Cut-off Testing

Question 1

What is done when auditing cash balances?

Answer 1

Care must be taken taken to ensure there is no window dressing, by auditing cut-off carefilly?

Question 2

What is window dressing?

Answer 2

An attempt to overstate the liquidity of the company

Question 3

Window dressing example (cash book remittances balance at bank)

Answer 3

Keeping the cash book open to take credit for remittances actually received after year end, thus enhancing the balance at bank and reducing receivables

Question 4

Window dressing example (recording cheques decreasing balance liabilities)

Answer 4

Recording cheques paid in period under review which are not actually despatched until after year end, thus decreasing balance at bank and reducing liabilities

Question 5

What can a combination of these two contrive?

Answer 5

To present an artificially healthy looking current ratio

Question 6

What happens where lodgements have not been cleared by bank until the new period?

Answer 6

Auditors should examine the paying-in slip to ensure that the amounts were actually paid into the bank on or before the period-end date

Question 7

What happens when there is a large number of outstanding cheques at the year end?

Answer 7

Auditors should check whether these cheques were cleared within a reasonable time in the new period

Question 8

Possibility if cheques haven’t been cleared within a reasonable time?

Answer 8

May indicate that despatch occurred after the year end

Question 9

What does performing cut-off testing for transactions at the end of the reporting period?

Answer 9

Gives assurance over the completenesss and existence of cash balances at that date