Testing revenue cut-off at year end
Testing that sales around year end land in the right period: selections either side, later credit notes, post-close journals and delivery evidence.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A wholesaler invoices a large order on the last day of the year. The goods leave the warehouse a few days into the new year. The invoice is in this year's revenue, the receivable in this year's balance sheet, and the inventory has already been taken out of this year's count. Nothing about the invoice looks wrong. It is simply in the wrong year.
Cut-off is an assertion about timing: transactions and events are recorded in the correct period. For revenue, it is also one of the places where error and manipulation are hardest to tell apart, because the same misstatement can arise from a busy dispatch clerk or a director who wanted a better year. Either way, the audit approach is the same.
Why revenue cut-off errors cluster at year end
Errors gather at the period end for practical and behavioural reasons:
- Process: invoicing and dispatch run on different systems or different days, and the year-end rush widens the gap.
- Terms: under IFRS 15, revenue is recognised when control passes to the customer, which depends on delivery terms, acceptance clauses and installation obligations, not on the invoice date.
- Incentives: targets, bonuses, covenants and sale negotiations push revenue forward; tax planning in some owner-managed businesses pushes it back.
- Services: work billed in advance, or in arrears, needs deferral or accrual that is easy to forget at year end.
The direction of the risk should shape the test. If the incentive is to overstate, focus on invoices before year end. If it is to understate, focus on dispatches and services before year end that were invoiced after.
Selecting sales either side of the date
A cut-off test needs selections in both directions and on both sides of the year end.
| Direction | Start from | Trace to | Tests for |
|---|---|---|---|
| Records to evidence | Invoices just before year end | Delivery or service evidence | Revenue recorded before control passed |
| Evidence to records | Dispatches or services just before year end | Invoices and ledger | Revenue omitted from the year |
| After year end | Invoices just after year end | Delivery evidence | Revenue that belongs in the year under audit |
The window around the year end should reflect how long the client's dispatch-to-invoice cycle takes and how much revenue moves through it; a client invoicing weekly needs a wider window than one invoicing on dispatch. Use the dispatch numbers recorded at the inventory count, if the team attended one, as the anchor.
Selection within the window can combine methods. Large invoices close to the year end are tested as specific items; the rest of the window is sampled. In Achekam's Audit Intelligence, the team loads the population, here the sales transactions in the window, and Achekam risk-scores it and proposes a sample. The methods available are random, systematic, monetary unit, specific items and all items. A reviewer who did not prepare the plan approves it before the draw, and every draw can be reproduced from its stored seed. No size is proposed without approved materiality and a confidence level.
Credit notes raised after year end
Credit notes issued in the weeks after year end that reverse invoices raised before it are one of the clearest signs of cut-off manipulation. A sale "made" at year end and cancelled in the new year inflates revenue and receivables at the reporting date with no lasting effect on the business.
Obtain the credit note listing for the period after year end, identify those relating to pre-year-end invoices, and ask why each was issued. Returns of goods that were never wanted, or credits for "pricing errors" on unusually large year-end orders, call for more work. Where the client's terms allow returns, consider whether a refund liability should have been recognised at year end.
Using the post-close journal flags
Not all cut-off adjustments go through the invoicing system. Year-end accruals of revenue, manual reclassifications and reversals often go through journals.
In Achekam, staff load a whole-population journal extract as CSV and map its columns, and Achekam flags entries such as manual, weekend, after-hours and post-close postings for staff to select and test. The CSV is not stored; its hash and row count are. For cut-off, the post-close flag is the one to start with: manual entries to revenue, receivables, deferred revenue or accrued income posted after the period was closed. Ask who posted each, why, and what evidence supports it. An entry that recognises revenue for "work in progress at year end" needs the same evidence as an invoice.
Matching invoices to delivery and service evidence
The evidence that control passed varies by business:
- Goods: signed delivery notes, courier waybills with dates, customer goods-received notes, and the delivery terms on the order.
- Services: timesheets, job cards, completion certificates or customer sign-off, and the contract's billing terms.
- Construction and long contracts: progress certificates and the measure of progress the client uses.
- Bill-and-hold: the customer's request in writing, goods identified separately as the customer's, and their readiness for transfer.
A worked example in words: among the invoices before year end, the team finds a large order for a new customer, with no delivery note on file and a credit note for the full amount raised soon after year end. Management explains it as a cancelled order. The team obtains the customer's order and correspondence, which show the customer never placed a firm order. The sale is reversed, the finding raised and the risk of other such invoices reassessed. In Achekam, findings can be raised from a working paper and closed or withdrawn, and staff can record an audit adjustment on a lead schedule line with a reason.
On the cut-off work item, a step is marked done only with a written response and its documents, or set aside with a reason; steps are never deleted. Record the window used, how items were selected, and each exception.
The IFRS Foundation's summary of IFRS 15 sets out the principles for reporting revenue from contracts with customers using its five-step model, which is the basis for deciding when control passed. Cut-off on the purchases side is covered in the search for unrecorded liabilities, and the wider fraud response in responding to the presumed fraud risk in revenue.
The question for the year-end visit
Ask the dispatch manager, not the accountant, what was shipped on the last day of the year and the first day of the next. The answer is the starting point for every cut-off selection.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
