Definition
The auditor watches something happen. Examples are staff counting inventory, a warehouse clerk receiving goods, or the opening of the mail. AU-C 500 recognizes it as a way to gather evidence. It differs from inspection, which examines a record or an asset, and from inquiry, which asks someone about it.
Why it matters in an audit or review
Observation shows how a process works in practice, not on paper. Its limit is that it is evidence only for the moment it was watched, since people behave differently when auditors are present. It therefore usually supports other evidence rather than standing on its own, and it cannot show that the control ran during the rest of the year.
Example
The auditor watches a cash receipts clerk open the mail on a Tuesday morning (illustrative). The clerk lists checks, a second person agrees the list to the deposit, and both initial it. This confirms the described design. To test operation across the year, the auditor then inspects the daily deposit lists for a sample of other dates.
Common mistakes
- Treating one observation as evidence that a control operated for twelve months.
- Not documenting the date, time, place and who was watched.
- Letting the client choose which day to observe.
FAQ
Can observation be used alone to test a control?
Rarely. It is usually combined with inspection or reperformance to cover the period.
Sources
- AICPA, AU-C Section 500, Audit Evidence (observation)
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error