In this guide
The Findings That Recur Most Often
The same small set of deficiencies turns up in bank stock audits across industries, and the great majority are record-keeping failures rather than losses. Stock statements filed from an estimate instead of a system extract. Valuation applied at selling price where the sanction requires cost. Slow-moving and obsolete items carried at full value with no ageing analysis behind them. Creditor balances for stock not deducted before drawing power is computed. Goods lying at a job worker or in transit either counted twice or missed at both ends. Godowns in use that were never disclosed to the lender. Insurance lapsed, or covering an address the stock left months ago. None of these require anybody to have done anything dishonest, which is exactly why they persist for so long. Each is cheap to fix once and expensive to leave, because a lender that finds two of them together stops treating the stock statement as reliable at all.
Stock Statement Not Agreeing to the Books
This is the most common deficiency and it usually has a mundane cause. The statement is prepared outside the accounting system, on a spreadsheet maintained by somebody who needs a figure by a deadline, from a stores extract, a physical estimate or last month's number adjusted. It is not fraudulent and it is not reconciled, which is the problem: nobody ever compares it back to the ledger, so the two drift and the drift is invisible until an auditor puts them side by side. Valuation basis differing between the two compounds it. The books apply cost or net realisable value, whichever is lower, while the statement is frequently prepared at cost without any obsolescence adjustment, or occasionally at selling price. Two different bases produce two different figures from the same physical stock, and the difference is then read as a stock discrepancy rather than a valuation one. Building one from the other is the fix and it is largely a sequencing change. Close the stock ledger to the statement date, reconcile it to the general ledger, apply the valuation basis the sanction specifies, and derive the statement from the reconciled figure rather than assembling it separately.
Creditors for Unpaid Stock Not Deducted
Stock the borrower has received but not yet paid for has been financed by the supplier rather than by the bank, and lending against it would mean two parties funding the same goods. That is why the deduction exists, and it is a standard term rather than a lender's preference. Missing it inflates the figure on which drawing power is computed, and since the eligible figure is reduced by the sanctioned margin, the error carries straight through to the ceiling on the account. A borrower who has been drawing against an overstated position is overdrawn against the security whether or not anybody has noticed. Identifying the correct creditor balance is where the practical difficulty sits. It is not the whole creditors ledger, which includes amounts owed for services and expenses that have nothing to do with stock, and it is not simply the trade payables total. What is needed is the creditors attributable to goods actually held in stock at the statement date, which means excluding amounts for goods already consumed or sold, and including goods received against which no invoice has yet been booked.
Obsolete Stock Carried at Full Value
Slow-moving and obsolete stock carried at cost overstates the security by exactly what it is not worth, and it persists because nothing in the ordinary monthly routine forces anybody to look. Ageing is never run, so there is no report identifying what has not moved, and the question of whether an item still has a market simply never arises. The first time it is asked is usually at an audit, which is the worst moment because the answer then arrives as a finding rather than as a decision. No provisioning policy applied is the second half of the same problem. Even where ageing exists, a business without a stated policy has no basis on which to provide, so nothing is provided and the ageing report becomes a document nobody acts on. A policy setting bands and percentages, applied consistently between periods, is what converts the analysis into an entry. The consequence for the facility is direct. Eligible stock is overstated, drawing power computed from it is overstated, and when the position is eventually corrected the limit moves against a borrower who had been treating the earlier figure as available.
What the Auditor Records and the Bank Reads
How a deficiency is worded determines how it is read, and borrowers rarely see the difference until it costs them. An observation recorded as a procedural gap, with the amount involved stated and management's explanation noted, reads as a control point. The same underlying fact recorded as an inability to verify a stated value of stock reads as a limitation on the audit, and limitations travel further than observations. Repeat findings are the second mechanism. Credit files carry the previous report, so an observation appearing for the second or third cycle is no longer a gap somebody has not got to yet; it is evidence that the borrower was told and did not act, which changes the tone of the whole file. The point at which a deficiency becomes a qualification is reached when the auditor cannot obtain sufficient evidence over something material, or when the records are inconsistent to a degree that the reported figure cannot be supported. That is the outcome worth avoiding, because a qualified report is read by every subsequent reviewer of the account and by any incoming lender.
Fixing Them Before the Next Cycle
Sort the observations into process failures and one-off corrections, because they need different responses and different owners. One-off corrections are the items where a number was wrong and can be put right: creditors for stock deducted, an ageing analysis prepared, insurance renewed at the correct addresses, an undisclosed godown declared. These close permanently once done. Process failures are the ones that produce the same observation next cycle: a stock statement compiled from an estimate, valuation applied on the wrong basis, goods at a job worker never reconciled. These close only when the routine producing them changes, which usually means a different person or a different sequence at month end rather than more care. Retain the evidence that each was closed, dated, so the next audit can be shown what changed rather than told. Running an internal count before the scheduled audit is worth it where the last cycle found a material variance, where locations have been added, or where you have no independent read on the position, and how we run a stock audit sets out what that involves.
