Understanding Observation, Inspection, and Inquiry in Auditing
As a CPA candidate preparing for the Auditing and Attestation (AUD) section, mastering the core audit procedures is crucial. Among these, observation, inspection, and inquiry are fundamental techniques used to gather audit evidence. This module will break down each of these procedures, explaining their purpose, application, and how they contribute to forming an audit opinion.
Inspection: Examining Records and Documents
Inspection involves the examination of records or documents, whether internal or external, in paper or electronic form. This procedure is used to verify the existence of assets, the accuracy of accounting records, and the proper authorization of transactions. For example, inspecting an invoice to confirm the details of a purchase or examining a bank statement to verify cash balances.
Observation: Watching Processes and Procedures
Observation involves looking at a process or procedure being performed by others. This is particularly useful for understanding how controls are actually operating and for verifying the performance of specific tasks. It provides evidence about the effectiveness of controls at the time of observation.
Inquiry: Seeking Information from Others
Inquiry is a procedure that consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or outside the entity. While it is a valuable source of information, it is often less persuasive than inspection or observation because it relies on the honesty and accuracy of the respondent.
Interplay and Application
These three procedures are not mutually exclusive and are often used in combination to obtain sufficient appropriate audit evidence. The auditor's judgment determines which procedures are most appropriate for a given assertion and risk assessment. For instance, to audit inventory, an auditor might:
- Inspect inventory tags and the final count sheets.
- Observe the physical inventory count process.
- Inquire with warehouse personnel about inventory management practices.
| Procedure | Primary Focus | Type of Evidence | Key Application Example |
|---|---|---|---|
| Inspection | Records and Documents | Tangible, verifiable | Reviewing invoices and bank statements |
| Observation | Processes and Procedures | Direct, real-time | Watching employees count inventory |
| Inquiry | Information from Individuals | Verbal or written responses | Asking management about internal controls |
Remember, the persuasiveness of audit evidence generally follows this hierarchy: direct personal knowledge (like observation) > inspection of external documents > inspection of internal documents > observation of client personnel > inquiry.
Active Recall Check
Inspection.
It provides evidence only for the point in time it is performed.
Inquiry.
Learning Resources
Access the official auditing standards from the AICPA, which detail the requirements and guidance for audit procedures like inspection, observation, and inquiry.
This Investopedia article provides a good overview of audit evidence and the common procedures auditors use, including explanations of inspection, observation, and inquiry.
AccountingTools offers a clear breakdown of various audit procedures, with specific examples for inspection, observation, and inquiry, making it easy to grasp their practical application.
A concise video explanation of the core audit procedures, focusing on inspection, observation, and inquiry, often used by CPA candidates for review.
International Standard on Auditing (ISA) 500 provides guidance on audit evidence, including the nature, timing, and extent of audit procedures like inspection and inquiry.
An article from the Journal of Accountancy discussing the nuances and importance of using inquiry effectively as an audit procedure.
A PDF module from the AICPA that covers audit sampling and procedures, often including detailed explanations and examples of inspection, observation, and inquiry.
This blog post offers a straightforward explanation of common audit procedures, including how inspection, observation, and inquiry are used to gather evidence.
A general overview of the audit process that often touches upon the fundamental procedures like inspection, observation, and inquiry as part of evidence gathering.
This resource provides a comprehensive look at audit evidence and the procedures used to obtain it, with clear definitions and examples of inspection, observation, and inquiry.