Cut off in audit refers to testing whether transactions for the specific accounting period have been recorded in the appropriate accounting period. In other words, transactions occurring in December must be recorded in December, or a cutoff error in financial reporting will occur if the recording is delayed to the extent of the change in the accounting period.

For instance, if you dispatched goods on December 31^st, 2024, it means the risk and rewards related to the dispatch goods have been transferred to the customer in the accounting year 2024. Hence, revenue for this dispatch must be recorded on December 31st, 2024.

However, if you record revenue against this dispatch on or after January 1st, 2025, it will result in cut-off errors and understated revenue for the accounting year ending in December 2024, resulting in understated revenue, understated profit, and understated tax liability.

Similarly, the impact of this error will be reflected in the accounting year 2025 via overstated revenue, overstated profit, and higher tax liability.

Hence, cut-off testing is essential to ensure the accuracy of accounting records and overall financial reporting. That’s why auditors are required to perform cut-off testing while obtaining sufficient and appropriate audit evidence.

Let’s go through audit procedures to ensure the accounting record is free from material misstatement.

Cut off procedures in an audit

The following audit procedures are usually implemented and executed by auditors.

For revenue cut-off testing

1. Obtain the last three goods dispatch notes and corresponding sales invoices for the specific accounting period being audited. Secondly, compare the dates on the goods dispatched notes with the dates on the sales invoices.
2. Make sure to reconcile the dates on dispatch notes and sales invoices in the same accounting period being audited. This should help ensure the goods dispatched have been recorded correctly.
3. Similarly, obtain the first three goods dispatch notes of the subsequent accounting period along with corresponding sales invoices and ensure all dates fall in the subsequent accounting period.

For expense cut-off testing

1. Obtain the last three goods received notes and corresponding purchase invoices (bills).
2. Compare dates on the goods received notes and purchase invoices (bills). All dates must fall in the accounting period being audited.
3. Obtain the first 3 goods received notes and corresponding bills of the subsequent accounting period. All dates of the goods received notes and bills must fall in the subsequent accounting period.

However, if the bill was not received from the vendor, the date of the purchase order and receiving notes can be a source to obtain date of transaction.

Conclusion

Cut-off in audit refers to testing if accounting transactions for the specific accounting period have been recorded in the correct accounting period. In other words, auditors perform procedures to ensure that the accounting period being audited only contains transactions that occurred during this accounting period.

For testing revenue cut-off – the auditors compare dates on the goods dispatched notes and corresponding sales invoices.

For testing purchase cut-off – Dates on goods received notes and purchase invoices are compared.

Are you still confused?

If you need additional assistance or professional insights on cut-off procedures and other auditing topics, please contact us.