## Audit of Trade Receivables – Completeness & Cut-off Procedures

### The Core Risk

Completeness means: all genuine receivables that should be recorded, ARE recorded. The opposite risk is omission — sales made before year-end are left out of receivables.

Cut-off is the mechanism that ensures transactions are recorded in the correct accounting period. A cut-off error occurs when a sale made before year-end is recorded in the next year, or vice versa.

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### The Cut-Off Decision Rule for Debtors

Situation	Treatment
Invoice issued in last 5 days of the year AND goods dispatched before year-end	Include in Debtors
All goods dispatched prior to period-end	Include in Debtors
Goods dispatched after year-end (even if invoice raised)	Do NOT include in Debtors

> The trigger for recording a debtor is dispatch of goods (risk & reward transfer), not just raising an invoice.

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### Step-by-Step Cut-Off Procedures

#### Procedure (i) – Last-5-Days Invoice Test

Identify all invoices issued in the last 5 days before the period-end.
For each such invoice, check the corresponding dispatch date.
If goods were dispatched before year-end → receivable is valid → include in debtors.
If goods were dispatched after year-end → do not include.

#### Procedure (ii) – Test Invoices Listed on the Receivables Report

Vouch a sample of invoices appearing on the Accounts Receivable report.
Verify each has a corresponding dispatch/delivery evidence.

#### Procedure (iii) – Match Invoices to Shipping Log

Compare the Invoice Date against the Shipping/Dispatch Date from the shipping log.
Invoice date before dispatch date = potential early revenue recognition (Completeness/Cut-off error).

#### Procedure (iv) – Bill-and-Hold Sales

Examine any sales where goods are billed to the customer but not yet dispatched (held by the seller).
Scrutinise supporting documentation to check genuineness of the transaction.
Bill-and-hold sales are a well-known technique for inflating year-end sales and debtors.

#### Procedure (v) – Review Discounts

Verify that discounts allowed are as per company policy and properly authorised.

#### The 3-Day Dispatch Review (Last Days of Year)

Obtain detailed shipping/dispatch logs for the last 3 days of the accounting year.
Verify that any dispatches in these last days have corresponding invoices recorded in the current year, not the next.
Sales booking for goods dispatched in the last days of the year must be in the current year only.

Worked example

### Example 1

Example – Cut-off Test:

Goods worth ₹3,00,000 were dispatched on 29th March. The invoice was raised on 2nd April (next year). Question: Should the debtor be included in the 31st March balance sheet?

Answer: YES — because the goods were dispatched (risk & reward transferred) BEFORE year-end. The invoice date is irrelevant. The auditor should identify this through the shipping log vs. invoice date comparison and ensure the receivable is recorded at 31st March.

Conversely: Goods dispatched on 3rd April with invoice dated 30th March → debtor should NOT be in the 31st March balance sheet.

### Example 2

Example – Bill-and-Hold Test:

Audit team finds an invoice for ₹10,00,000 dated 28th March to Customer X, but the shipping log shows no dispatch. When queried, management says 'the customer asked us to hold the goods.' Procedure: Obtain written agreement from Customer X confirming the bill-and-hold arrangement, check if Customer X has accepted risk of ownership, verify the goods are separately identified as Customer X's goods. If these conditions are not met, the sale should not be recognised.

⚠️ Common exam mistakes

Using the invoice date as the cut-off date instead of the dispatch/shipping date — revenue is recognised on transfer of risk & reward, not on invoice generation.
Ignoring bill-and-hold arrangements — these are a classic area for revenue manipulation at year-end.
Testing only the last day's invoices instead of the last 3–5 days — errors are spread across multiple days near year-end.
Failing to inspect the shipping log — without cross-referencing invoice dates to actual dispatch dates, cut-off errors remain undetected.
Not checking whether last-day dispatches are recorded in the current year's revenue books.

Reference:

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