—Guide
Bank Stock Audits Explained: Drawing Power, Stock Statements and What Auditors Check
Why banks commission stock audits for working capital accounts, how drawing power is worked out, and what a stock auditor checks on site.
If your business has a cash credit or overdraft limit secured on stock and receivables, sooner or later the bank will send a stock auditor. Knowing what they check — and why — makes the visit straightforward. This guide explains.
Why Banks Commission Stock Audits
A working capital limit against stock and receivables is secured by hypothecation of those assets. The bank lends based on the stock statements you submit, often monthly. A stock audit gives it independent confirmation that the stock and receivables exist, are in good condition, and are worth what the statements say. Banks set their own policies on which accounts need audits and how often — commonly annually for accounts above a certain size.
Drawing Power
Drawing power is the amount you can actually draw on your limit at any time. It's calculated from your stock and receivables, less the bank's margin, and excluding anything ineligible under the sanction terms — for example:
- Receivables older than a set number of days.
- Receivables from related parties.
- Obsolete, damaged or slow-moving stock.
- Stock that's already paid for by creditors, depending on the bank's method.
What the Stock Auditor Checks
- Reconciles your latest stock statement with your stock register and books.
- Physically verifies stock at your premises, often on a sample basis.
- Checks the condition of stock and identifies obsolete, damaged or expired items.
- Checks the valuation method and prices used.
- Reviews receivables, ages them, and may confirm balances with customers.
- Checks insurance covers the stock, with the bank's interest noted.
- Recalculates drawing power under the sanction terms.
The Report
The auditor reports to the bank, with verified figures, eligible stock and receivables, the recalculated drawing power, and observations. If drawing power is lower than what's been drawn, the bank will ask you to regularise the excess.
How to Prepare
- Keep stock registers accurate and reconciled with the books.
- Submit stock statements based on the same figures.
- Write off or separately identify expired and damaged stock.
- Age receivables monthly and chase old debts.
- Keep insurance current, with the bank's clause.
Getting Help
Think Filing carries out stock and receivables audits, and pre-audit reviews for businesses preparing for their bank's audit.