1. Introduction to the Technique
Observation is a valuable audit technique that involves watching a process or control being performed in real time. It allows auditors to see what actually happens—not just what is written in procedures. For internal auditor Auren at ACME Corp, observation provides an unfiltered view of operations and control behavior, helping identify potential non-compliance, inefficiencies, or workarounds. It’s especially effective in high-risk, manual, or operational areas such as inventory handling, cash processing, and access controls.
2. Template for Applying the Observation Technique
To apply observation effectively, auditors can follow these steps:
Define the Objective: What process or control are you observing? What are you trying to confirm?
Plan the Timing: Observe the activity at the right time (e.g., during peak operations or month-end).
Notify or Don’t Notify: Decide whether to perform the observation overtly or discreetly.
Document What You See: Record steps taken, tools used, timing, and any deviations from procedures.
Compare with Documentation: Check if the observed behavior matches written policies.
Follow Up with Questions: Clarify unclear steps or anomalies with staff post-observation.
3. Practical Example: ACME’s Physical Inventory Process
CEO Liora is concerned about increasing inventory write-offs at ACME’s main warehouse. She assigns Auren to assess the effectiveness of the inventory control procedures. Auren decides to conduct an on-site observation of the physical inventory count process during month-end.
Objective: Confirm whether inventory is being counted according to ACME’s documented procedures.
Timing: Auren schedules the visit during the actual cycle count, coordinating with Project Manager Aven, who oversees warehouse operations.
Execution: Auren observes two warehouse staff as they count and record items in Zone B of the facility. He notes that:
The counters don’t refer to the system inventory printout during counting.
Discrepancies are jotted on sticky notes instead of being logged in the system.
Supervisor sign-offs are done after the fact, not immediately after the count.
Auren discreetly compares what he observed to the inventory SOP and finds three control gaps: lack of real-time reconciliation, informal documentation, and post-hoc supervision.
After the count, Auren debriefs with Aven and the warehouse lead. They admit the process was rushed due to staffing issues. Auren includes his observations—with timestamps, notes, and photographs—in the audit file and recommends procedural retraining and digital entry tools to support real-time tracking.
This use of observation provided critical, firsthand evidence that written documentation alone wouldn’t reveal. When used properly, observation uncovers operational realities and strengthens audit credibility by tying findings directly to what was seen and experienced on the ground.