, first out or weighted average) is covered in inventory valuation methods.

The worksheet

Compute gap vs books as (count − books) ÷ books. Mark a class "fail" at 10% or more in either direction. Then redo the drawing power calculation from your sanction letter with the count in place of the statement.

Trace the gap to items before you touch any total. Start with the largest rupee differences, because a handful of high-value items usually explain most of a class gap, and UCO Bank's notice tells auditors to physically count high-value stock.

Then separate timing from loss. A register that is a week behind receipts and issues shows up as a shortfall even though no stock is missing. The auditor still reports it, so fix the entry dates rather than argue the point. For causes and fixes, read why system stock differs from the shelf, and for a count routine that keeps the gaps small, cycle counting.

If the gap is real, correct the stock statement before the auditor arrives. Our recommendation is to file the lower figure and tell the branch why, rather than let the auditor find it.

All plans give you one record of stock by warehouse and item, so the books column of your worksheet matches the count location by location; the Enterprise plan adds lot tracking. Arka Inventory is cloud software built natively on Salesforce, and it does not replace your auditor or your count. It keeps the records the count is tested against.

• Stock by location. All plans show stock across multiple warehouses, so each godown can be laid next to its count.
• Lot, batch, expiry and serial tracking. On our Enterprise plan, you can see which lots are near expiry or past it before they are carried at full value (lot and serial tracking). Bin tracking is also on Enterprise.
• Barcode receiving. Goods are logged on arrival, so the register does not run a week behind the dock.
• Custom reports and dashboards. You can build a report of stock by warehouse and item, and by lot on Enterprise, to sit beside your count sheet.

As of November 2026, Basic costs $199 a month and Advance $499 a month on annual billing, with Enterprise priced on request (pricing).

You can try everything free for 15 days with full access and no credit card; talk to our team to start.