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 that provides an economic benefit over more than one period, capitalised as an asset on the balance sheet and expensed through...
- 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
- A potential obligation whose existence depends on a future uncertain event, such as pending litigation or a guarantee given to a third...
- Cookie-Jar Reserve
- An accounting reserve built up in a period of strong earnings by overstating provisions or allowances, then released in a later period...
- Off-Balance-Sheet Financing
- Any arrangement that keeps debt or obligations from appearing on the consolidated balance sheet, including special-purpose entities, sale-and-leaseback structures, and operating leases...
- Operating Expense (Opex)
- Costs consumed in the current period, expensed in full through the income statement. Reclassifying opex as capex defers the income-statement impact across...
- 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 legal vehicle created by a sponsoring company for a specific purpose, such as securitising assets or financing a project. Under certain...