Cut-off issues and avoiding management letter comments

July 3, 2014

A common audit management letter comment given to organizations is due to cut-off issues.  There are two types of cut-off issues, accounts payable/expenses and checks.

Cut-off issues for accounts payable/expenses arise when an expense is booked in an incorrect period leaving the liability to be misstated. According to GAAP, expenses should be booked in the period the expense occurred.  Therefore if the work has been performed prior to year end, even if the invoice is received after year end, the expense and liability should be recorded in the previous year. For example, a lawyer gives you advice in December but you don’t receive the invoice until January. The expense and liability should be recorded in December.

Cut-off issues for checks occur when checks are back-dated or they are held after being cut.  Checks should never be back-dated.  They should always be dated on the day they are cut.  Back-dating causes issues when trying to determine what should be on the outstanding checklist at year end.  Back-dating a check is also not the proper way to get the expense in the correct period.  As shown above, if an invoice is received after year end then record an expense and liability at year end.  Another issue is checks that are cut at year end but are then held until after year end.  These checks incorrectly show up on the outstanding check list.  Another issue that affects cut-off is using check stock out of sequence.  This causes an issue when trying to assess if the list of outstanding checks and cut-off are appropriate and complete.

Cut-off issues are generally easy to fix. Just take your time and make sure you are recording items in the appropriate period.

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