i) Cut off Procedures
- A cut-off procedure is a type of evidence gathering activity performed by auditors during the substantive testing stage. In particular, the cut-off procedures gathers evidence that transactions are recorded in the period to which they relate.
A cut off test, depending on its direction, provides evidence as to two types of misstatement, namely:
- A misstatement relating to completeness, where an economic event that occurs in the financial period being audited (i.e. up to and including the cut-off date) is recorded in the related account balance in the subsequent accounting period.
A misstatement relating to validity, where an economic event that occurs in the period following the period being audited (i.e. after the cut-off date) is recorded in the related account balance in the period being audited.
A simple example in relation to accounts receivable and related sales transactions is as follows. On the cut-off date i.e. the balance sheet date the auditor obtains details (including details of the sequential identification number, customer name, product description and quantity delivered) of the last delivery advice to be issued on the cut-off date by physically examining the source documents at the close of business.
If the auditor needs evidence as to the completeness of accounts receivable and related sales transactions, then subsequent to the cut-off date the auditor selects a number of delivery advices with identification numbers before or including the number of the last delivery advice issued on cut-off date. The details on the delivery advices (as noted above) are traced to the relevant sales invoices and then to the accounts receivable records to ensure that the sales have been included in the accounting records on or before the cut-off date. In addition, the auditor selects a sample of sales invoices recorded in accounts receivable records in the first few days of the month following the cut-off date. All invoices selected should refer to delivery advices with identification numbers after the number of the last delivery advice issued on the cut-off date.
(ii) Audit in depth
This refers to the carrying out of detailed substantive procedures. It is characterized by extensive vouching and verification of the underlying transactions and account balances.
ISA 500 ―Audit evidence‖ defines substantive procedures as tests performed to obtain auditevidence to detect material misstatements in the financial statements and are of two types: –
a) Tests of details of transactions and balances
b) Analytical procedures