Audit Objectives for Cutoff for Sales Transactions
Audit objectives for sales cutoff focus on ensuring that sales are recorded in the proper period. Small-business owners can count on the auditor gaining assurance over the cutoff of sales using multiple procedures. Understanding some of the more common sales cutoff procedures can eliminate some of the surprise in your company's audit.
An understanding of the company's policies and procedures employed in the sales process is the most important tool the auditor has to assess sales cutoff. Because sales cutoff concerns whether sales are recorded in the proper period, it is important for the auditor to understand when title of goods passes from the seller to the buyer. Small-business owners should be prepared to describe and show documentation that supports a company's title transfer procedures. This is especially salient if the company does not simply transfer title upon the exchange of cash.
Auditors gain some assurance over sales cutoff through accounts receivable testing. When performing this audit procedure, auditors will send letters asking the company's customers to confirm the amount owed to the company as of the balance sheet date. If sales are recorded in an incorrect period, customers may reply that the balance wasn't owed as of balance sheet date, alerting auditors to a potential cutoff problem. Small-business owners should realize, however, that this method does not provide adequate concern over cutoff on its own and additional procedures are likely to be performed.
If a company numbers invoices sequentially and has a standard procedure for transferring the title of goods sold, then examining the invoices that surround the year-end date can be a simple and effective method for testing sales cutoff. To perform this procedure, the auditor usually will ask for the invoices for the five days before and after year end. Depending on the number of invoices, the auditor will then ask for shipping information regarding either all of the invoices or a reasonable sub-selection. Small-business owners should be ready to supply the auditor with this evidence. In addition, small-business owners may wish to examine these transactions themselves before the audit begins. This give the company time to correct any errors, if they arise.
For companies that have material amounts of sales returns, generally accepted accounting principles require that sales returns are matched with the original sale and counted in the same period. Many companies operate on the assumption that if sales are consistently recorded in the period in which the item is returned, then over time, the sales mis-recorded in each period balance out and there is no material difference between recording the return upon receipt and matching the return to the proper period. Small-business owners who are experiencing rapid growth should take caution with this approach. If sales are increasing year over year, the amount of sales returns may be increasing as well. In this case, this assumption may not hold and the auditor may determine that there is a sales allowance cutoff error that needs to be corrected.