Cut-Off Testing
Definition
An audit procedure that examines transactions immediately before and after the period-end date to verify that each is recorded in the correct accounting period. Detects expenses shifted into subsequent periods and liabilities omitted at year-end.
- Field
- Forensic accounting / audit
- Focus window
- Transactions just before and after period-end
- Detects
- Expenses shifted to next period, omitted liabilities
- Related fraud scheme
- Expense understatement
Common questions
Why do fraudsters target the days right around period-end specifically?+
Shifting an invoice's recording date by only a few days into the next period keeps the current period's expenses and liabilities artificially low while the underlying transaction still looks routine to a casual reviewer.
What documents does an auditor compare to catch a cut-off manipulation?+
Shipping and receiving records, invoice dates, and purchase orders are cross-checked against the dates the transactions were actually posted in the ledger, since physical delivery evidence is harder to backdate than paperwork.
Related terms
- Accrual Omission
- The failure to recognise a liability at period-end for services received but not yet invoiced, or for costs incurred but not yet...
- Capital Expenditure (Capex)
- Spending on assets or projects that may qualify for recognition under the applicable reporting framework. An expected future benefit alone does not...
- Capitalisation of Operating Costs
- The misclassification of a period cost as a long-lived asset. Instead of recognising the full cost on the income statement in the...
- Contingent Liability
- Under IAS 37, a possible obligation or a present obligation not recognised because specified recognition criteria are unmet. It is generally disclosed...
- Cookie-Jar Reserve
- A liability or provision created in excess of its justified amount during a period of strong earnings, then released into income in...
- Off-Balance-Sheet Financing
- Off-balance-sheet financing describes arrangements whose funding or obligations are not presented as ordinary recognised debt on an entity’s balance sheet. Applicable recognition,...
- Operating Expense (Opex)
- An operating expense is a cost recognised in the income statement under the applicable reporting framework rather than retained as an asset....
- Reserve Manipulation
- The use of discretionary accounting provisions, such as allowances for doubtful debts or warranty accruals, to manage reported earnings by setting reserves...
- Special-Purpose Entity (SPE)
- A special-purpose entity is established for a defined activity such as financing, securitisation or holding assets. Its legal separation does not decide...