Revenue testing and cutoff around period-end

• Explain the AU-C 240.26 presumption of fraud risk in revenue and what rebutting it requires
• Design occurrence and accuracy tests that follow a contract through to cash
• Perform cutoff testing on shipments, credit memos and deferred revenue around period-end
• Recognize revenue findings that peer reviewers flag

Start from the presumption

AU-C 240.26 requires the auditor, based on a presumption that risks of fraud exist in revenue recognition, to evaluate which types of revenue, revenue transactions or assertions give rise to those risks. If you conclude the presumption does not apply, AU-C 240 requires you to document why. Rebuttals hold up only for simple revenue, such as rent from a single rental property. "Revenue is recurring" is not a rebuttal.

A fraud risk is a significant risk, so AU-C 330.22 applies: procedures specifically responsive to the risk, including tests of details when the approach is substantive only. SAS 151, the new fraud standard approved in August 2026 and effective for periods ending on or after December 15, 2028, keeps the revenue presumption and the requirement to identify which revenue types or assertions give rise to it. See the SAS 151 summary.

Be specific about the risk. "Revenue" is not a risk. "Sales recorded in December for goods shipped in January to meet a covenant" is, and it points to cutoff.

Occurrence and accuracy

Under ASC 606, revenue follows five steps: identify the contract, identify the performance obligations, determine the transaction price, allocate it, and recognize revenue when or as each obligation is satisfied. A substantive test that vouches an invoice to a shipping document skips most of that. A stronger test follows each selected item from contract to cash:

1. Contract or purchase order: does an enforceable arrangement exist with a real customer?
2. Price and terms: agree quantity and price to the contract, including discounts, rebates and rights of return that affect the transaction price.
3. Satisfaction of the obligation: shipping or delivery evidence, proof of service, or progress measurement for over-time revenue.
4. Recording: correct period and correct amount.
5. Cash: subsequent receipt from the customer.

Select from the revenue ledger to test occurrence. Select from shipping records or contracts to test completeness. The contract-to-cash vouching example walks through a sample.

Cutoff testing

Cutoff is an assertion about classes of transactions: transactions are recorded in the correct period. Test both directions.

• Before year-end: select sales recorded in the last days of the year and agree each to evidence that control transferred on or before year-end.
• After year-end: select shipments from the first days of the new year and confirm they were not recorded as prior-year sales; select shipments from the last days of the old year and confirm they were recorded.
• Credit memos: review credit memos issued after year-end. A large credit soon after year-end that reverses a December sale points to a sale that should not have been recorded.
• Deferred revenue: for billings in advance, agree the deferral to the contract and the period of service.

Window size follows risk and volume. Tie the window to the size of daily sales: if a typical day is $40,000 and performance materiality is $150,000, a two-day window may miss a misstatement that a five-day window would catch. The cutoff test selector helps size it.

Shipping terms matter. FOB shipping point and FOB destination are indicators of when control passes, but read the contract and how risk of loss and title actually work.

Findings that recur

• Fraud risk identified in revenue, then answered with an analytic and nothing else.
• Cutoff tested only before year-end.
• No review of post-year-end credit memos.
• Sample items vouched to invoices the client generated, with no external or shipping evidence.
• Bill-and-hold or consignment arrangements not identified.

Cutoff test at Tamarack Outdoor Gear, Inc.