Cut-off testing: movements at period end

On the evening of 31 December a lorry arrived at the warehouse of a textile importer. The goods were received and put on shelves, but the receipt was posted in 1C only on 3 January. At the reporting date, the year end, that consignment is in the warehouse but not in the books. Likewise, the sale of goods dispatched on 30 December might be recorded on 2 January. Testing for such shifts at the edge of the period is called cut-off testing.

Why the boundary matters

The balance in the accounts, trade payables, revenue and profit are all tied to the reporting date. Every movement near the boundary has to land on the correct side, or both periods come out wrong. Three typical errors:

• Goods arrived before the date, the document was posted after: stock and payables are understated. For example, if a consignment worth 85 million so'm arrived on 30 December and was posted on 3 January, both inventory and the debt are 85 million so'm too low.
• Goods were dispatched before the date, the sale was recorded later: stock is overstated and revenue understated.
• The reverse: goods were dispatched in January but the document is posted with a December date. The year ends up looking "better".

How to run the test

1. On count day, write down the last document numbers: the last receipt No. and the last issue No. The storekeeper and the commission members sign the sheet.
2. Stop goods movement while counting. If that is impossible, log every movement on a separate list.
3. Take the last 10–15 receipt and issue documents before the reporting date. Compare the physical date (gate log, the driver's waybill) with the date in 1C.
4. Do the same for the first 10–15 documents after the reporting date.
5. Review the change history in 1C: are there documents entered after the period was closed or posted with a back date?

If the count date does not coincide with the reporting date (say, you counted on 28 December), receipts from the count date to the reporting date are added to the count result and issues are deducted. Each shift found goes into the register of findings with its amount, cause and correcting entry.

Example: following one consignment

The list of the latest receipts includes document No. 2417: a consignment of fabric worth 85 million so'm. The supplier's delivery note is dated 30 December, the gate log shows the lorry entering on 30 December at 17:40, and the storekeeper's signature on the driver's waybill carries the same day. But in 1C the document was posted on 3 January. The auditor records this difference as a finding: inventory and trade payables are understated by 85 million so'm. Then comes the question of cause: did the accountant get the delivery note only in the new year, did the storekeeper hand the document in late, or had the program closed the period? The recommendation depends on the answer: a daily hand-in routine for delivery notes, or a rule to post the document on the day of receipt.

Goods in transit

For an importing company this raises the most questions. The goods are on the road from China or Turkey, payment has gone out, but the warehouse has not seen them yet. Whose goods they are and when risk passes depends on the delivery terms in the contract (under Incoterms, FCA, DAP and so on). So for each consignment in transit, look at the contract and at the transfer date in the shipping documents. Goods the warehouse has not yet counted but that already belong to the company should be shown in the books separately as "goods in transit". Which accounting rule applies is confirmed with the accountant.

Where abuse may occur

• Even with the period formally closed, documents are written with a December date in the first week of January.
• A large shipment is entered at year end, and an identical return is processed in January.
• Goods that never reached the customer's warehouse are recorded as sold.
• Returned goods are posted as a receipt dated before the reporting date, though they came back in January.

A suspicious sign: a sharp rise in returns or cancelled documents in the first week of January.

Conclusion

A cut-off test is not a large job: a few dozen documents and a signed sheet of numbers from count day are enough. Yet it puts inventory and debts in the right period. OmborAudit compares movements around the cut-off date by physical and book dates and presents the shifts it finds in monetary terms.