Sales cutoff tests are performed to determine that sales are recorded in the correct time period according to the revenue recognition rules of the applicable financial reporting framework.
a. What is the revenue recognition rule for recording revenue when your audit client sells a product that it ships to the customer?
b. What is the accounting rule for recognizing revenue when your client performs
a service such as one a dentist could perform?
c. How would you perform cutoff tests for a product that is shipped to the customer if your primary audit concern is gathering evidence to support the existence of the sales? What conditions could be present in an audit client resulting in a risk that sales recorded at year-end do not exist?
d. How would you perform cutoff tests for a service that your client performs (for example, a dentist’s office) if your primary audit concern is completeness of sales?
e. What conditions could be present in an audit client leading to a risk that sales recorded at year-end are incomplete?