How do you test revenue cut-off?
A core Audit & Assurance interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Cut-off tests that revenue is recorded in the correct period. I select a sample of transactions either side of the period end — the last days before and first days after — and trace each to evidence that the performance obligation was actually satisfied in the period booked: shipping/delivery documents, customer acceptance, or service-completion evidence, per the contract terms (FOB shipping vs destination matters). I test both directions (sales recorded that shouldn't be in this period, and deliveries not yet recorded). I also review post-period credit notes and returns that may reverse aggressive late sales, and unusual large period-end transactions. It catches channel stuffing, holding the books open, and early recognition — and directly affects the reliability of the period's revenue and EBITDA.
WHAT INTERVIEWERS LISTEN FOR
- ✓Test transactions either side of period end vs delivery/acceptance evidence
- ✓Apply the contract's delivery terms (FOB shipping vs destination)
- ✓Test both directions; review post-period credit notes/returns
- ✓Catches channel stuffing, books held open, early recognition
COMMON MISTAKES
- ✗Checking invoice dates only, not delivery/acceptance
- ✗Testing one direction only
- ✗Ignoring post-period credit notes
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