A cut-off test is a type of evidence gathering activity performed by auditors during the substantive testing stage. In particular, the cut-off test gathers evidence that transactions are recorded in the period to which they refer.
A cut off test, depending on its direction, provides evidence as to two types of misstatement, namely:
A simple example in relation to accounts receivable and related sales transactions is as follows. On the cut-off date (which may be the balance date or an earlier date) the auditor obtains details (including details of the sequential identification number, customer name, product description and quantity delivered) of the last delivery advice to be issued on the cut-off date by physically examining the source documents at the close of business.
If the auditor needs evidence as to the completeness of accounts receivable and related sales transactions, then subsequent to the cut-off date the auditor selects a number of delivery advices with identification numbers before or including the number of the last delivery advice issued on cut-off date. The details on the delivery advices (as noted above) are traced to the relevant sales invoices and then to the accounts receivable records to ensure that the sales have been included in the accounting records on or before the cut-off date. In addition, the auditor selects a sample of sales invoices recorded in accounts receivable records in the first few days of the month following the cut-off date. All invoices selected should refer to delivery advices with identification numbers after the number of the last delivery advice issued on the cut-off date. Refer to example.
If the auditor needs evidence as to the validity of accounts receivable the auditor selects a number of sales invoices recorded in accounts receivable records in the last few days up to and including the cut-off date. Each one of the invoices selected should refer to delivery advices having an identification number before (or the same as) the number of the last delivery advice issued on cut-off date. In addition, the auditor selects a number of delivery advices with identification numbers after the number of the last delivery advice issued on cut-off date. Details on the delivery advices (including customer name, product description and quantity delivered) are traced to the relevant sales invoices and then to the accounts receivable records to ensure the sales have been included in accounts receivable records after cut-off date.Refer to example.
Auditors perform cut-off tests for all major classes of transactions, either at balance date or, where substantive evidence is gathered prior to balance date, at an earlier cut-off date. (Refer to roll forward procedures).
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