Revenue Cut-Off and Period-End Procedures

Revenue cut-off, the question of which period a sale belongs to, is the most heavily-tested area in any audit. Get the discipline right at year-end and you avoid the biggest single source of audit adjustments.

The cut-off principle

Revenue belongs to the period in which control of the goods or services transfers to the customer, usually delivery for goods, completion of service for services. Invoice date is not the determinant; transfer of control is.

Two failure modes: invoicing in this period for goods delivered next period (overstates revenue), or delivering this period and not invoicing until next (understates revenue). Auditors test both directions.

What auditors test

Last 5-10 sales of the year: examine shipping documents, signed delivery notes, customer acknowledgments. Confirm the date control transferred. If after year-end, the sale should be next year's, even if invoiced before year-end.

First 5-10 sales of the new year: same procedure in reverse. If control transferred before year-end, the sale should have been this year's revenue, regardless of invoice date.

Best practice procedures

On the last working day of the year: stop invoicing at end of business. Document the last invoice number issued. List every shipment in transit at year-end. The auditor will reconcile your year-end revenue to these schedules.

For services: complete a status report on every active project at year-end. Document percentage complete for any percentage-of-completion contracts. Pre-empt the auditor by having the documentation ready at fieldwork start.

Common cut-off errors

End-of-year sales push: pressure to hit revenue targets leads to invoicing for goods that have not shipped. The auditor finds them via shipping document tests. The adjustment reduces this year's revenue by the amount.

End-of-year delivery push: shipping in last week without invoicing, the customer has the goods but no invoice. The adjustment increases this year's revenue. Less common but happens in volume-driven businesses.

This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.