Definition
Cutoff is the assertion that transactions and events were recorded in the proper accounting period. Cutoff testing selects transactions just before and just after year end and compares the recorded date against the date the control of goods or services actually passed, supported by documents such as bills of lading, receiving reports and service completion records.
Why it matters in an audit or review
Cutoff errors move revenue, expenses, inventory and payables between periods, and management has motives to push them the favorable way. Revenue shipped on January 3 booked on December 31 overstates both sales and receivables. AU-C 240 presumes a fraud risk in revenue recognition, and cutoff testing is a common response to it.
Example
A year-end of December 31. The auditor takes the last 25 shipments recorded in December and the first 25 recorded in January (illustrative). Three December-recorded invoices relate to goods with a January 2 bill of lading. Total $38,500 of revenue is recorded early, and a proposed entry reverses it.
Common mistakes
- Testing cutoff for sales only and skipping purchases and expenses.
- Using the invoice date as proof of the delivery date.
- Checking only one side of the year end.
FAQ
Is cutoff testing only for inventory?
No. It covers revenue, purchases, payroll accruals, cash receipts and any account with period-end activity.
Sources
- AICPA, AU-C Section 315, Identifying and Assessing the Risks of Material Misstatement (cutoff assertion)
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks
- AICPA, AU-C Section 240, Consideration of Fraud in a Financial Statement Audit (presumed revenue recognition risk)
- AICPA, AU-C Section 501, Audit Evidence-Specific Considerations for Selected Items (inventory)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error