In addition, we should perform purchase cut-off test to address the potential risk of misstatement arising from improper cut-off.
As an auditor, we can examine the Goods Received Notes ("GRN") near year-end and after year-end to check that Goods Received Notes details matached with the supplier's delivery order details and supplier's invoices details.
For instance, Auditor Arthur is auditing Company E (whose year end is 30 June 2010) creditor's balance. As part of cut-off testing procedure, Auditor Arthur requested the details of Goods Received Notes near year-end and after year-end. And noted the following sample:
"Goods received notes was generated on 01 July 2010, however, supplier's invoices, supplier's DO indicated the date of 30 June 2010. Further investigation revealed that, supplier generated their internal documents on 30 June 2010, but only delivered the goods to Company E in 01 July 2010. As such, there's no exceptions for Company E"
Cut-off testing is deemed as a compulsory procedure in auditing creditors' balances.