Accounting is a continuous process because the business never comes to halt. It is, therefore, necessary that transactions of one period would be separate from those in the ensuing period so that the results of the working of each period can be correctly ascertained. The arrangement that is made for the purpose is technically known as “Cut-off arrangement”. It is essentially forming part of the internal check of the organization. Accounts, other than sales, purchases and stock are not usually affected by the continuity of business and, therefore, this arrangement is generally applied only to the aforesaid accounts. The auditor satisfies by examination and test checks that the cut-off procedures adequately ensure that:
Goods purchased, property in which has passed to the client, have in fact been included in the inventories and that the liability has been provided for in case of credit purchase, and
Goods sold have been excluded from the inventories and credit has been taken for the sales is to be received, the concerned party has been debited.
The auditor may examine a sample of documents evidencing the movement of stocks into and out of stores, including documents pertaining to period shortly before and after the cutoff date and check whether stocks represented by those documents were included as appropriate during stock taking.