Which procedure is used to confirm proper recognition of transactions post year-end?

Cutoff testing is a crucial audit procedure used to ensure that transactions are recorded in the correct accounting period, particularly around year-end. This procedure involves examining transactions just before and after the period-end to verify that they are recognized appropriately in the financial statements. For instance, if a sale occurs in January but is recorded in December, it could misstate revenue for the respective periods.

The essence of cutoff testing is to prevent misstatements related to timing issues. Auditors will typically review shipping documents, invoices, and receiving reports to confirm that transactions are recorded in the correct accounting period. This is essential for accurate financial reporting, as it directly impacts the income statement and balance sheet.

In contrast, reconciliation of accounts relates more to ensuring that balances are accurate and consistent; inquiry into management's estimates focuses on understanding the application and reasonableness of estimates made by management; and analytical review of year-end balances is concerned with identifying any unusual trends or discrepancies rather than specifically verifying transaction recognition based on cutoff dates. Each of these other procedures supports different aspects of the audit, but cutoff testing specifically addresses the concern of recognizing transactions in the appropriate reporting period.